Observation on Real Estate Investing after a Hurricane
In September of 2022, Hurricane Ian decided to make landfall in Fort Myers, Florida, where our office is located. We are approximately 5 miles from the beach, and while most of Southwest Florida is returning to normal, Sanibel and Fort Myers Beach beaches are still in tough shape. The storm flooded the entire coastline from Marco Island to North Fort Myers, approximately 60 miles. This was a massive hurricane. These communities are both looking at a 2-5 year time window before returning to any normal level.
I'd like to share some things I've learned about real estate reconstruction and investing after a hurricane. Nothing was immune to the hurricane. All types of real estate were affected, not just homes. Even high-rise condominiums sustained damage. Many of the condominiums from the 90s were built under old codes, where the electrical panels were located on one of the first two floors, causing entire systems to be replaced. It is hard to understand the various types of damage that can occur, whether it be flooding caused by roofs getting blown off, trees falling on houses, or windows getting knocked out. One thing is for sure; all structures were affected on some level.
It is approximately five months after the hurricane today. Reconstruction is incredibly slow. Contractors are working hard, but there are just not enough of them. Add supply chain issues and labor shortages on top of that, and it is no wonder why rebuilding is hard. As for real estate prices, we have not seen real estate prices for houses decrease dramatically. The Market is very efficient. Almost every single-story house near the coast was affected. Depending on the house's location, assuming a single-story house worth a million dollars to a million three before the storm, we have seen a very little decrease in price after the houses had been gutted for remediation. Astonishingly, there has not been more of an adjustment. Even the most devastated houses you would have thought should have been knocked down have been cleaned, and the owners are ready to rebuild. Part of the reason that prices have not come down is the 50% build-back rule. To rebuild a single-family home, you can only send a construction cost of 50% of the value to get a building permit. If the construction costs of any structure are more than 50% of the value, the building will have to be torn down and rebuilt to current codes, which will be substantially more money.
Fort Myers Beach has had significantly more damage than Sanibel, the major difference being that Sanibel's buildings withstood the storm much better than the beach homes. The beach had many older cottages and stilt homes that could not withstand the storm surge. On Sanibel, five months after the storm, 100% of the condominiums are unoccupied or unlivable at this time. Most are looking at a 2 to 4-year rebuild of their associations. Condominiums are difficult in the rebuild process because of the scope of work that must be done. While your condo unit might be intact, that owner relies on the entire association for their utilities and maintenance.
While there have not been as many condominiums marketed for sale since the hurricane, the ones I've heard about have decreased in price substantially from their high last summer. At this time, associations do not know the full cost of the renovations or the ultimate assessments after insurance has been paid. Many are still dealing in massive negotiations with their insurance companies.
One thing that we saw on day one, I believe most realtors would agree if you had clients with properties with substantial damage and they were “older"( approximately 70+), they were more likely to sell their properties and move on. The days following the hurricane were very traumatic for a lot of people. To see their lives and dreams destroyed or substantially destroyed is a difficult psychological event. I assume they don't want the hassle, and as someone that was here the weeks after the hurricane, I don't blame them.
Where are the opportunities in the real estate market? No one would disagree that over the next five years, as condominiums and homes are rebuilt, the prices will ultimately increase. In Southwest Florida, demand is incredibly high, and assuming that interest rates come down from their current high rates, our real estate market near the coast should be very strong.
I'll give you one example of a condominium sale I heard about last week. I know a gentleman that is 70 years old and owns a nice condominium on the beach; it is a third-floor penthouse. While his building is intact, his roof sustained damage and his unit was flooded. At this time, his association (3 units of 16 condominiums) has to be totally rebuilt. The final cost and assessment are unknown to individual unit owners. This association is estimating a $100,000 to $150,000 assessment per unit. There are 64 units in the association. Pre-hurricane, this property would have sold for $1.1 to 1.2 million. There are so many uncertainties between the total cost to rebuild plus the assessment and time; this gentleman stated that he would take 60 to 65 cents on the dollar of pre-hurricane value to sell this condo unit. The new owner, while maybe getting a deal, does take on substantial risk in not knowing what the future holds regarding construction costs and assessments. At the same time, by doing the extra effort may be getting a good deal, assuming prices continue to rise.
Owners of these newly renovated condominiums will expect higher prices based on the improved product and the additional money put into their units. As we saw the average price of a condominium in Mexico Beach after their hurricane in 2015, prices are up approximately 30% four years later. Based on the locality and the climate in Southwest Florida, I doubt we would see any different results.
There will always be good deals out there. In Southwest Florida, we have not seen a massive price decrease. I have seen that the properties that had the most destruction, if they remediated (gutted the home and cleaned it up), are selling for close to the pre-hurricane value; this includes commercial properties.
As I mentioned above, an incredible amount of new construction will happen in Southwest Florida during the next five years, and current property values will increase. Insurance will be a going concern in Florida for the foreseeable future. We've seen market flows in the past; if you're willing to do the work, think the opportunities are available for real estate growth. In the words of a wise old real estate investor, the money is made on the purchase.
Midland Trust specializes in 1031 exchanges and self-directed IRAs. Hurricane properties are still a tremendous opportunity to take advantage of a 1031 exchange. Just because your property was destroyed, if it still has gains and was used as an investment property, you are eligible to sell, buy another investment property and defer all the capital gains.
We have had multiple new clients show up since the hurricane and purchase damaged homes with a Self Directed IRA. This could be a great opportunity to buy and fix up a home or condominium. These properties will ultimately be sold, and there will be no gains inside the IRA. Self-directed IRAs are a great vehicle to invest in Alternative Assets.
If you'd like more information on either of these services, please feel free to contact us at 239-33-1031. There are links on our website at www.midlandtrust.com that will direct you to open an IRA today easily.
Many thanks go out to the volunteers, first responders, and construction workers who have helped continue bringing back Southwest Florida. This is one of those life events; unless you see it firsthand, it is hard to comprehend the amount of work. We will be back; it is just going to be a few years.
Dave Owens is the CEO of Midland Financial Corp. Midland, a company specializing in alternative asset investing using 1031 exchanges and Self Directed IRAs.