Author Topic: The Big Earthquake + 2 rental properties destroyed = ???  (Read 4171 times)

Landlady

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The Big Earthquake + 2 rental properties destroyed = ???
« on: August 02, 2016, 12:21:42 PM »
I own a duplex and triplex in the Seattle area. Both properties are too old to buy earthquake insurance on. The thought of them getting utterly destroyed in the BIG ONE keeps me up at night because they are a large part of my retire early plan. I'm also building my dream home in the country so soon I'll have a brand new 30 year loan of $417,000.
Does anyone else like to think through these worst case scenarios like I do?
What do you think would happen to my financial stability if I lost both houses?
Are there government programs that would help me in a state of emergency?
Would bankruptcy be my only option if I was not generating rental income?
Is it wise/possible to protect my investment properties with an LLC?
Would rent insurance help?

My monthly situation:
Gross rental income: $10,630
"Real" job income after taxes: $10,979
Monthly family spending: -$3,700
Combined mortgages and taxes: -$7,563

So if I were to lose both investment properties in an earthquake I would risk defaulting on a loan. :( Help me plan for my worst case scenario!

Zoot Allures

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #1 on: August 02, 2016, 04:28:47 PM »
I have two properties in Portland...so I feel ya.

I haven't thought this through enough to answer any of your questions, but you didn't mention seismic retrofitting. Have you looked into that? That might be absurdly insufficient in the event of the Big One, but surely it can't hurt with smaller quakes and might give you at least a bit of peace of mind.

Jack

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #2 on: August 02, 2016, 05:06:07 PM »
The clock is ticking on when a major earthquake will next strike, said Jay Patton, an OSU doctoral student who is a co-author on the study.

“By the year 2060, if we have not had an earthquake, we will have exceeded 85 percent of all the known intervals of earthquake recurrence in 10,000 years,” Patton said. “The interval between earthquakes ranges from a few decades to thousands of years. But we already have exceeded about three-fourths of them.”

As a software engineer who has in-laws in Portland and who lives about as close to a "Portland-like" lifestyle as it's possible to get in Atlanta, you'd think I'd be an obvious candidate for moving to the pacific northwest. I had been considering it, but with the cascadia subduction zone in it's current state? Nope!

If I were you, I'd sell ASAP and either find new rentals in a different market (such as Atlanta, actually) or just invest in the stock market instead. Granted, "the big one" will probably cause a nationwide recession, but that's better than the gigantic wipe-out risk.

(Here's another article about it I particularly enjoyed reading: http://www.newyorker.com/magazine/2015/07/20/the-really-big-one)

Zoot Allures

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #3 on: August 02, 2016, 05:47:43 PM »
Excellent. Now we have the "OMG, sell ASAP" perspective, and we just need the "buy and hold forever, the benefits far outweigh the risks" voices to chime in. The best course of action, as usual, will be somewhere in that big, frustrating gray area...

Thinkum

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #4 on: August 02, 2016, 05:54:26 PM »
I am really surprised that you cannot get earthquake insurance. Is it only because the buildings are old(er)? Californian's can buy EQ insurance last time I checked. They did a lot of retrofitting, so perhaps that is part of the reason? If you form an LLC, would your property be protected from loss? I would definitely want some sort of protection and I'm sorry you're having to deal with this. I hope you find some resolution.

Bracken_Joy

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #5 on: August 02, 2016, 06:02:56 PM »
Honestly, given the LLC consideration, and not knowing the implications there, I would get thee to a lawyer and ask these very questions. Find a way for the law to help you! Lawyers are good at that when they're on your side =P

Glenstache

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #6 on: August 02, 2016, 06:23:44 PM »
What is the age of the buildings (I'm guessing old from your comments, but not sure), are they seismic retrofitted, and what part of town are they in? There is a big range of peak ground motions possible in the Seattle area depending on underlying geologic materials (till vs fill or other soft deposits), location, and which "big one" EQ you are talking about (Cascadia vs Seattle fault). Single story wood frame structures tend to do well in earthquakes as long as they don't have fundamental structural issues like no foundation, poor attachment to foundation, unreinforced chimneys, 3rd floor water heaters that are not strapped in, etc. For the likely transaction costs of selling a building in Seattle, you could do a decent seismic retrofit. Also, it is worth asking questions about if there is an EQ and it makes a tree fall on your house, would THAT be covered even if you can't get EQ insurance (ie, what about secondary effects such as trees and fire).

