EP 507 – Hurricane Dorian’s Destruction

NCS 507 | Hurricane Dorian

NCS 507 | Hurricane Dorian

 

Hurricane Dorian is one of the recent calamities that devastated the northwestern Bahamas and caused significant damage to the Southeastern United States and Atlantic Canada over the past weeks. Scott Carson discusses Hurricane Dorian and some of the things property owners and investors will see over the next six to twelve months. Taking note of what Harvey has done, he also gives some heads-up on the things you need to keep in mind if you find yourself in these affected areas.

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Hurricane Dorian’s Destruction

What’s in the news is everything going on with Hurricane Dorian. It’s a Category 5 hurricane. It’s over The Bahamas, a few miles off the coast of Florida. It could stay over The Bahamas. It could move up the coast. First and foremost, our thoughts and prayers go with the families of people that are there, that have had to evacuate. Those that have family in the neck of the woods, our thoughts and prayers go out to you. A couple of years ago, we had Hurricane Harvey hit here in Texas. It hit the Gulf Coast where I grew up from and Houston. It caused over $125 billion in damage. It’s estimated that Dorian is going to see at least that amount, if not more. Maybe Hurricane Katrina for over $160 billion.

For a couple of reasons, one, I would say Harvey would have caused more devastation if it hit a little higher valued area. I’m not saying I wished for that, not at all. It means the South Coast and Southwest. The Gulf Coast part of Texas, the property values are less than they are in Houston or other areas of the country. You have to look at how many people were impacted more so then you look at the amount of damage that was caused because that can vary depending on what happens in specific areas of the country.

A Look Back On Harvey

What I wanted to have this episode talk about a little bit is if we look back at what happened with Harvey and the subsequent dominoes that fell in the industry, what can you expect?

First and foremost, let’s talk about, there’s going to be some damage when you’ve got 120, 180, 200-mile per hour winds. Stuff is not built to stand up to that for the long-term. You look at some of the early photos coming out of The Bahamas. There has been some damage and we’re going to see that damage. One of the things that come to mind more than anything else was when Hurricane Andrew hit in Florida several years ago. What caused when you look at some of the photos in the devastation as it rolled across Florida. I was working for Palm Harbor Homes for a brief stint, about 120 days. They used photos from that devastation to help sell their homes there because there was a mobile home park that was hit and everything was destroyed except for the one Palm Harbor Home that was built there. It was built as a traditional home. It’s a rickety mobile home, which you often think are modular homes. Are we going to see some of that? We’re going to see some batteries and it all depends on what happens with the hurricane. Does it come offshore, full brunt there?

Does it hit Cape Canaveral? Does it go up to Jacksonville? Does it stay a little bit further south and come across through West Palm Beach and that neck of the woods or Martin County. Being that I invest heavily or have invested heavily in for the last couple of years, I know those areas all too well. Fortunately, we’ve been able to divest most of our investments over the past couple years or the stuff that we own is not on the water anymore because that’s where it’s going to be hit the worst. You’re going to have wind damages. You’re going to have a storm surge. You’re going to have a lot like happened in Houston with the flooding.

That was the biggest thing that happened a few years ago. It was a lot of devastation from the rain and the flooding. The lower places washed or flooded. We had some more students that dealt with some of that stuff. I can think back to when I was in college and seeing the power of water that happened. I worked at a restaurant in the south of Austin, north of San Antonio called the Gristmill in an area called New Braunfels in Comal County, right on the River of Guadalupe. They would always say, “A 100-year flood with rainfall.”

A 100-year flood can happen every year as we see 100-year hurricanes can happen almost every year too. I’ve seen buildings washed away. I’ve seen what rain can do. Rain is one of the most powerful factors out there, especially if it’s got no place to go because it builds up and builds up and it runs. That’s one of the biggest things that we saw happening in Houston is that areas that never been flooded before had three, four feet of water inside of them and people weren’t expecting that. We’ve seen some of our friends who have also lived in Florida, they’re on the second floor. They’re putting in sandbags around their doors. They’re trying to waterproof and cock up their doors and windows and things like that.

