I have received a number of inquiries about appraising Jersey Shore properties that were damaged by Hurricane Sandy for casualty loss under Internal Revenue Service Rule 165. Thus far, I have not taken on any of these projects. I am not going to lie to you, this has ticked off some clients.

Let’s start from the beginning. Real estate consists of two parts: land and building. During Hurricane Sandy many, many buildings were damaged by wind and flood. Now this is a loss, and to the extent that this loss is not covered by insurance, I believe that there is a legitimate casualty loss deduction. And while this loss can be measured by real estate appraisers, I think it is best left to people more expert in the cost of repairs like contractors, engineers and insurance adjusters.

Now let’s talk about the land. There have been some cases where the land was damaged. Washed away, to be exact. To the extent that the land is permanently unbuildable, I believe that there is a legitimate casualty loss. So far I have not seen too many of these cases.

I was listening to a story about Hurricane Sandy on National Public Radio yesterday. The story decried the losses experienced by people who sold their properties for “half of what they are worth”. But then the details emerged. These sales were of badly damaged homes that had not been repaired. So the sales were of (I assume) buildable lots, not single family dwellings. Of course the value was lower. The buyer had to (a) repair the house or (b) pay the cost of demolition and build another house. And that costs money. Thus the lower sale price.

Going forward, I see two issues relating to the land. The first is one of supply. There is little question in my mind that in the next year there will be a large number of properties for sale in Sandy-damaged communities. Some sellers will just be frustrated or afraid of another storm. Many simply won’t be able to afford to rebuild. There will be a glut of properties on the market which will tend to push prices down. However, I think this “rat in the python” bulge will work itself out relatively quickly and prices will firm by spring 2015, perhaps even sooner, barring another Sandy-sized storm.

Issue two: as these properties are sold, they will be rebuilt to current flood zone standards, elevated above the high water mark set by Sandy. And two things will happen: (1) the views will probably improve and (2) the homes will be perceived by the market as “safe”. As risk declines, values tend to go up. In my view, the only “damage” to these lots will be the cost of elevating the house, which is relatively small compared to the total cost of construction.

So what does all this mean? There will be great opportunity for buyers through 2013, and a chance to create a whole new Jersey Shore.

We should probably get to work.

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