Despite some of the economic turmoil that has resulted from the COVID-19 pandemic, the private, residential real estate market has been relatively steady. With zero percent interest rates, and high demand, rising prices have created more wealth for homeowners. However, the same momentum has not translated to the commercial real estate market. While the market continues to recover from the previous pandemic year, sales and leases remain down YoY.
There’s also a mixed bag of fluctuations depending on the type of commercial property that is available. Investor interest remains high for undeveloped land and industrial property, but momentum is not as high with retail and office space. Therefore, building owners are looking for any advantage they can get, including flipping or leasing storm-damaged properties.
With the polar vortex of 2021 wreaking so much havoc in states like Texas, several experts are suggesting it could be the event responsible for the most insurance claims in the state’s history. That, paired with hurricane season on the horizon, is going to result in a dramatic upswing of CRE properties with potential flooding or structural problems. So if you are trying to properly survey the market for your clients, read our tips below to understand how to work with buyers and sellers of storm- or flood-damaged properties.
Why Buy a Property ‘As-Is’?
Brokers often list CRE for sale as-is for a handful of reasons: they do not want to spend additional money doing repairs that may increase the value before listing, or they are looking for cash buyers. Buildings or properties that are for sale do not automatically mean they have repairs that are beyond fixing, but it should raise any agent’s antenna to discover a checklist of potential future repairs needed when sifting through the disclosures on the contracts and/or after a thorough inspection (or two).
Due to the economic downturns from the pandemic in 2020 and because commercial real estate has stalled in some areas in 2021, there are significantly fewer new builds underway in most major metropolitans. With supply going down, that means buyers have a smaller pool to choose from, and they might be forced to look into properties that might require infrastructure repairs down the road.
Insurance and Inspection
The inspection process is a normal step in the CRE purchase process, but for storm-damaged properties, this step is particularly important. Even for experienced investors or contractors, when it comes to buying a storm-damaged building, you might want to consider bringing in a professional industrial hygienist who is qualified to survey the property for mold, dry rot, and can also measure air quality.
When going through the inspection process, we’ve included a list of things that the buyers and inspectors should be keeping an eye out for:
- Support structures
- Water damage in the ceilings
- Water-logged framing
- Signs of water logging around windows, screens, and light fixtures
Most inspectors worth their weights can also give a general estimate on the cost of repairs or replacements, or can signal to buyers if a property is not worth the investment because the renovations are simply too costly.
The insurance claim process is typically not as smooth sailing as inspections. In many cases, it can be difficult to receive coverage on a damaged building after it has changed owners, so it’s important for the buyers to include repairs before the sale is completed. In that case, it would be valuable to have an adjuster accompany the buyer and inspector during the inspection to get an understanding of the totality of the damage.
The policy on the building put in place by the previous owner should cover expenses, including potential losses in rent, but it still requires all steps to be followed meticulously. Unfortunately, insurance claims take weeks or even months to be processed, so it requires patience. Don’t allow a lack of paperwork or personal hurdles to provide additional stoppages in the buying process.
Understanding Restoration Costs
Water damage, especially standing water, can pose a litany of problems to structural integrity: mold, foundation, plumbing, and rust can all be consequences of water damage, and all are costly to address. The damage to water treatment facilities from the natural disasters this year has also affected the type of water that could be damaging the property.
For example, in Texas and Tennessee, the damage from the polar vortex was so bad, there was a statewide boil notice for all tap water, regardless of use. That means more than likely, what was flowing out of burst pipes and into basements was category three water, contaminated by bacteria or sewage. If this water sits for a prolonged period, the untreated water damage can cause ground floor wall flexing and a building can actually sink into the ground.
We also know from studies that water that sits for longer than three days gives way to mold and fungus, which can create a new set of problems for air quality. These air quality problems can be dramatically more expensive to repair.
So instead of pushing your client to buy a property ‘as-is’ for less and presenting them with an option to contract out repairs after the fact, agents can work with sellers to incorporate repairs into the negotiations of closing costs. Luckily, buyers in this situation are at a point of leverage because the demand for a building that has weather damage isn’t usually as high, therefore you are more likely to get the cost of repairs approved.
However, if your clients are worried that damage is too extensive, it’s imperative to know when to walk away. So what does a snapshot of costs look like? It’s difficult to get an exact forecast of how much repairs are going to cost because there are so many variable factors: labor, time, supplies, demand, etc.
While the median cost for a homeowner to repair storm or wind damage might be above $5,000, because investors and brokers can get things at cost, it greatly improves their margin for profit. For a commercial property, the cost to repair could be exponentially higher.
However, once foundational problems are introduced into the equation, it’s difficult to get a read on how costly it will be. While some experts suggest that slab foundation repair is in the range of $10,000 or more, it’s really more of a case-by-case basis.
For some of the more routine fixes like roof repair, replacing the floors, and repainting walls, there are cost-calculators online that also account for prices to renovate in the area. If there is standing water, it is imperative to get it out as quickly as possible to not only reduce long-term effects, but also to better gauge the damage that is already done.
Facilitating the buying process with your clients is not an easy venture, and when serious weather damage is thrown into the mix it only complicates things further. Luckily, there are buyers and investors out there willing to take the risk if the price is right. The important thing is to do all necessary diligence beforehand so your client isn’t walking into a sinking money ship.
If there’s any doubt about the long-term viability of a property, we recommend being risk-averse, but that’s not the opinion of everyone. Ultimately, most buyers rely on instinct and that’s why they make the big bucks.