As Hawaii mourns its dead, 'disaster vultures' are swooping in to make a quick buck
Business Insider
ANTHONY DIMAURO
August 31, 2023 at 9:27 AM
As Hawaii mourns its dead, investors are swooping in to make a quick buck
When disaster strikes, there are often two tragedies. The first, and most important, is the loss of life: Over 100 people died when wildfires burned across Hawaii in early August. Homes, cherished belongings, and local history were engulfed in flames. Thousands of locals were displaced, and there are still hundreds of people missing.
But the tragedy doesn't stop when the fires go out. The second tragedy is the exploitation of grief by investors looking to make a buck. While families are still mourning their loved ones and figuring out how to move forward, these disaster investors swoop in to buy damaged properties from locals. They purchase the cheap land and then wait to resell the properties after the lingering effects of the disaster have passed and property values increase. Critics refer to these real-estate players as "vulture investors" because they prey on grieving families.
In the Maui fire, more than 2,000 buildings were destroyed — 86% of them residential homes. Before the fire, many of those properties would have been worth millions of dollars. But just a week after the devastation, investors began calling residents of Hawaii's destroyed townships to try to convince them to sell their homes for cut-rate prices. Concerned about predatory investors taking advantage of vulnerable families, Hawaii's governor, Josh Green, called for a moratorium on damaged-land sales in his first press conference after the fires.
The Hawaiian fires aren't the first time investors have trotted out this playbook — every time disaster strikes, the "vultures" come calling. When tornadoes struck Tennessee in 2020, destroying 771 businesses and residences, the Nashville Metro Council passed a resolution against predatory developers targeting residents who had lost their homes and offering to purchase plots for submarket rates. Hurricane Ian, which struck Florida last fall, also saw developers swarm vulnerable families, hoping to snap up destroyed properties for cheap.
Climate disasters are growing more common and more destructive by the year. And after the initial losses subside, the profiteers inevitably arrive.
Strike early
The vulture playbook is pretty straightforward: Investors approach affected homeowners with an offer just days after tragedy strikes, hand them a prewritten contract, and try to reach an agreement on the spot. Once acquired, the investors turn around and resell the land for a higher price — sometimes without ever repairing the property.
This strategy works because the value of disaster-struck land consistently bounces back — often within months of the tragedy. A 2021 study of the 20 most-expensive hurricanes on record showed that in each case, home values in disaster areas increased at a higher rate the year after the disaster — compared to the same area the year prior and the national average. The study found that the year after Hurricane Katrina destroyed nearly 850,000 homes, home values in New Orleans increased by 12% compared to the year before the disaster — and the gains were 9% above the US national average for the year. Home sales in areas affected by Hurricane Michael, which struck the Florida panhandle in 2018, killing 45 people and destroying 60,000 homes, also rose significantly in the months following the storm. And these gains have been shown to maintain their momentum for up to three years after disaster strikes. A 2019 Wall Street Journal report found that one investor who bought up properties damaged by Hurricane Michael was able to earn $10,000 to $15,000 per property — without doing any work on them. Another investor group bought up more than 600 properties after Hurricane Katrina, making an average of $20,000 per property, also without touching most of them.
Prices generally go up post-disaster because the area is suddenly hit by a reduced supply of habitable property, while the demand to live there stays the same. So as homes are rebuilt or the debris is cleared for a new structure, the plots become more lucrative. The rebuilt homes are also newer than the ones that were destroyed, which adds value.
This venture has the potential to be even more rewarding given the increasing frequency of natural disasters in the US. The National Oceanic and Atmospheric Administration's National Centers for Environmental Information released a disaster report last year that found the US suffered 18 billion-dollar weather disasters in 2022, resulting in $165 billion in total damages. And this year is shaping up to be even more expensive. In eight months, there have already been 15 weather disasters, each with losses exceeding $1 billion.
For disaster investors, these increasingly common tragedies are an opportunity to win big, and the residents who have lost their homes pay the price.
Desperate situations
Even if there's an economic explanation for predatory investments, why would residents sell their homes for insultingly low prices? One obvious reason is that they simply don't have enough cash on hand to renovate their property back to a habitable state. For most families, their homes are the source of their wealth. According to the Federal Reserve's Survey of Consumer Finances, American families consistently list their primary residence as their largest asset, with home ownership accounting for 30% of household wealth for non-white families. With most Americans having their money tied to their house, losing it to a wildfire or other natural disaster can be devastating.
