Distressed Investors Are Already Buying Houston Homes for 40 Cents on the Dollar

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The flooded Nottingham Forest neighborhood of Houston after Hurricane Harvey.

Photographer: Daniel Borris/REDUX

Bryan Schild drives through the byways of Houston looking for what could be the investment opportunity of a lifetime: homes selling for as little as 40¢ on the dollar. “We Pay Cash For Flooded Homes $$$$$$$$ Don’t fix it, sell it. Quick close,” read the signs piled in the back seat of his Ford pickup.

Schild stops by a ranch-style house where 74-year-old Paul Matlock lives with his wife, disabled from multiple sclerosis. Matlock is desperate to leave and is considering Schild’s offer of $120,000—half the home’s value three weeks earlier. A half-dozen other investors have made offers, one as low as $55,000. “The whole thing makes me feel like there’s a bunch of vultures sitting on my back fence,” Matlock says. “They’re waiting for the dead body to fall over.”

It’s axiomatic on Wall Street that the time to buy is when fear overtakes greed—when blood (or, in this case, water) is in the streets. Now some are eyeing the billions of dollars in hurricane-ravaged property in Texas and Florida and deciding it may be the time to take out their checkbooks. Investors such as Schild figure they can buy low, either fix up and flip the houses or rent them out for several years, and unload them later, doubling their money or more.

Schild making Matlock an offer in his flooded house.

Photographer: Prashant Gopal/Bloomberg

Those kinds of bets have often paid off. Buyers who snapped up co-ops and office towers when New York was near bankruptcy in the 1970s made a killing. More recently, companies including Blackstone Group LP and other marquee names bought foreclosed homes after the 2008 financial crisis and are sitting on billions in potential gains.

The cycle begins with small-time investors such as Schild, who’s bought more than 30 waterlogged houses for an average $175,000 apiece. Then Wall Street swoops in. Gary Beasley, former chief executive officer of Waypoint Homes, also sees an opportunity. He’s pitching private equity firms and pension funds on the potential profit in buying flooded homes, repairing them, and renting them back to homeowners.

Bain Capital LP and billionaire Marc Benioff, co-founder of Salesforce.com Inc., are backing Beasley’s two-year-old company, Roofstock Inc. It runs a website where investors can buy and sell single-family rental properties. Beasley thinks owner-occupants may be interested in selling there, too, and that flooded neighborhoods are the Next Big Thing. “It’s much like the housing crisis, when the institutional guys came in to buy homes nobody wanted,” he says. Like other investors, Beasley and Schild view themselves as helping homeowners to move on and Houston to rebuild.

Others take a less rosy view. “What worries me is people making pretty dramatic decisions without the education to figure out what the alternatives are and without looking at the situation rationally,” says Andrea Heuson, a finance professor at the University of Miami who specializes in mortgages. Some of those considering Beasley’s strategy don’t want to be named for fear of looking like catastrophe profiteers, Beasley says.

Many homeowners would be forgiven for panicking. During hurricanes Harvey and Irma, wind and water damaged almost 1.8 million homes, causing uninsured flood losses of as much as $57 billion, according to CoreLogic Inc., a real estate data firm. Homeowners without federal flood insurance are most likely to be desperate. Those with policies don’t yet know how much they’ll get for their losses, which is key to deciding whether it makes sense to sell.

Who Pays the Bill When Mother Nature Strikes?

Investors don’t want to pay too much because they’re taking many risks. The storms are driving up not only financing costs but also expenses for labor and materials. Other challenges include mold, local efforts to restrict rebuilding, and rising costs for flood insurance, says Jesse Keenan, who leads the Harvard Graduate School of Design’s real estate program.

The biggest risk is climate change. These homes may be subject to so much flooding in the future that they fall further in value or become uninhabitable. “Climate change represents both a risk and an opportunity,” says Keenan, who specializes in global warming and real estate. “The risk is that in the two or three or five years that you hold on and rent out the house, you get another event.”

Back in Houston, Schild joins more than 1,100 real estate investors drinking beer, eating catfish, and swapping investment tales at the Redneck Country Club, a music hall. A giant bar is decorated with pictures of guns, mounted deer heads, and a chandelier made of Lone Star beer bottles.

The crowd is assembling for a monthly meeting convened by Eddie Gant, a real estate investor who specializes in “hard money lending”—offering short-term, high-interest-rate loans to house flippers and landlords. The topic is flooded houses. Standing in front of a giant American flag, Gant, 55, his head shaved and gleaming, wears a neon green shirt and black caiman-skin cowboy boots. “You wanna make some money?” he calls out to the cheering audience. “Be careful—you better buy low.”

The home of disabled U.S. Army veteran Joseph Hernandez in Houston.

Photographer: Prashant Gopal/Bloomberg

One of Schild’s prospects is Joseph Hernandez, a disabled U.S. Army veteran married to a housekeeper. The couple are living in a hotel and saving money by eating only two meals a day. Schild has made them a painful offer. If they walk away from their two-bedroom house, worth $127,000 before Hurricane Harvey, Schild will pick up the mortgage payments, paying nothing else. Although he says he sympathizes with the Hernandezes’ plight, he thinks the offer is fair because he figures the home is now worth less than its $65,000 mortgage.