Even on the second floor based on the pure power of the rain coming in sideways, storms and things like that, who knows what the flooding is going to do. That’s the thing to keep in mind is look, first and foremost, be careful. Get the heck out of there if you’ve got people that have escaped or evacuated. My mom lived in Aransas Pass, Texas and went through the hurricane a few years ago by getting out and evacuating north to south of San Antonio. Fortunate for her, her house only had had the roof replaced and some things are done. Fortunately for them, most of the house was okay unlike a lot of other neighbors that their houses were destroyed completely. The thing you got to look at when you have 150 plus greater or higher winds, it’s like a sandblaster.

One side of her house looks like it was sandblasted from the wind and the rain coming through. I expect to see that with a lot of the images we see from South Florida, especially if you are looking at condos and things like that. You’re going to see a lot of devastation, a lot of windows broken and a lot of interior stuff. We know that’s going to happen.

What’s Going To Happen?

What does that mean? For the last couple of years when the hurricanes come through, especially with the last twelve, twelve months, the areas of the country that have been devastated the most by hurricanes have also led the country in default and foreclosure rates. Harris County has one of the highest foreclosure rates in the country and also Florida.

Texas itself has not been such a high foreclosure rate, but Harris County and the Gulf coast areas where the hurricane came through for two years is still seeing a higher foreclosure rate. The default rate kicks in and Florida’s been one of the higher states for foreclosures because of the hurricanes coming through. Not just the major ones, but also you have smaller hurricanes that caused damage to go through there. That’s what we’re going to see. What’s going to happen immediately? We know the devastation. You’re going to have water. You’re going to have buildings that need to be torn down. Roofs are going to be gone. There’s going to be an increased cost of supplies because supplies will be at a higher priority. They’ll have high demand. Often it will be a little slow getting in the supplies depending on what’s going on. That’s what you’re going to see happen for the most part.

Let’s talk about a couple of things here. You got to expect the devastation. What’s going to happen immediately is banks, hedge funds in those areas, real estate investment funds that have mortgages in those areas, they’re going to do the right thing. Most of them should be doing the right thing and not sit there and go after the borrowers who now have a damaged house or suffered a travesty or their jobs have been lost. They’re often going to give the homeowners six to twelve months to get back on their feet. They’re going to give some time. They’re going to say, “Let’s work with you. Let’s work with the insurance companies. Let’s see what’s going to take place and what’s going to happen.”

That’s a good thing. I’ve had people reach out to me, “Florida may be on sale.” I’m like, “Let’s relax here for a second.” First and foremost, you never want to wish that on somebody, but Florida has faced enough hurricanes in the past anyway over the years that you should also always expect stuff like that to happen. If you’re living on the coast in Florida, you have to understand this is going to be a way of life. This is what’s going to happen. Unfortunately, it seems like a lot of the storms are getting stronger and stronger and all this because of global warming. We have more moisture in the air, more water out there from the ice caps melting. I don’t know. I’m not a meteorologist or a scientist.

NCS 507 | Hurricane Dorian

Hurricane Dorian: Banks, hedge funds, real estate investment funds that have mortgages in affected areas shouldn’t go after borrowers who now have damaged houses, suffered travesties, or lost their jobs.

 

We’re seeing progression Category 4, Category 5, maybe Category 6 they were talking about. That is possibly happening. You’re within 50 miles off the coast. You have to expect the devastation of the high winds, the rain and flooding. It’s got to become a way of life. You have to expect that living on the coast in Florida or even in Texas or in South Carolina, Georgia or North Carolina. You can see the governors now are also recommending evacuation for those low lying areas. Even though the hurricane maybe two, three days away, they’re trying to prepare to keep a mass panic taking place. That’s the thing you look at, where l this hurricane hit, wherever it goes, you’re going to see an increase in default. It’s going to happen.

