Evaluating the Property Post Hurricane Disaster
published in REOMAC Magazine, November 2005?
By Robert Klein
CEO, Safeguard Properties
Hurricanes Katrina and Rita recently ravaged the Gulf Coast of the United States, fundamentally altering the landscape forever. As a company in the business of property preservation, Safeguard Properties has been intimately involved in the aftermath of these storms.
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All across the region, homes have been destroyed, damaged, flooded and often plagued with toxic mold. Entire towns in Mississippi and Louisiana were, for all intents and purposes, ripped off the map. The cities and towns lucky enough to have escaped total obliteration still saw unprecedented levels of property damage. Many homes, even if not totally destroyed, are nonetheless essentially lost, destined to be razed rather than repaired, preparing the way for rebuilding.
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Understandably, much of the focus will be on rebuilding in the wake of such devastation, and a great many millions of dollars have already been earmarked for that reconstruction. In many cases, homes and businesses will have to be built anew. But what of the properties still standing and of residents searching for new homes? Reconstruction will not begin for some time, several months at the very least. Gulf Coast residents have been flung far and wide, and many are eager to return back home; if not to the physical properties they left behind, at least to the cities and towns they fled.
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A New Landscape
In the aftermath of this historic disaster we have found that more than the physical landscape of the Gulf Coast states has been altered? the real estate market itself has undergone a climactic shift as well. The real estate market post-disaster bears little resemblance to what it was before. In terms of the market, it?s a simple matter of numbers, the law of supply and demand. Tens, if not hundreds of thousands of displaced homeowners are now suddenly in the market for new homes.
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A spike in the number of buyers, particularly one of this magnitude, is bound to alter availability, demand and therefore prices. This is exactly what Safeguard Properties has found to be the case. Change also comes with regard to matters of marketability, in that buyers are placing primary and immediate importance on purchasing structurally sound homes rather than looking for any certain design, ideal location or level of amenities.
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In speaking with agents and appraisers in affected communities across Louisiana, Mississippi and to a lesser degree Alabama, it has become plainly apparent that valuations in this post-disaster environment have been significantly affected. Appraisers have seen a marked increase in demand for their services, and time is of the essence; many properties are selling quickly, without much if any negotiation between buyer and seller.
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In fact, there seems to be a near total disassociation from accepted standards, not with regard to professionalism, but in terms of market forces and valuation techniques as well. Lenders? who require appraisals before releasing funds ?are often being sidestepped as desperate buyers are paying cash, at or above listed prices, for whatever surviving properties are left on the market.
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A Buying Frenzy
People in this region are actively seeking properties that are still standing or at the very least salvageable. With so much of the coast left in rubble, there is now a premium placed on any piece of property left. Real property appraisal in such an environment has proved to be difficult at best. Market forces are erratic and nonstandard, with values being determined by a historic and sudden increase in demand and the appraiser is often left to fend for him or herself. For instance, comparable sales, the traditional key to an accurate and effective valuation, are simply no longer available for the vast majority of saleable subject properties.
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On the whole, property values are increasing across the board. In places of relatively less devastation, the increase is negligible, perhaps a percentage point or two. Conversely, in more hard-hit communities appraisers are determining values 10-15% above normal. In fact, many homes? even some which had been on the market for three or more months before the hurricane ?are netting as much as 20% over the initial asking price. Some brokers refer to the scene on the ground as a ?free-for-all,? and that is actually an accurate assessment.
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Lenders on the other hand, are still looking for pre-hurricane values on which to base lending decisions. It?s understandable that they?re hesitant to be pulled into what may prove to be an irrational housing market spike, but unfortunately that?s just not the reality on the ground. With property availability driven so far down and with such a dramatic increase in the number of home-seekers, pre-disaster values no longer apply. Bidding wars are driving up prices even on homes that sat dormant before the disaster. While not the most lucrative properties before the fact, in the aftermath they?ve become highly desirable commodities ? simply because they still exist.
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Demand Dwarfing Supply
Both speculative investors and locally-based companies trying to find homes for displaced employees are currently adding to the volatility of the situation. Many companies are buying up properties “site unseen,” even without having access to sufficiently appraised market values. Even the rental market has been decimated as landlord investors, rather than renting their vacant units, are instead selling them for a profit. As this occurs, the price of the remaining rental units is rising. All of this brings a substantial tightening to the market.
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For example: properties listed at $179,000 before the storm are now selling for $191,500 on average. That?s actually one of the more reasonable increases. At the extreme, one house in Kenner, Louisiana listed at $400,000 before Katrina is now listed at $1.2 million. To account for the increased demand, appraisers are increasing their value estimates by an average of 5% to 10%, with some adding as much as 15% to pre-disaster value. It is, as stated earlier, changing the face of the market. But is this a long-term phenomenon, or is it as the lenders seem to think, that we are simply in the midst of a passionate, irrational spike?
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The Days Ahead?
If there is any lesson to be learned from the aftermath of the natural disasters, it is that the industry needs to take a careful look at the evaluation of properties following disasters, particularly one of Hurricane Katrina?s (and to a lesser extent, Rita?s) magnitude. Perhaps there needs to be some level of standardization applied to property appraisal that takes into specific account the volatility of post-disaster market forces. As always, market forces will determine fair value for a property, and when an area has been demolished, sharply curtailing the availability of properties, prices are bound to rise sharply as well.
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It is likely that in the affected communities, the market will eventually readjust to pre-disaster levels, with the expected associated decrease in property values. This is precisely why lenders are hesitant to base long-term investments (mortgage origination) on short-term market realities. A lender outlaying the funds for a disaster-inflated loan amount may very well lose money when the market stabilizes and returns to a semblance of normalcy (however long that may take).
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In a time when the importance of the collateral to the lender has never been higher, there needs to be some understanding and agreement amongst all players as to how to best address the appraisal and evaluation of properties post-disaster. In the midst of crisis, traditional standards are pushed to the side. This does not serve anyone?s long-term interests.
