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Making a fast buck out of misery

Speculators in Houston flip flood-ravaged homes. "We're like the first responders, critical to getting the economy moving again, equipped to take on the risk," defends one.

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An agent who deals in flooded homes with a contractor in the Canyon Gate subdivision in Katy.

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Mr Pelletiere is inspecting a property for the first time that he purchased in Canyon Gate (above) and he is at his home, which is undergoing repairs after it was damaged by flooding during Hurricane Harvey.

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Mr Pelletiere is inspecting a property for the first time that he purchased in Canyon Gate and he is at his home (above), which is undergoing repairs after it was damaged by flooding during Hurricane Harvey.

Houston

THE yard signs appeared almost immediately. Canyon Gate was still in ruins, its streets strewn with moldy furniture, the stench of rot everywhere. But somehow, someone had managed to plant dozens, maybe hundreds of them across the tiny Houston suburb.

One proclaimed "Dump Your Home!" Another, stuck into the dirt, read "Flood Damage? We Can Help."

Bernadette Leaney, 67, one of the thousands of Houston residents whose homes were swamped in the aftermath of Hurricane Harvey, hated them. She and her neighbours were just beginning their grim reckoning with the damage. Who could be looking to make a buck this soon? She tried to ignore the come-ons. "But then I realised I just couldn't stand looking at them anymore," she said. "They were adding to our despondency."

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She tore down every sign she came across - 114 by her count - until another resident told her it was one of their own neighbours who had posted many of them. His name was Nick Pelletiere, she learned. He ran a company that transported cadavers for funeral homes, but recently he had expanded into another lightly regulated trade: buying and selling flooded homes. People in Canyon Gate called him Shady Nick.

Mr Pelletiere is one of the many speculators driving a new - and somewhat confounding - economy in neighbourhoods across post-Harvey Houston, one that is especially notable in Canyon Gate, a subdivision built in the 1990s where rice fields once stretched to the horizon. Many parts of the city were hit hard by the hurricane, but Canyon Gate has the extraordinary distinction of being built within the confines of a reservoir specifically designed by the Army Corps of Engineers to protect central Houston from calamitous flooding. Nearly every one of the 721 homes there is destined to flood again, yet the local trade in storm-damaged real estate is flourishing.

Canyon Gate's dilemma lays bare a defining feature of coastal life in a time of climate change: Many of the neighbourhoods where we already live should never have been built in the first place, and doubling down on reconstruction could make the consequences of the next disaster much more severe. But doubling down is what speculators do, and - at least in the short term - they are profiting from their efforts.

"I'm the guy who put up the bandit signs around town," Mr Pelletiere said one morning in February in his own flooded home, where he and his family were living on the second floor as contractors slowly repaired the first. He said that, like most of his neighbours, he had no idea that he was living inside a reservoir until the hurricane unleashed nearly 50 inches of rain and the reservoir - just as its designers intended - flooded the land all around him.

But where some saw calamity, Mr Pelletiere, a 47-year-old Chicagoan who followed his star to Houston two years ago, saw opportunity. Even as a volunteer boat team was evacuating him, his wife, their two children and the family dog, he was growing obsessed with a single thought: It's time to buy.

And buy he did. Within weeks, Mr Pelletiere snapped up seven properties in areas hit by Harvey, all at a steep discount from their pre-storm values, pocketing sizable gains while some of his neighbours were grappling with financial ruin. In one deal, Mr Pelletiere bought a flooded four-bedroom home, valued at US$280,000 before the storm, for US$135,000. He sold it the same day to another investor for US$165,000. After accounting for closing costs and the interest he paid on a short-term loan to complete the transaction (Mr Pelletiere rarely uses his own money for such deals) he walked away with about US$27,000, all in the space of just a few hours.

Mr Pelletiere laughed when he learned that his neighbours had taken to calling him Shady Nick. He said that the months since the storm had tested everyone. In December, he briefly "flatlined" during a test of his heart rate, he said. A few days later, he underwent surgery to have a pacemaker implanted in his chest to help treat heart failure.

Neither the shady nickname nor the abnormal heart rate seemed to faze him.

"My other business is picking up dead people for funeral homes," Mr Pelletiere said. "A nice recession-proof hedge against real estate: People are always dying. Those who are alive need to buy or sell their homes. For me it comes down to the numbers of whether a deal is feasible."

Making a fortune

Houston has always drawn fortune seekers looking to make a quick buck. The city was founded in 1836 by two brothers from New York, John and Augustus Allen, who had immigrated to what was then northeast Mexico only to side with the proslavery separatists who led the Texas Revolution. Within a few months of the war's conclusion, they began to develop a patch of land on the Buffalo Bayou. They made a fortune in the murky trade of land certificates, promising would-be settlers that their mud-bogged, landlocked new city idyllically offered "the sea breeze in all its freshness".

The reservoir in which Canyon Gate persists owes its existence to yet another calamity, the Great Houston Flood of 1935. Rains that year turned the streets of downtown Houston into choppy rivers, killing several people and shutting down the Port of Houston for eight months. The solution? Authorities built flood-control reservoirs in the 1940s, in effect creating new flood zones to protect the old ones.

Canyon Gate is designed to flood, but it is not part of the 100-year floodplain defined by the Federal Emergency Management Agency, so it is not covered by FEMA rules that require mortgage seekers in flood zones to buy flood insurance. Some residents say little effort has been made to inform buyers of the risks they face.

In the beginning, it seemed as if there was no need. "Back in the 1940s, when the reservoirs were built, this place was way out of town, and they thought that the cows would just get out of the way if there was some overflow," said Judge Robert E Hebert, a top elected official in Fort Bend County, a once sparsely populated expanse that now has more than 700,000 residents, including those in Canyon Gate.