It doesn’t mean you can jump on board, start calling banks immediately to start buying that debt because the banks know that they wait around a little bit and work with the borrowers. They don’t want to be the bad guys, “We foreclosed on somebody that lost their house.” They don’t want that PR nightmare. They’re not going to do that. They’re going to wait for the insurance company to come in to stroke a check to help them either get paid off in full or go from there. You’re still going to have a fair share of properties where the borrowers walk away. Houses demolished. Look at what happened in New Orleans years ago. You still had empty properties for a couple of years.

The Gulf zone, that was in place coming in and provided benefits to investors to come in and rebuild those houses and go from there, but will we see that? I don’t think we’ll see that necessarily in Florida because of the high-end real estate aspect of that. You’ll probably see that in some areas in Florida and Georgia, maybe the lower economic areas. People don’t have the extra money where they move and maybe never come back like what happened in New Orleans. You don’t know, but you’ve got to expect that.

Things New Real Estate Investors Need To Keep In Mind

Things as a note real estate investor to keep in mind are if you owned a property, you better be having your insurance taken care of and paid up-to-date. That’s going to be one thing that’s going to be costly to invest in areas that are hit repeatedly like Florida. You got to make sure that your coverage with wind damage, rain and all that stuff that you got those writers or coverage on there because that alone can, I hate to say it, ruin a deal when you’re looking at it. You can pick up something non-performing and pick something that’s taking over in distressed assets in twelve or eighteen months from now because that’s the thing to look at. Foreclosure rates that have been a little higher in those areas are going to tick up a little bit, but you’re not going to immediately start seeing foreclosures skyrocket there. The banks are not going to do something to start foreclosing. They’re going to give the borrowers time of six, twelve months before they start the foreclosure process or sending out notice of default.

The thing is when you look at the states like Florida and South Carolina. I’m separating those from Georgia and North Carolina because South Carolina and Florida are both judicial states. You have a longer foreclosure timeframe, let alone the states, nine to twelve months to foreclose. It used to be over two years at one point over a decade to get in Florida. The online foreclosure and the court system that expedited to get that stuff done over the last several years. It’s not nearly as dramatic or as long as it used to be, but it’s still a longer time frame than Georgia, which has a 60 to 90-day foreclosure timeframes. It’s the second-fastest in the nation compared to Texas. That’s the thing to look at.

One thing in Georgia that’s going to slow you down a little bit is how the state wants you to be a licensed mortgage broker in Georgia. If you’re going to be buying debt outside of your self-directed IRA, that’s the one you say the get out jail clause. If you use your self-directed IRA to fund the deal, you don’t have to have it. It doesn’t have to be a licensed mortgage broker. Everything else does there in Georgia. North Carolina is a relatively faster foreclosure state anyway. You’re going to have everything from the coast and who knows how far the hurricane goes up the coast or what ends up happening.

You can start identifying those states. If you invested in those states, start marking, start tracking stuff and start marking your calendars for six months to nine months to twelve months to start reaching out to the banks that lend in those areas. You start reaching out because you can probably pick up some assets that are relatively inexpensive. They either have been damaged because the hurricane or they paid off. You get somebody and walks away. Banks will often look at a portfolio or two in specific areas to get off their books. It depends on what the default rates are in those areas. That’s the thing to keep in mind.

First and foremost, our thoughts, our prayers go out to those that are being affected by this and who are going to be affected by this in a variety of reasons. Not just those that are in those areas, but those that have evacuated. I can think of what happened in Houston a few years ago or New Orleans was hit and Houston and Austin and San Antonio were effectively everybody moving here. FEMA can step in, provide temporary housing, took over apartment complexes. That’s the thing if you look in the areas around maybe two, three hours away from the hardest-hit areas of this hurricane area, the area is going to be impacted faster than anything else.

