How to Sell a Flooded House

Not only did Harvey drop a historic amount of rain on the Houston and Katy areas, but a historic number of homes flooded as a result. While many neighborhoods that experienced flooding appear to be mainly back to normal, some areas still look as if Harvey happened last month.

A significant number of flooded homes in the Katy and Houston area are still vacant, in shambles, and many of those owners are still wondering what to do with them. As mortgage forbearance programs end, some of these homeowners are finding themselves in the situation of needing to decide to rebuild or sell – and quickly.

If you’ve made the decision to sell, or are simply gathering information about your options, you’ll want to check out the information below to help ensure you get the most you possibly can for your home.

So who wants to buy a flooded house?

In almost all cases, it will be an investor who purchases your home if you decide to sell. Flooded homes rarely can obtain conventional financing and are typically limited to cash or “hard money” purchases. Hard Money Lenders loan on the after repair value of the home, and don’t require the house to pass any inspections to lend on it. But the interest rate is usually in the double digits, so hard money is typically used only by investors as a means of short-term financing until they fix the home and can either refinance it into a rental or sell it.

So now that you know who your target market is, how can you get top dollar value – all things considered – for your home?

As with all home sales, motivation to sell varies by seller. Some flooded sellers want out as fast as possible; others want (or need) the most money possible for their home – even if that means it takes more time to sell it. In a perfect world, most flooded sellers usually want both. While you’re likely selling the home because you don’t want to or can’t afford to repair it, there are some basic sweat equity things you can do to make your home worth more to an investor:

• Ensure the home is mucked and all ruined or molded material has been removed from the house.
• Sweep and vacuum the inside of the home as best you can.
• Clear the front and back yards of all debris and mow them.

Investors will have to pay for all of the above to be done once they purchase the home. Many times, homeowners can find volunteer groups willing to come out and help them get the above done. If you can reduce an investor’s expenses, they have room to be able to increase their offer.

Understanding – and accepting – the new value of your home

A massive misconception by many flooded homeowners is that the post-flood value of their home is “what it was worth before flooding minus the amount it would cost to repair it.” The parts of the equation many sellers forget to include is the potential decrease in value for a home that has been flooded – even after being fixed – and the profit for the investor to cover their time and risk.

We don’t fully know yet how a home being flooded in Harvey is going to affect its value. It can depend on a lot of factors, such as where the house is, how bad it flooded, how many times it flooded, the price range of the home, the current aesthetics of the neighborhood, and any change in demographics – such as it being mainly resident owners before the flood and becoming primarily renter inhabited post-flood.

Investors are typically taking between 10-20% off the home’s pre-flood value as its potential new value – even after being renovated. The values in some areas will no doubt bounce back quickly. Others will take a hard hit for quite a while. It’s an unknown factor and investors will usually play it on the safe side.

Additionally, investors need to turn a profit on their investment. Rehabbing a flooded home can take months. During that time the investor is paying interest, holding costs like utilities, spending the money on the rehab, and can be incurring unexpected expenses during the rehab of the home – and all without fully knowing the effect the flood will have on the end value of the home after it’s completed. If the investor plans to sell the house once it’s finished, they’ll also typically incur closing costs and agent commissions to get it sold.

Homes that have mold clearance have an increased value

If you have a mold clearance certificate by a state licensed inspector, it adds value for the investor. The home already being cleared and certified as not having mold issues means they can start rehabbing the home right away. While some investors might not bother to have the house cleared for mold, upstanding investors will. Mold remediation and mold testing can take 1 to 2 weeks depending on the size of the home. During that time, the investor is paying the interest and holding costs discussed above, plus the cost of the remediation and testing itself.

So, if you went through the remediation and clearance process, it carries additional value for the investor and should allow them to increase their offer price. But if you haven’t already gone through the process, that doesn’t mean you should rush out and do so. Mold remediation and testing companies can have a wide disparity in their fees. You have to weigh the cost you’re being quoted against the value it adds to the investor – who often knows how to get the best price for it.

Listing your home with an agent vs. selling to an ugly house buyer style company

Each of the above options has advantages, disadvantages, and commonalities.