There are hazards everywhere ranging from tornadoes to floods to landslides to hurricanes to.... you get the picture. Plenty of houses will fall down the next time the New Madrid fault goes.

If you are deeply concerned about owning a duplex in this area, I'd be happy to take it off your hands. :)

v8rx7guy

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #7 on: August 02, 2016, 10:43:28 PM »
Dangit... another thing to worry about :(

cchrissyy

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #8 on: August 02, 2016, 11:06:41 PM »
Before you worry too much, it's worth chekcing on what your current policy will cover.

For instance, I do not have earthquake coverage but my homeowner's insurance DOES cover fires that result from earthquakes. Which is  realistically the greater risk in my case.

Also, you can buy "loss of income" insurance. Maybe it is already in your landlord/homeowner's policy. If not, call your company to quote it. Should help with your peace of mind. That is insurance to pay your typical monthly rate in a situation where the house is not rentable. Not vacant in an ordinary way, but like, flooded.

Ensign1999

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #9 on: August 03, 2016, 11:28:39 AM »
Also, you can buy "loss of income" insurance. Maybe it is already in your landlord/homeowner's policy. If not, call your company to quote it. Should help with your peace of mind. That is insurance to pay your typical monthly rate in a situation where the house is not rentable. Not vacant in an ordinary way, but like, flooded.

I would look into the loss of income insurance.  We have a vacant rental house across the street from us that had a tree fall on the roof a year and a half ago.  It took the LL a long time to get the roof repaired so I can only imagine what the inside looked like as I'm sure the tarp didn't keep everything out.  The LL (a grumpy older man) said he was in no rush to get it rented back out as the insurance was covering the house not taking in rent.  All the neighbors are a bit frustrated with the situation as we would rather have someone in the house, but there isn't much we can do to force him to get a new tenant.  Honestly, the way he treats the property and stories from previous tenants we wouldn't want someone to rent from him.  Hopefully he will just sell it.

Long story short: his insurance has been taking care of him when his house was damaged and not able to be rented out.

TrMama

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #10 on: August 03, 2016, 11:38:23 AM »
Is the value of the property mostly in the land, or in the buildings? We also own an old rental just north of you in Vancouver. The value of the building only makes up 5% of the total value of the property. Frankly, it would only be more valuable if the house were destroyed, so we're not worried about earthquake insurance or retrofitting.

We live in a less costly town and the value of the property we live in is more evenly split between the land and building. So we carry earthquake coverage on it.

Jack

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #11 on: August 03, 2016, 12:26:42 PM »
Is the value of the property mostly in the land, or in the buildings? We also own an old rental just north of you in Vancouver. The value of the building only makes up 5% of the total value of the property. Frankly, it would only be more valuable if the house were destroyed, so we're not worried about earthquake insurance or retrofitting.

If the "big one" hit, the entire region would be a wasteland and property values would plummet. New Orleans still hasn't fully recovered from Katrina; Portland/Seattle/Vancouver after a Cascadia quake/tsunami would be even worse.

Here's what that New Yorker article I posted earlier had to say about it:

Quote
Wineglasses, antique vases, Humpty Dumpty, hip bones, hearts: what breaks quickly generally mends slowly, if at all. OSSPAC estimates that in the I-5 corridor it will take between one and three months after the earthquake to restore electricity, a month to a year to restore drinking water and sewer service, six months to a year to restore major highways, and eighteen months to restore health-care facilities. On the coast, those numbers go up. Whoever chooses or has no choice but to stay there will spend three to six months without electricity, one to three years without drinking water and sewage systems, and three or more years without hospitals. Those estimates do not apply to the tsunami-inundation zone, which will remain all but uninhabitable for years.