What do I mean by faster than anything else? Those are the areas that here over the next six months, next twelve months, you’re going to see an increase in occupancy and see people that evacuating or staying with friends and family. They’re doing temporary rentals. You’re probably going to see an increased cost in Airbnbs and short-term rentals. Your vacancy rates will go down as people are staying there longer. I’ve already had people reach out to me who lived in Florida, but they’ve moved to Ohio temporarily or they’re out of Jacksonville or they’re out of West Palm Beach. They’re not moving back for a while. Give it a month or two before they end up heading back home on a fulltime basis because there won’t be a place for them to stay.

That’s the thing too. We had stuff that happened here on the Gulf Coast of Texas. The eye of the storm went over Aransas Pass, Texas. That’s where I grew up. The eye of the storm went over my Ingleside Aransas Pass where I grew up. It’s my old home where my parents raised us. You can go there and help, but there is no place for you to stay unless you got a travel trailer. You’re still going to need your electricity and your gas because things were devastated. That’s the thing to keep in mind is if you’re an investor and you’ve got properties in those areas, first and foremost, I hope your insurance is doing well. I hope you paid up your insurance and you get the extra insurance there, but you’re probably don’t want to take a look at areas that are being affected where people are moving to.

That’s the thing that I would be doing as looking at the maps of your assets. If you got stuff across the country or you’re in a market, look at stuff that’s two hours, especially an hour, two hours or maybe three hours away from where a lot of that devastation is going to hit along the coastline. That’s where you get to see the first impact in the first 30 days. The first week, you already have seen an impact in those areas. People are coming in temporarily staying in hotels, family and friends like that and Airbnb. You see an increase in that spike up. Hopefully, we’re not seeing people that are price gouging, which happens quite a bit. We’ve seen that happen in some resorts. People are going, “I live on the coastline. I’m going to Orlando. I’m going to go ride it out in the resorts.”

The increasing costs are going up in the rooms because of their being nearly booked. It becomes a supply and demand. There’s a lot of demand but less supply, the cost is going to go up. I don’t consider that initially price gouging. You’re not charging $80 for a sheet of plywood or $100 for a sheet of plywood like what’s happening before some of these hurricanes in the past. There are opportunities, but you also have to keep in mind, “What’s going to happen?” People are going to lose their jobs. People are going be able to work because their job back home is gone or it’s completely shut down or expect and stuff like that. This is where we are going to see more issues more than anything else.

Not the housing, not the insurance, we’re going to see the default rates increase because of the hurricanes. You’re also going to see people that are staying somewhere right now. They don’t have money long-term. They don’t have savings. 10% of America is already one month behind their mortgage payment. 85% of Americans are a paycheck away from being default. You have to look at those different economic issues of what’s going to happen. Yes, it’s going to take money to come in and repair. A lot of people are doing in Houston, people who are showing up to Houston with a razor blade cutters, going door to door and helping people taking where the water level came in at four foot or less or whatever and running that razor blade.

They’re cutting that sheetrock or finish it taken out and everything else that’s been damaged or waterlogged. You’ve got to get that out of the house within the first two to three days. Otherwise, you’re going to have the dramatic mold sitting in and that’s never a good thing. It’s going to take a little while for those houses and the housing markets in these areas that are here all cover because people are not going to want to buy in those areas immediately. What’s a beautiful thing is when investors do come in, they’ll pick those things up. They’ll buy those things because they know to put the work in especially if they’re willing to hold onto it as part of their models holding out the assets for 12, 24 or 36 months. It’s an opportunity to come in, pick up those assets at a cheaper price and hold onto them while the market rebounds or recovers.

I don’t think it’s a quick fix and flip market for the most part. It’s more of a buy and holds on the assets for an extended period of time. That’s why it’s important. Start looking at what’s going on in those markets. Start understanding. If you’re a landlord and your properties survived okay, you should not have a vacancy factor. You should be able to rent that property out. Maybe even a little bit of a premium because I wouldn’t say like doubling the rent, but I have at least a premium because of supply and demand or a lack of demand more than anything or lack of inventory more than anything else especially in a lot of areas. Here in Austin, vacancy factor is low because we have so many people moving in the area and we have a shortage of new homes being built.

