Story of 2 sinkholes: money pit and money pot
By LEONORA LaPETER
As Landrie and her family tried to figure out what to do, a stranger walked up and offered $5,000 for her home in Holiday. The Landries, who had lived in the two-bedroom home for 11 years, rejected the offer.
"I couldn't believe that lady showed up the same day," said Landrie, mother of four and a records clerk with the Pinellas County Sheriff's Office. "She knew how scared I was. I was thinking, 'How dare she offer me $5,000?' They prey on your fears."
Over the ensuing months, three other offers came in. The Landries took the highest, $43,000.
The sale and an $80,000 insurance settlement left them better off than before the sinkholes. Landrie said they paid off a $45,000 mortgage and put down $30,000 on a $147,000 house with four bedrooms.
"I can't complain," said Landrie, 38.
To be sure, homeowners with sinkholes on their property face stress and tough financial decisions. But for some, owning one of these homes isn't the nightmare you might imagine.
"Ninety-five percent of them make out like a bandit," said Phyllis House, an investor who buys sinkhole homes, fixes them structurally and sells them. "The money they get from the insurance company pays off their mortgage, and they may have money left over. What I give them puts them at fair market value or over."
The dividends don't stop with the homeowners. House is among a growing legion of entrepreneurs making a tidy profit on these seemingly undesirable homes.
But there are different breeds of sinkhole speculators out there.
-- Some investors buy sinkhole homes and spend $20,000 to $50,000 on an engineer-approved plan to repair the sinkholes and the homes, then sell the houses near market value. They can earn profits on average of $30,000 per house.
-- Other speculators offer homeowners more money for the homes -- about 65 percent of their presinkhole values -- fix them cosmetically and rent them out without fixing the problems underground.
-- Still others buy the houses, patch the cracks and sell the homes for full price to unsuspecting homeowners without disclosing the sinkholes, according to lawsuits. This is against the law.
"We're in a dilemma here," said George Weber, a sinkhole home investor who also works for Discount Settlement Solutions, a company that repairs sinkhole homes. "There's a bunch of (people) out there buying, repairing and selling them. Then you have this other group buying them and not fixing them. It's a big bidding war."
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Sinkholes develop when the underground limestone is dissolved by acidic rainwater. Eventually, the overlying earth collapses, or "subsides" into the cavities.
While there is debate about whether there are actually more sinkholes these days or simply more homeowners to spot them, insurance companies are clearly being hit by more claims. And insurance claims for sinkhole repairs have risen from an average of $40,218 in 1996 to $62,628 in 2001, according to a Florida State University study.
People knowledgeable about the process say many homeowners, though not all, are receiving full payouts on their insurance policies. They say insurers seem bent on paying off policies in an effort to get out of sinkhole-laden neighborhoods.
Arthur Dillman, director of operations at All Coast Engineering Inc. in Brooksville, recalled one home that had subsided because of a furrowing gopher turtle. He called the homeowner back a few days later and she said her insurance company had paid the full policy limit, $120,000, without even sending an adjuster out.
Of course, some homeowners find they don't have enough insurance to cover the damage or they must battle insurers that deny their claims. They must negotiate a maze of geotechnical engineers, repair contractors and sometimes lawyers. If attorneys get involved, they take a cut and reduce the insurance payout. One law firm in New Port Richey has gone from one lawyer to six in the last few years just handling sinkhole claims.
The FSU survey of insurance companies found they were more likely to deny claims in 2001 than they were in 1996. Insurance companies are required by law to cover sinkholes but not damages from settling.
But insurers are finding it easier to simply pay off policies in some neighborhoods with lots of problems, experts say. Pasco, Pinellas and Hillsborough counties generated the largest number of claims in the state through 2001.
"What we heard is that insurance companies were trying to do repairs, trying to fill it up and then they were ending up with more problems on some properties," said Cassandra Cole, a co-author of the FSU study on the economic impact of sinkholes. "In some areas, they're finding it's just cheaper to pay it off and move on."
Rade Musulin, a spokesman for the Florida Insurance Council and vice president of Florida Farm Bureau Insurance Cos., said the only time a policy limit would be paid is if the cost to repair the damage exceeded the cost of replacing the dwelling.
"There's no systematic paying off of policies just to get out of policies," he said. "It's not something one would do. It gets very expensive."
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Three years ago, Phyllis House bought a home in Dunedin that was on top of a sinkhole. She spent $52,000 on it, about half its presinkhole value. House, who had sold real estate for years, was told it had been repaired by shooting a concrete-like grout into the sinkhole.
She didn't know the work was done without an engineer's approval. She learned that after spending $14,000 to renovate it. After the drywall started peeling away from the ceiling in her living room and the floor started sloping down in her bedroom. When the noises in the night, popping sounds like water over ice, became commonplace.
Her insurance company called it a pre-existing sinkhole and refused to pay her a dime.
She went to a lawyer, Alan Marshall, who asked her a simple question. Did she want to spend $50,000 fighting it? Or, did she want to spend $30,000 fixing it and get on with her life?
House fixed her home.
"I started doing some research, and I found out you can buy these homes for 20 cents on the dollar, repair them and then you could make $20,000 to $40,000 on the home depending on the price," said House, 59.
