Would You Rebuild?

This is a thought exercise.

Suppose that you owned a home in Pacific Palisades, or Altadena that was destroyed by one of the wildfires. You have been through a very tough time. The fires are out, and after reporting your loss, you are waiting to hear from the company adjuster. You have a big decision to make……Will you rebuild?

Our little housing area here in the PNW has about 2000 single family homes. The first ones were built in 1976, and the build out was completed 20 years later. Between the start, and today, there has been only one structure totally destroyed by fire. And, I think this is really the norm with modern building codes. There have been a number of other fires but none with 6 digit damage amounts. The 2200SF home that was destroyed was owned by an elderly man and he elected not to rebuild. His homeowner’s insurance paid to have the debris removed, and he sold the lot to a builder. Our HO association had the plans for the home and the builder was able to rebuild using those plans with only minor updates for changes in the building code. The whole process took about 9 months. The original owner settled his claim with his insurance company and received the Actual Cash Value of the structure, plus his additional living expenses up to the time of the sale of the lot. You cannot collect the cost to rebuild unless you actually do so. ACV is defined in most policies as the Replacement Cost of the structure using “materials of like kind and quality” less depreciation. The home had been built in 1978 and the fire occurred in late 2009. I don’t know how much depreciation was deducted; perhaps 20%.

Let us think for a minute about what the property owners faced after the Paradise, CA fire (Camp Fire 18000 structures burned) in 2018, and what the people who have lost their homes in the current fires in Los Angeles will face.

1. Hazardous waste. Fire debris from modern materials including plastics and electronics is hazardous and must have special, expensive handling. In some cases top soil will need to be removed as well. Your HO insurance usually includes an additional 10% for debris removal. Because so many homes have been destroyed the government will have to make a decision about what to do with this waste.

2. Damage to infrastructure. All above ground utilities will need to be replaced. There may be damage to some in the ground utilities. Without electricity to your lot, you cannot rebuild.

3. Shortage of contractors and building materials. This will cause rebuilding to be MUCH more expensive through supply and demand, and profiteering.

4. Redesign and creation of building plans, and permitting. With thousand of people trying to do the same thing, the bureaucracy will be burdened and slow. There are only so many architects.

5. Insufficient insurance coverage. Typically in a catastrophe , a significant % of destroyed houses will not have enough coverage to pay for replacement. Many existing policies will not have coverage for required building code upgrades. There will be disagreements with the insurance company about what existed before the fire. (We had gold door knobs and marble floors.) Many people who rebuild will want to build something different than what they had…

6. The time required to replace the home will be much longer than people imagine. With 12000 buildings destroyed, just going through the adjustment process with the insurance companies will be difficult and time consuming and emotionally draining.

7. Living in the rebuilding area while reconstruction is going on is going to be very, very difficult. If your home is done first, you will be living in a place with no stores, no restaurants, no schools, and the constant din of rebuilding. The rebuilding zone will be visually sterile, with no vegetation, no landscaping, etc. There will be odors both from the fire, and construction.

8. You don’t know if you will you be able to insure your new home both during the course of construction, and after it is completed. Only one insurance company has begun selling policies in Paradise.

9. Just finding temporary housing for the residents of 12000 homes is going to really stress the rental housing market.

So, after going through all the trauma of being burned out of your home, seeing everything you own destroyed, knowing that it is going to take years before you can be in your rebuilt home, are you going to want to rebuild? Or perhaps, will you take the ACV payment settle up with your mortgage company, sell your lot, and relocate somewhere else?