Buying Hurricane-Damaged Homes in Your Real Estate IRA

Hurricanes cause lots of personal disaster and hardship for homeowners and Real Estate IRA owners. Many homeowners find themselves with hurricane-damaged homes that they don’t want to repair, or can’t repair, because they were under-insured, didn’t have flood or windstorm insurance, or some other circumstance, and therefore choose to sell their homes.

Whatever the circumstances, these sellers need cash to buy their new home or to start over. This creates an opportunity for Real Estate IRA owners: Typically, after a major storm like Harvey or Irma, a lot of homes are listed for sale at the same time. This increase the supply of homes, pushing down prices for a period of time, and (hopefully) increases the long-term yields on properties you can buy using your Real Estate IRA.

But along with the opportunities, there are also risks. Investment in storm-damaged property isn’t for rookies. Real Estate IRA investors who are interested in purchasing these properties would benefit from some experience in home repair, remodeling and renovation, so they will have a feel for how much time and money it takes to repair them.

Before you commit Real Estate IRA funds to an investment, try to determine the following:

  • Was the property flooded?
  • How high did the water go?
  • Is there mold damage?
  • Was there any mold remediation work done? Can the owner show receipts for that work?
  • Were any electrical outlets submerged under water?
  • Was the damage fully repaired? Or did someone just throw bleach on the damaged areas, slap a coat of paint on it, and list it for sale to a sucker?
  • Is the wiring, plumbing or other fixtures corroded or destroyed by salt water?
  • Are there any signs of rot in structural supports and beams?
  • Is the foundation on solid ground or has there been earth movement under the home?
  • Who did the repairs?
  • Did they pull the proper permits?
  • Do they have construction defect insurance and will you be covered in case their work was defective?

Unless you’re a very experienced home inspector or contractor yourself, you may want to call in a professional home inspector. You may also want to buy a home that’s been listed with a licensed real estate agent or broker, as they are typically required to disclose any material defects or problems with the home they are aware of. If you go direct for-sale-by-owner, they may not feel any such obligation to disclose these defects. Owners of FSBO properties don’t have a real estate license for the state to revoke, and they don’t carry professional liability insurance to protect you against any damage you may incur as a result of a failure to disclose a material issue with the home. However, going direct may save enough money on commissions to pay for a very thorough home inspection many times over.

Tip: Consider hiring a professional industrial hygienist, rather than a run-of-the-mill mold inspector. Your hygienist or inspector should also look for dry rot, as well as mold.

It may be worthwhile to drill holes in drywall and pull up some flooring in the inspection process, so you can look at what’s beneath the surface. This is pretty invasive stuff, and it can add to the cost of the inspection, but it may be worth it for both you and the seller, to arrive at a fairer price.

Be aware that if you’re buying the property for your Real Estate IRA, your IRA must cover all the repair costs. You can roll over assets into the IRA to cover the costs, but you cannot pay contractors or inspectors out of your own personal funds, or from anywhere outside of the Real Estate IRA itself.