Home insurance often covers wildfire and storm damage, but private coverage is increasingly more costly and more companies are dropping home coverage altogether as the number of natural disasters keep rising, something that has already happened to many homeowners in Florida and California. Those left with no insurance or inadequate insurance are forced to rely on tenuous government aid for funds to rebuild. But federal disaster relief is painfully slow to respond and often doesn't cover most of the costs. Individuals, renters, and homeowners are all, in theory, potentially eligible for disaster-relief aid. However, qualifying for aid involves a long and convoluted process. Generally, the Federal Emergency Managment Agency first refers homeowners to the Small Business Administration to apply for a home-disaster loan. These loans require applicants to show certain levels of creditworthiness and an ability to repay the loan with interest, meaning many lower- and middle-income households may not qualify.
The next option is to apply for aid directly from FEMA — a process that requires several confusing and time-consuming steps. First, a presidential declaration of a major disaster is required, then residents must complete a self-assessment and application for relief. After that, FEMA officials conduct an inspection of damages and decide how much relief to provide. This process can take up to a month — and for other expenses like lodging reimbursements, people often wait up to two months for the funds. And other problems often arise: Inconsistent damage inspections, minimum damage amounts, and a confusing application process that has to be completed in a short time frame often leave disaster victims without the relief they desperately need.
In Puerto Rico, where thousands remained unhoused three years after Hurricane Maria struck, or in tight-knit areas like Lahaina, Hawaii, residents can face even steeper barriers to aid. Both Puerto Rico and Lahaina have a history of informal construction, meaning buildings often lack documentation, and homeowners can have a hard time proving property ownership. Given FEMA's strict proof-of-ownership requirements, many end up being unqualified to receive FEMA relief. The Urban Institute reported that "multigenerational family homeowners without active mortgages or who live in rural communities where a formal title is not readily documented are at a disadvantage."
The Government Accountability Office found that fewer than half of the applicants for relief under FEMA's Individual and Housing Assistance program between 2016 and 2018 — most of whom were uninsured or had an income under $50,000 — qualified for aid. For those who do qualify, the FEMA funds can be inadequate to cover the cost of rebuilding. Payments max out at $36,000 for home-rebuilding assistance and the average payout from FEMA is just $8,000.
After FEMA's 18-month funding period ends — assuming enough money has been approved by Congress — a last backstop is supposed to kick in through the Department of Housing and Urban Development's Community Development Block Grants. The grants are for long-term rebuilding projects, but administration of the funds often takes nearly two years. A 2020 congressional report found that New York still had more than $700 million to be distributed from grants given after Hurricane Sandy in 2017.
This interlocking nest of confusing aid options leaves many people desperate and willing to wash their hands of the properties. Some families may look at the damage and decide it's better for them to sell their home and rebuild somewhere else with the money from the sale. But other families may feel forced to sell their home for less than it's worth just to bridge the financial gap between the destruction and the potential aid.
Given the threadbare relief options, an offer from an outside investor and a plane ticket to a new state may seem like a lifeline.
How to curb profiteers
Instead of being a boon for residents and towns that are trying to build, outside investment often changes the character of an area. New developments often include strip malls and luxury hotels that can replace working-class communities and previously affordable housing — usually without creating any new housing. And the profits that out-of-state investors make by reselling damaged properties comes at the expense of the struggling households that could have reaped those benefits.
One promising solution is a piece of legislation proposed in 2019, the Reforming Disaster Recovery Act, that aims to streamline the process to receive HUD's block grants so that communities get relief more quickly. The bill, which passed the House but has yet to be put up for a vote in the Senate, would help relieve the pressure on homeowners to sell because they're out of funds to rebuild. In Hawaii, local grassroots organizing has provided a crucial cushion for people who lost their homes. Organic efforts have raised more than $12 million, and locals have even set up a home-sharing system where people have volunteered to host families who have lost their homes.
And while moratoriums on damaged land sales aren't a long-term, legally tenable solution, there are ways state officials might be able to deter disaster investors. For instance, a state "disaster-relief tax" could be applied to all sales of land occurring within a certain amount of time after a presidential declaration of a major disaster. The tax could serve as an indirect deterrent to disaster investors, and the revenue generated by the tax could be redirected into local relief efforts, helping other families who intend to remain in the area.
Since the climate crisis isn't going away, finding a solution is critical. As the threat of natural disasters increases, so will disaster profiteers.
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