What they have in common

• Cash or “like cash” sale – as we discussed above, your home is likely to be bought using cash or a hard money loan.
• As-is purchases – the buyer understands in either case that the seller is unable or unwilling to make any repairs to the home.
• Title company closings – the buyer will want to ensure a clean title in either case and to do so will close using a title company to complete the transaction.
• Quicker than normal closings – because the buyer is paying cash or using hard money financing, the process moves much faster than it does with a home that is being purchased using a conventional loan.

Selling to a house buyer

When it comes to house buying companies, they’ll typically have one of three objectives in mind when putting your home under contract:

1. Purchase the property themselves, rehab it, and sell it – also commonly referred to as flipping.
2. Purchase the property themselves, rehab it, refinance it using a conventional loan once the rehab is complete, and hold onto it as a rental.
3. Put the home under contract and then sell their interest in the deal to another investor who will either flip it or turn it into a rental – also commonly referred to as wholesaling.

The pros of using these companies: They can typically close in two weeks or less. They are also adept at dealing with homes that have additional issues such as being in pre-foreclosure, having tax-liens, etc. Home buyers will almost always cover your closing costs, and since you didn’t use an agent to sell the home there are no agent commissions involved.

The cons of using them: Not every house buyer is reputable. They are massively skilled negotiators; if negotiations make you uncomfortable, you won’t have a buffer between you and the buyer to act as the heavy. If the plan is to wholesale the home and the house buyer offers you an unrealistic amount of money, they may not find an investor willing to take over the deal and won’t actually close on your home.

Some tips on dealing with house buyers:

• If the investor isn’t willing to put down a significant amount of earnest money on the deal (I typically recommend buyers look for 1% or $1000 – whichever is greater), then they might not be confident they can close.
• Require the investor you’re dealing with to show you proof of funds.
• Research the company online to look for negative issues other sellers may have had with them.
• Ask what their “close rate” is – meaning the percentage of homes they close on after putting them under contract. It’s not uncommon for a wholesaler to put 30 homes under contract in a year yet only close on a handful of them.
• Be sure to do your own research on comparable sales in your market before discussing price with an investor.
• Don’t feel pressured to sign anything on the spot; if the investor takes issue with that, it should raise a red flag.

Using an agent to sell your flooded home and listing it on the MLS

Enlisting an agent to help you sell a flooded home has its advantages, but of course, it comes at the price of their commission. That said, they are duty-bound to do what’s best for you as the seller, know the market, and they’re incentivized to get you the most money possible for your home since their commission is typically a percentage of the sales price.

That said, not all agents are created equal and being a successful agent in standard home sales doesn’t necessarily make the agent adept at dealing with investors.

Some tips on what to look for in a real estate agent when selling a flooded home:

• Experience with dealing with investors – If your agent doesn’t have a lot of experience dealing with investors, they might not be able to spot games, warning signs, or red flags concerning their offers. Additionally, an agent that is well-versed with investors will know how to craft the listing to appeal to them.
• Strong negotiation skills – Investors thrive or fail based on their negotiation skills. You want an agent who isn’t afraid to go toe to toe with them to fight for your interests.
• Strong market knowledge – Your agent should be looking at comparable home sales from before the flood, after the flood in as-is condition, and after being rehabbed post-flood. Since investors are typically discounting the pre-flood value and basing their offer on that and the after flood value, it’s essential that your agent has a handle on all three comparable sales types.
• Knowledgeable on rehab costs – Investors will toss out a lot of numbers as far as what the rehab of your flooded home will cost. Some of them will be reasonably accurate while others might be heavily inflated. You’ll want your agent to have a basic grasp on renovation costs.

So what should a flooded homeowner do?

Whether it’s best for you to use a house buyer or a real estate agent will depend on your situation. If your home is in pre-foreclosure and you want to avoid having that foreclosure on your record, then your biggest concern is probably the speed of the sale – making a house buyer the likely better choice. If you’re looking to achieve top dollar without a need for extreme speed, then listing on the MLS with the right agent will probably net you the most money.

If you’re looking for an agent with substantial experience with dealing with flooded homes and investors – and strong negotiation skills – I’m that agent. Feel free to get in touch with me to discuss your options.