How much all this will cost is anyone’s guess; FEMA puts every number on its relief-and-recovery plan except a price. But whatever the ultimate figure—and even though U.S. taxpayers will cover seventy-five to a hundred per cent of the damage, as happens in declared disasters—the economy of the Pacific Northwest will collapse. Crippled by a lack of basic services, businesses will fail or move away. Many residents will flee as well. OSSPAC predicts a mass-displacement event and a long-term population downturn. Chris Goldfinger didn’t want to be there when it happened. But, by many metrics, it will be as bad or worse to be there afterward.

Glenstache

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #12 on: August 03, 2016, 12:38:09 PM »
Is the value of the property mostly in the land, or in the buildings? We also own an old rental just north of you in Vancouver. The value of the building only makes up 5% of the total value of the property. Frankly, it would only be more valuable if the house were destroyed, so we're not worried about earthquake insurance or retrofitting.

If the "big one" hit, the entire region would be a wasteland and property values would plummet. New Orleans still hasn't fully recovered from Katrina; Portland/Seattle/Vancouver after a Cascadia quake/tsunami would be even worse.

Here's what that New Yorker article I posted earlier had to say about it:

Quote
Wineglasses, antique vases, Humpty Dumpty, hip bones, hearts: what breaks quickly generally mends slowly, if at all. OSSPAC estimates that in the I-5 corridor it will take between one and three months after the earthquake to restore electricity, a month to a year to restore drinking water and sewer service, six months to a year to restore major highways, and eighteen months to restore health-care facilities. On the coast, those numbers go up. Whoever chooses or has no choice but to stay there will spend three to six months without electricity, one to three years without drinking water and sewage systems, and three or more years without hospitals. Those estimates do not apply to the tsunami-inundation zone, which will remain all but uninhabitable for years.

How much all this will cost is anyone’s guess; FEMA puts every number on its relief-and-recovery plan except a price. But whatever the ultimate figure—and even though U.S. taxpayers will cover seventy-five to a hundred per cent of the damage, as happens in declared disasters—the economy of the Pacific Northwest will collapse. Crippled by a lack of basic services, businesses will fail or move away. Many residents will flee as well. OSSPAC predicts a mass-displacement event and a long-term population downturn. Chris Goldfinger didn’t want to be there when it happened. But, by many metrics, it will be as bad or worse to be there afterward.

As a PhD geologist who has been studying or working in PNW geology for 15+ years, I found the New Yorker article to be a bit exaggerated, and missed some important technical distinctions. This article summarizes part of that and the feedback from John Vidale (whose opinion I respect quite a bit on these matters). http://www.slate.com/articles/health_and_science/science/2015/07/kathryn_schulz_s_new_yorker_story_on_pacific_northwest_earthquake_geologists.html

Yes, a Cascadia mega quake would be bad, but in Seattle it would not necessarily be fire and brimstone. Location, construction, and surroundings will matter. I wouldn't want to be in Ocean Shores, that's for sure.

TrMama

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #13 on: August 03, 2016, 01:23:44 PM »
Is the value of the property mostly in the land, or in the buildings? We also own an old rental just north of you in Vancouver. The value of the building only makes up 5% of the total value of the property. Frankly, it would only be more valuable if the house were destroyed, so we're not worried about earthquake insurance or retrofitting.

If the "big one" hit, the entire region would be a wasteland and property values would plummet. New Orleans still hasn't fully recovered from Katrina; Portland/Seattle/Vancouver after a Cascadia quake/tsunami would be even worse.

But property insurance only covers the building, not the land. If the big one hits, you're correct that the value of it would be close to 0. There's nothing you can do about that, other than choose not to own property in that location.

The short answer is that yes, if the big one hits we're (we = everyone living in the PNW) financially screwed. You could choose to get insurance (income replacement, property, etc), or rely on government programs, or put the investment in an LLC, or sell and invest in something else, or carefully choose a property that's less likely to be totalled or whatever. But the reality is that if you choose to live here and there's an earthquake, you WILL be negatively affected. You have to either develop a level of comfort with that, or move elsewhere.

