Suppose you have a $600k house in RB and it burns down.
* $300k appraised RE value, $300k land.
* To think of it, it costs less than 300k to rebuild (houses like that one go for 150-200k tops in Texas)
* If you owe more than $300k, insurance will pay $300k to your lender. If you owe less than $300k, insurance will pay off your balance and give you whatever’s left.
* You end up with a piece of land in RB with ruins of your old house on it in your possession, and possibly a mortgage on it.
* At first, it seems that equity in your land is equal to equity you had in your house.
* In reality, however, there isn’t much demand for empty lots in RB, 4 out of 5 people would rather buy an existing house than to build a custom house on your land. Furthermore, your land has just lost a lot of value because it is now viewed as risky.
* Your equity suffers a 100-150k hit.
* You have a strong incentive to rebuild. Your land isn’t worth much, you may even have negative equity, but rebuilding will give you a chance to recover and your insurance will even pay your rent while you’re waiting.
* One exception is if you bought your house with zero down in 2004 or later. You had no equity to begin with, and now you’re seriously upside down. The way out is to buy a new house, then foreclose on land. (It may be difficult to get a mortgage for a new house, though.)