But in the late 1990s, bolstered by Houston's rapid expansion and the construction of new roads nearby, a residential development company called Land Tejas unveiled plans for Canyon Gate. County officials insisted that the developer warn prospective buyers that the homes lay in a flood reservoir, and Land Tejas agreed to do so, but only by way of an obscure filing. "This subdivision is adjacent to the Barker Reservoir and is subject to extended controlled inundation under the management of the US Army Corps of Engineers," the developer stated in 1997 in the fine print of the plat, the county's document approving the Canyon Gate subdivision.

"This is a man-made disaster we're dealing with, make no mistake," Mr Hebert said. "All these houses shouldn't have been built in the first place, and now the speculators are moving in. The last thing I'd want to do is buy a house flooded in a reservoir." And yet the neighbourhood is attractive in many ways. Canyon Gate, as its name suggests, offers a coveted sense of safety. It is also a remarkably cheap place to buy a home, and getting even cheaper. Spacious three-bedroom homes sold for about US$230,000 before the storm, drawing some buyers from costlier real estate markets elsewhere in the United States. Now, homes in Canyon Gate go for about US$130,000, and investors are scrambling to bet on Houston's recovery.

Before the storm and after, Canyon Gate stood out for its capacity for welcoming people from around the world, its cul-de-sacs home to Nigerians, Indians, Venezuelans and Canadians, along with people from dozens of other countries. Fort Bend County ranks among the most ethnically diverse places in the world. Scholars at Rice University's Kinder Institute for Urban Research recently found that Fort Bend rivalled the diversity of New York and Los Angeles, with 35 per cent of its population Anglo, 24 per cent Latino, 21 per cent African-American, and 19 per cent Asian.

As Houston sprawls over the prairies, its residents are reckoning with the likelihood that the city will flood time and again in the decades ahead. And if Canyon Gate is a harbinger, that means homeowners will face dizzying choices with each big storm: rebuild on the same spot, pull up stakes and move on - or effectively trade on their neighbours' misfortune.

Mr Pelletiere, for his part, sees nothing wrong with buying flooded homes. He said he did not expect everyone to approve of what he was doing but said that investing in such real estate depended on acquiring local knowledge and accurately measuring the value of a property.

"Yeah, people call me a vulture when they learn what I do," said Mr Pelletiere, his sturdy frame clad in home-office attire of jeans, T-shirt and stocking feet on a typical work day in February. He was darting around his home, barking instructions to construction workers fixing the first floor.

"In reality I'm offering homeowners solutions," Mr Pelletiere said. "I was flooded, too, I get it, but this hurricane is a monstrous opportunity." Born and raised in Chicago, Pelletiere grew up washing dishes for US$1 an hour in his father's Italian restaurant. He dropped out of community college, he said, after realising that higher education was not for him.

Seeking opportunity, he lit out west for Southern California, where he met his wife, who works in the aviation software industry. Undaunted by his lack of a college degree, Mr Pelletiere worked in corporate sales jobs, founded his cadaver-transport venture, and dabbled in real estate in San Diego, embracing the chance to use those skills when his wife was transferred to Houston.

Keeping a low profile

For some of his neighbours who remain unaware of his business activities, Mr Pelletiere is just another recent transplant to Houston's suburbs. He keeps a low profile, coaching his son's baseball team and working from home, managing by phone and email his employees who drive vans around Southern California with bodies in them. With his earnings swelling after flipping homes in the aftermath of Hurricane Harvey, Mr Pelletiere said he was planning to embrace Texas' business culture even more energetically, eyeing investments in dozens of oil wells in parts of the state.

After the storm in August, Mr Pelletiere joined a constellation of other speculators scrambling to buy flooded homes on the cheap. Mr Pelletiere said his ambition was to rival pioneering operators in the space, like Big State Home Buyers, one of Houston's largest buyers of storm-damaged properties.

Brian Spitz, Big State's president, said that he had developed a model for evaluating such homes, one that considered factors such as a neighbourhood's desirability, whether the property was in a FEMA-designated flood zone, a subdivision's history of flooding and how much of a neighbourhood flooded. Canyon Gate scored well on nearly every measure, and Big State bought 13 homes in the neighbourhood in the months after the hurricane.

Mr Spitz, a fourth-generation Texan with family roots in the pest control business, plunged into the post-disaster frenzy, snapping up 150 homes around Houston in the first 90 days after the storm. He said that some of the most alluring opportunities were found in areas with relatively low-priced properties before the storm, since homeowners in those neighbourhoods sometimes lacked the financial resources to quickly rebuild.

"Canyon Gate looked like a war zone after the storm," Mr Spitz said. "I've never seen anything like it, and this is a city with a high frequency of flooding. In a place like that, we're like the first responders, critical to getting the economy moving again, equipped to take on the risk."

Ms Leaney, who tore down all the bandit signs around Canyon Gate, remains one of the neighbourhood's biggest boosters. A Canadian immigrant from British Columbia, she moved to Houston 13 years ago after living in Britain, Indonesia and France, countries where her husband worked for an oil services company. She said she was drawn to the community by its affordability and its access to open spaces. Now she is the president of the homeowners association.

She said that her views on speculating in flooded homes had evolved to the point where she and her husband recently decided to take the plunge themselves, buying a damaged home on their street for their daughter and her fiancé.

"Some people say the investors are horrible, preying on vulnerable people, but that's not my view," said Leaney, emphasising that buyers of flooded homes were paying the association's dues, badly needed for the upkeep of playgrounds, picnic areas, swimming facilities and attendants at the front gate. "The investors like Nick are saving us. This is tough to acknowledge, but where would we be without them?" NYTIMES