Disaster-Damaged Properties Have Hidden Costs

p>When a natural disaster strikes, houses suffer, and so do the people who own them. Although many homeowners jump right back in with a plan to rebuild, some decide to start over somewhere safer. The result? In a housing market faced with dwindling supplies of available homes, a variety of dwellings are going up for sale in disaster-struck areas such as those hardest hit by last fall’s Superstorm Sandy.

Although the prices are modest, the headaches can be big, pointing up problems such as exceptions to insurance coverage, financing obstacles and permits for repairs that can plague both residential buyers and investors interested in rehabbing homes damaged by natural disasters.

In many areas along the East Coast that were hard-hit by Sandy, the majority of homeowners are rebuilding and not seeking to sell. But for some, the costs of rebuilding are just too high. In areas with high damage, some homes were completely flooded while others sustained major damage to walls, roofs and foundations. And some properties on which structures sustained severe damage are now being sold just for the land.

That means price reductions of up to 60 percent in certain neighborhoods – even on homes with a pre-storm asking price of millions. For investors looking to buy quality properties at low pieces, or homeowners willing to take on the ultimate fixer-upper, the long-term upside may outweigh the short-term downsides of repair costs. But the costs of restoring the property may be just the beginning.

Like earthquake, tornado and other kinds of disasters in other parts of the world, Sandy made an impact on homeowner insurance. Many of the storm’s survivors found that the coverage they had didn’t include that kind of event – many “basic” homeowner packages only cover situations specifically named in the policy and others require supplemental insurance specifically targeted to events such as floods. Now, in the aftermath of the storm, some insurance companies are skittish about offering coverage to owners buying or building in those damaged areas, and premiums for coverage may be higher.

Another obstacle facing buyers of homes severely damaged by Sandy – and those seeking to buy in other disaster-prone areas – can be financing. Some lenders may be reluctant to underwrite this kind of purchase, and after the storm, numerous borrowers were at risk for mortgage defaults. Some lenders instituted special homeowner support programs just for Sandy survivors who were in danger of defaulting.

Getting permits for repairs and new constructions has also proved problematic for buyers hoping to cash in on a bargain purchase. Some areas have restricted building in severely damaged areas, allowing the land to return to its natural state rather than permitting residents to return to vulnerable areas. Other restrictions may apply, too, as neighborhoods try to blunt the effects of massive demolition and hauling. And because of demand, contractors and maintenance businesses may charge hefty fees to do work in these areas.

Snapping up distressed properties in areas hit by natural disasters can be a smart move. Income property investors following Jason Hartman”s investing guidelines may be able to walk away with an exceptional deal – but as Superstorm Sandy shows, the hidden costs of buying disaster-struck property may outweigh the benefits.

The American Monetary Association Team

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