Hernandez is in a bind. He didn’t buy flood insurance because his house wasn’t in a high-risk area. He can’t afford to rebuild, and he’s been told he’s eligible for only $23,000 in federal assistance. If he turns over the deed, he’s looking at losing the entire $60,000 in equity he had before the flood. “It’s blurry, what’s coming,” he says. “We’ll probably have to sell to an investor, and that’s not good. We were forced out.”

Hernandez isn’t ready to take Schild’s deal. But Matlock, who rescued his disabled wife from chest-high water, is tempted by the investor’s $120,000 offer. Their home, now stripped to the beams, has flooded twice in two years. Schild says Matlock should be able to recover much of his loss on the house’s value through federal flood insurance. (In past storms, homeowners have complained the program lowballed them.) Before he leaves, he asks Matlock to spread the word. “Anybody looking to sell, tell them to call me,” he says. “I’ll give them a bid.”

One person's "vulture" is another person's entrepreneur. As the story says, there is significant risk in buying these homes. If investors don't buy them--and they won't if the profit potential is too low--then they will rot where they stand and the 40 cents per dollar of value left today will become 0 cents in a year or so.

There is a whole industry behind "salvage." It saves what can be saved at a price the market will bear. For someone with no flood insurance...what would they rather have: 40 cents on the dollar or 0 cents?

I would sell if it were my choice and get to a state with higher ground. We are in a 1000 year warming trend, the Dansgaard-Oeschger Event. Has happened every thousand years since the last ice age 25K years ago. A couple of Swedish guys dug up some ice cores in Greenland and found this out by analyizing the vegetation that grew there every thousand years. Remember, when the Vikings found it they called it Greenland. We only remember the ice and cold.

We can't stop the event. It's caused by the sun getting stronger and once ice starts to melt the land warms up and keeps the warming process going. Fewer volcanoes means not volcanic dust in the air to block the sun.

Thank the Lord that we bought a high level of flood ins on the house my DH bought for my daughter in Houston! So far, DH had paid out $42K in labor and materials, but has only been paid an initial $25K by the ins co. That's $17K out of pocket and we don't how much of that we will get in future ins payouts. And a is just for repairs to the physical structure.

Just so people don't get the wrong idea, the same happened in my town. 600 homes damaged by flooding, some 6 feet deep.

(It only takes an inch of water inside the house to ruin floors, soaks up inside the drywall and insulation, baseboard, cabinets, furniture...)

After a flood, MANY people do not want their houses.

There is a HUGE emotional factor where people cannot cope with the loss and WANT OUT. Perhaps a loved one died in the flood. The flood itself is as emotionally distressing as the death of a loved one. Another group does not want to bother repairing. Another group does not have the funds to repair. Another group uses this as an opportunity to make a life change like rent a downsized condo.

The math is VERY important. Locally, even without flood insurance FEMA was giving homeowners $28,000 for anything.

Let's say you have a $75,000 house, with a $60,000 mortgage balance. FEMA gave you $28,000 and Investor Sid offers you $40,000 for the house because it need $25,000 in repairs. You break even and are free as a bird.

Here's another problem for the buyers: that house is "marked" as a flood house so for the next few years buyers will avoid it. But 4 years later they have forgotten.

And MANY homes will not be repaired and sit vacant and dirty next door to the freshly rehabbed house.

Our flood was 9 years ago and there are still vacant, molded houses just sitting.

My first thought when I saw the hurricanes hit was that some investors were going to make a killing.

I bought 8 or 9 off the last storm that hit us.

When Irene rolled thru I looked at FEMA for damage to the lake house... NO coverage for second homes or businesses. 35k cap assuming you lost EVERYTHING.

All these years later, now looking at a handful of commercial "shells" being offered at auction.

Thanks for the plug, Brad! Although investor Sid would have to come in lower than $40K + $25K repairs...$65K "all in" on a $75K house is too low a profit margin for the risks. (wink)

But yes, the point is well-taken. Salvaging homes is a business, just like any other. The market expresses a need to turn over these damaged assets to someone who has the willpower and the capacity to do something with them. As has often been noted by the builders and rehabbers on this board: most home buyers want PERFECTION in a house and are incapable of fixing a scratch in the paint, much less gut to the studs and begin sheet-rocking over several months. They have to LIVE somewhere...maybe move out of town if their job also got flooded out. No one should blame the investor who takes a huge risk and hope to make a decent buck.

My parents had water inside their house from Harvey. They were lucky-- it just missed the electrical outlets. But it's still a long recovery process...

We were discussing that, because I remember how long those blue tarps stuck around after Ike, and that was just wind damage... They had been in Mississippi for a wedding, and the same subject had come up. They had been hit by Katrina back in August, 2005, and it really took 10 years before you looked around and thought "things look normal". (It's now 12 years post-Katrina.)

New Orleans is still 100,000 people short of its 2000 population peak. It lost more than half of its inhabitants when Katrina happened in 2005. It's still 60,000 short of its pre-Katrina population count.