We’re three hours away from the coast. San Antonio is two hours away from the coast. If something were to hit the Gulf Coast again, you’re going to see some impact. We get some rain. We get some wind. We’ll get a tornado that’s two, three hours out, but it’s not the same thing as bearing the brunt of the force. It was 150 plus mile per hour winds. I will tell you a story. I grew up in South Texas. I worked down in Port Aransas on the coast. I worked for Royal Caribbean condos there. What’s funny is most of those large buildings that are built with large condos, they have a wind factor of about 100 miles an hour. There’s not much holding them up. You’ve got some rebar. You’ve got exterior paint and stucco.

What’s on a Sheetrock are not Sheetrock? It’s a Styrofoam exterior for the most part. It’s harder stuff. You would see spots with the Sheetrock and you are like, “What is this? This is foam board underneath here. It’s not Styrofoam, but pretty much it is. That’s the thing you keep in mind. Realize, they’ve got insurances on high rises and the condos too. Part of the reason I loved condos in the past, especially in the Gulf Coast is because it’s pretty easy to fix. You can go in if you’ve got some water damage, clean everything out relatively quickly and replace it. Be up and rocking and rolling and in 30 days or less, depending on the situation of the unit. Your insurance costs are going to be higher. We’ve got some friends that have bought some property that had been hit by those areas.

They were excited because they were getting the asset at a discount. The insurance costs have removed most if not all the profits from it because they’ve been had to hold onto the asset for a while. They’re carrying these costs on an investment property. That’s the thing to keep in mind. If you’ve got friends and family and those areas, reach out to them and realize something’s going to happen. I know everybody likes to stress out about this thing. The banks are not going to sit here and start the foreclosure process if you’re in an area. If you’ve been affected by the hurricane, they’re going to get a bailout by the government or some insurance. They’re going to be, “Let’s wait six months at least to see if you’re in the heavy devastation areas. They’re not going to sit there. They’re going to work with you.

The best thing you can do is if you’ve got friends and families in the area, start praying for them. Make sure to reach out to them and say, “You may want to look into this.” Depending who your bank is, reach out to them, let them know immediately that, “You’re in an area that was hit hard and they’ll be able to see that by the insurance numbers and everything going on. Also, your job, your employment was effective but it is affected. If you are a tradesman, that’s the thing to keep up. You got friends that are in trades. There will be plenty of work in these areas. Repair and rehabs that are being financed by banks, by insurance companies and things like that to get a land sale.

NCS 507 | Hurricane Dorian

Hurricane Dorian: 10% of America is already one month behind their mortgage payment. 85% of Americans are a paycheck away from being default.

 

We’ve seen this happen before. We’ve seen this happen all in Texas, especially during summers, we have these horrible thunderstorms come through. Roofing companies are going all over the place, especially if a tornado hits an area or hail goes through an area. You’ll see an area flooded with roofing companies coming through to give bids to get insurance checks and to go to work and make that stuff happen. You can see that happening throughout Florida there. One of the things you also want to keep in mind, make sure the animals and stuff are better-taken care of. I saw somewhere in Georgia, South Carolina, they’ve got a bunch of animals ready of adoptions that had been evacuated. They’re looking for homes because they’re sitting there and these areas are going to be hit. These shelters are looking to move these animals out before the hurricane hits because they’re going to be able to have limited staff and we will take care of the things.

They’re going into power being out, water being out, storm surges and things like but they got to take care also. The best thing I can tell you to do is if you’re in an area like that, our thoughts and prayers go out for you if in your evacuation. We wish you the best. If we can help in any way, please don’t hesitate to reach out to us. Keep an eye out if you’ve got a property within two hours of those areas, you’re going to see an influx and you see some opportunity if you need to. For those looking to invest back in Florida and other parts that are hit there, you’re not going to see a rush to the bank selling notes off in those areas. They’re going to wait a good six to twelve months to see if they can get paid off in full. You’re going to start seeing the opportunities to start hitting.

