Don’t put all your eggs in one basket.
This, of course, is another way to say “DIVERSIFY”, which I often recommend here. In personal finance terms, this means don’t tie your financial future to just one investment or source of income. This story from CBS News, about a dam bursting due to heavy rains, shows how this concept can also apply to a single, important investment.
Apparently, heavy rain in Iowa caused a dam on a nine-mile long lake in that state to burst. The result: what was a beautiful lake is now nothing but a small stream with a lot of mud and dead fish strewn about. Homeowners no longer have lakeside homes; rather, they have mud homes with a view of a muddy mess.
According to one an individual quoted in the article, the lake area had about $100 million in property value. Additionally, what would have been a $500,000 home would now be worth about 25% of that. Losing $375,000 in the blink of an eye – or the quick bursting of a dam – would be painful for most people, no question about it.
I feel for these people, and hope they get help rebuilding this dam. This totally stinks, and not just due to the dead fish. Can you imagine losing that much equity in a home that fast – in a matter of minutes? I mean, the real estate market in some places has been really bad, and it has caused a lot of problems, but it doesn’t help when Mother Nature takes a sledgehammer to your home equity.
What jumps out at me is the driver of home values on the lake. Yes, of course, it was the lake. I assume this, having never been to Lake Delhi, but if home valued drop once the lake is drained it’s clear to see that people paid a huge premium to live on water. That alone isn’t surprising, as people have been known to pay astronomical sums for great views, including locations on or near water. But what’s interesting to me is that the lake’s existence was apparently dependent of this dam functioning properly.
Thus, connecting the dots, the home values were actually dependent on the dam functioning properly. These homeowners in Iowa, in effect, had their financial lives tied to a dam built in 1927.
Now, people do regularly buy homes that are at the mercy of Mother Nature. Theoretically, this could be the case anywhere. Tornadoes, lightning, earthquakes, tropical storms, flooding, and other weather-related factors can harshly impact people’s lives. That said, there are probabilities and risks to consider related to these factors when buying a home.
For example: if you buy a home right on the ocean, you can have the thrill of living a beach life right on the water – but you’re at higher risk for high waves crashing through your property. Buying a home on higher ground a mile away won’t give you the beach life, but won’t subject you to the same risks either. You’re taking a chance by living on the beach.
Bottom line: it’s important to fully think through the risks associated with any purchase – including nature-related risks when buying a home. And remember not to put all your eggs in one basket.
Have you considered such factors when buying a home or choosing a place to live? As you think about it further, are you subject to risks that you might not have originally considered?