So she bought another sinkhole home. And fixed it. And another. Now she and her daughter, Tina Olinski, 40, have gone into the sinkhole business. House hires a foundation repair company that stabilizes the home by connecting steel rods around the foundation to the limestone bedrock below.
And they've added a company to finance their niche business. Home buyers cannot get loans to buy a sinkhole home that hasn't been properly fixed, so Olinski has lined up a dozen investors who put up money and get a 15 percent return.
House said she has about 15 repaired sinkhole homes on the market, most for sale at market value. Durenda Fachtmann, a Realtor in Dunedin, said home buyers sometimes see the logic of buying a house that has been stabilized with steel pins in a neighborhood where sinkholes can happen at any time.
Kristi Curtis, 33, an investor, said she hasn't had any problem selling the homes she has fixed up. House often gets so many people trying to sell her their sinkhole homes, she sends them to people in her women's property investment group, such as Curtis.
"When we go to sell the property, we disclose everything, and most people don't have a problem with it when they see the engineering report," said Curtis, who turned to buying homes after closing a brass interiors shop at Clearwater Mall. "I had one by Westchase that sold in seven days."
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But a new breed of sinkhole investors is pushing these kinds of entrepreneurs out of the business. These are investors who offer homeowners more for the house but often don't spend tens of thousands of dollars underpinning it with steel rods and grout.
"There are probably like 20 people out there in the sinkhole industry, but a big problem we're having is that a lot of people are fixing them up and renting them out without telling the tenants there is a problem," said Hayden Wrobel who buys and sells sinkhole homes.
Investors who fix the sinkhole problem end up being priced out of the sale during the bidding war. Cheri Fish, who has bought four sinkhole homes in the last eight months, said she has ended up being outbid on a number of sinkhole homes recently.
"Personally, I can't buy anymore, because they're paying too much for me," said Fish, 48, a former receptionist who lives in Port Richey. "How can I compare with them? I fix mine. They don't fix them. We're getting blown out of the water because people can get much higher offers."
Chessie Landrie said she and her husband, James, sold their home to a man who told her he was going to rent it out. Her insurance company shot some filler into the sinkhole closest to her home. The other she filled with dirt brought in by a dump truck.
Joe Mackey, who runs Sinkhole Solutions ("We pay more for your home because we do the work," says his flier), bought the home and told Landrie he was going to rent it. When reached by phone, Mackey said he would either sell it or rent it. He acknowledged that he would need to fix it before he sold it, then declined to answer any other questions.
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When Steven and Sandra Kangas lie in bed, they look up at cracks that stretch across their ceiling like lines on an Etch-A-Sketch.
They have watched the fissures spread through their home for the past year and a half, from the master bathroom to the front hallway and the living room and up and down the outside of the one-story stucco home in Holiday.
It is a regular reminder that they purchased their very first home atop a sinkhole.
"We're making payments on something, and we don't know if it's going to cave in or not," said Sandra Kangas, 35, a Winn-Dixie customer service manager and mother of three.
Their insurance company denied their claim, saying it was a pre-existing sinkhole.
The Kangases claim in a lawsuit they were duped by a Realtor who knew there were sinkholes beneath their home when she sold it to them in January 2000 for $72,900. Their suit says that Realtor Suzanne Gallant, who worked for ReMax Executives at the time, sold it to them at a profit without disclosing the sinkholes.
The Kangases' attorney, Daniel Klinedinst, says he has proof Gallant knew there was a sinkhole beneath the cream-colored stucco home. The woman who sold the home for $23,000 to a trust formed by Gallant disclosed the sinkhole at the time of sale, according to court records. The suit alleges Gallant failed to give the Kangases this disclosure statement.
Gallant could not be reached for comment, nor could her attorney. An attorney for ReMax, which is also a defendant in the lawsuit, did not return calls for comment.
Klinedinst said his law firm has seen a growing number of cases where homes with sinkholes are being patched up and sold without disclosure. His firm went from handling one every now and then to handling eight cases in the last six months.
"One of the problems is that there's no place that records it's got a sinkhole. There's no storehouse databank where records like that are kept," he said.
The Southwest Florida Water Management District has kept a list of sinkhole homes, but it is incomplete (the Landries' home, for example, isn't on it).
In Pinellas County, the county appraiser's office also keeps a list of properties that experienced "subsidence" problems (they avoid the word sinkhole for liability reasons). It is not a complete list of all homes with sinkholes, only those that have been reported to the office.
There are 1,435 addresses on the list.
HOW PEOPLE MAKE MONEY FROM SINKHOLE HOMES
1. The owner of a home worth $100,000 finds a sinkhole and calls his or her insurance company, which pays for an engineer to investigate. If the problem is too expensive to fix, insurance will pay off the entire policy, giving the owner of a home from 80 to 100 percent of replacement value, depending on the policy.
2. The homeowner pays off the mortgage with the insurance. Sometimes, if an attorney has helped the homeowner get insurance money, the attorney takes a cut.
3. A speculator comes along and offers the homeowner anywhere from $30,000 to $65,000 for the home. The homeowner walks away with this money for a down payment on another home. The speculator may spend $30,000 or more fixing up the home with grout or steel underpinnings.
4. The speculator lists the home for full market value, sells it and makes a $30,000 profit.
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