As you start seeing, depending on what happens there and how heavy the damage is or how little the damages in an area, there is some opportunity there. Keep that in mind. One of the things you can look at too is you talked to the zoning department and code enforcement in the next few months. You’re going to see, especially if it’s in areas you like, those code enforcement guys and gals are the best eyes and ears in a specific city. Oftentimes they can provide you with a list of properties that have been hit in areas. That may be a list for you to target as far as the banks that are on those lists of doing some research, tracking down the smaller banks. You’re not going call Bank of America, Chase, Citi Bank, Wells Fargo to buy their debt, but you’re going to see smaller banks.

I don’t have quite the reserves that might be willing to sell the debt off on some of those homes in the next six months. I wouldn’t jump on it here now. I would wait for three, six months before you start reaching out to those banks to see if there’s a way for you to step in and become the bank, buy that bid at a discount and negotiate something with the homeowner. If they’re still in their house, try to get them back up on their feet. If they’re not in the house, then a Cash for Keys or deed in lieu. You always want to make sure to put eyes on those assets. That’s going to be the most important thing is you may be buying a note on a house, but you have gotten as a slab or a shell or half a house that been blown away or torn down.

We got to keep that in mind is it’s going to be a little bit more expensive. If you’re a renter in the Orlando market, you’d expect that to go up if you’re living there. It’s the one thing that people don’t think about. I’ve got some friends that are running in Orlando. Hopefully, you’ve got your lease in for another six to twelve months because I would not be surprised if your landlord bumps the rent up when your lease is up in the next couple of months. I’m not talking by $50 to $100. It may be about $200, $300 depending on what happens in the market. Be prepared, be working and be ready to rock and roll. That also leads to an increase in money coming into those markets. More restaurants, fast food and entertainment as people are living there, grocery stores and things like that. You’re going to see a lot of basic stuff. Probably necessities be a little higher priced because there’s been an increase of need in those areas.

Somebody made a joke that people in Orlando going to get water look like something from Mad Max, which we’ve seen that happen. A few years ago, we saw even here in Austin. Three hours from the coast, we saw areas where aghast people were getting an extreme amount of light. In Austin, we’re going to get some rain. It’s a little bit of wind. We’re not going to see the dramatic effects of a hurricane. We’re three hours away. There is no reason to panic. Yes, it’s good that you got extra stuff at your house in case something happens. Let’s not be dramatic and cause chaos in specific areas because you need to get your extra six-pack or twelve-pack of water out there.

Once again, Dorian destruction, we wish everybody the best. Our prayers go out to them. If you’re interested in the note business and stuff like that, you’re going to see some defaults in there. It’s going to be six to twelve months before anything happens. You’re going to see an increase in the cost of housing, increase across the supplies, insurance costs are going to go up dramatically as we already know that they’ve already done that there. Some people will leave and never come back. Others will rebuild again and will absorb the cost. We have to realize that something happens when you live in Florida. We have to expect that. You’re going to hit by hurricanes.

That’s the thing that’s great about the news. You know that something is coming. It’s not like they are showing up instantly with no alert. Luckily, the death toll decreases dramatically because we have such great news, weather and radar these days compared to what it was a century ago or even 50, 60 years ago. Once again, please be safe out there. If you’ve got friends and families in the area, our thoughts and prayers, go out to everybody out there. Lend a hand, feel free to reach out to people. We can help in any way. I’m sure there’ll be some funds donated like how J.J. Watt did with his funds that he helped out with $26 million donated. I’m sure you’ll see that. Make a donation out to your Red Cross and other places out there as well. Be safe and we look forward to seeing you all at the top.

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