Jack

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #14 on: August 03, 2016, 02:13:24 PM »
But property insurance only covers the building, not the land. If the big one hits, you're correct that the value of it would be close to 0. There's nothing you can do about that, other than choose not to own property in that location.

Right, which is why earlier I advocated doing exactly that:

If I were you, I'd sell ASAP and either find new rentals in a different market (such as Atlanta, actually) or just invest in the stock market instead. Granted, "the big one" will probably cause a nationwide recession, but that's better than the gigantic wipe-out risk.

According to Glenstache's Slate article, the Cascadia fault has about a 15 % chance of going in the next 50 years (which, if I lived in the PNW, would happen to coincide with my expected time horizon). A 15% chance of total investment loss (let alone life loss) is way above the threshold of acceptability for me, especially when you can easily avoid that risk by choosing to invest (and live) elsewhere.

By the way: Glenstache also claimed that "there are hazards everywhere" but that's also a red herring. Take Atlanta, for instance: about the only disaster we're susceptible to is tornadoes (and minor flooding, if you live directly adjacent to one of the rivers). But tornado risk is almost negligible compared to Cascadia earthquake risk, given that (A) tornado damage is covered by insurance, and (B) a tornado can't wipe out the entire metro area. You get hit, your insurance pays for you to rebuild, and you go on enjoying use your property -- that's a very different outcome than a PNW earthquake scenario where you have to deal with a total loss and long-term displacement.

Glenstache

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #15 on: August 03, 2016, 02:32:30 PM »
But property insurance only covers the building, not the land. If the big one hits, you're correct that the value of it would be close to 0. There's nothing you can do about that, other than choose not to own property in that location.

Right, which is why earlier I advocated doing exactly that:

If I were you, I'd sell ASAP and either find new rentals in a different market (such as Atlanta, actually) or just invest in the stock market instead. Granted, "the big one" will probably cause a nationwide recession, but that's better than the gigantic wipe-out risk.

According to Glenstache's Slate article, the Cascadia fault has about a 15 % chance of going in the next 50 years (which, if I lived in the PNW, would happen to coincide with my expected time horizon). A 15% chance of total investment loss (let alone life loss) is way above the threshold of acceptability for me, especially when you can easily avoid that risk by choosing to invest (and live) elsewhere.

By the way: Glenstache also claimed that "there are hazards everywhere" but that's also a red herring. Take Atlanta, for instance: about the only disaster we're susceptible to is tornadoes (and minor flooding, if you live directly adjacent to one of the rivers). But tornado risk is almost negligible compared to Cascadia earthquake risk, given that (A) tornado damage is covered by insurance, and (B) a tornado can't wipe out the entire metro area. You get hit, your insurance pays for you to rebuild, and you go on enjoying use your property -- that's a very different outcome than a PNW earthquake scenario where you have to deal with a total loss and long-term displacement.

This link provides some more reasoned examples of the greater Seattle area seismic risk considerations.
http://www.seattle.gov/Documents/Departments/Emergency/PlansOEM/SHIVA/2014-04-23_Earthquakes(0).pdf

It should be noted that a 15% chance of a Cascadia event in the next 50 years is not the same as a 15% chance of total investment loss. Again, location style of insurance coverage and actual nature of the loss matter. The most useful metric for EQ hazard is the maps in Figure 6 in the link showing probability of ground shaking intensity.

I don't believe that saying hazards exist in other places is a red herring as long as it is viewed in a site-specific context. The probabilistic hazards associated with a house on bedrock in the Puget Sound is likely lower than being on a floodplain near Atlanta. As you point out, each person needs to understand what their personal comfort level is with various types of risk, and what types of risks they are comfortable accepting. 

dilinger

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #16 on: August 03, 2016, 02:45:36 PM »
Next time you have a vacancy in the basement area of those rentals, get some quotes for seismic retrofitting (or do it yourself).

Information to help give you an idea of what's needed to retrofit:
http://www.seattle.gov/dpd/cs/groups/pan/@pan/documents/web_informational/p2191423.pdf

This has a list of contractors (expand the retrofitting part):
http://www.seattle.gov/emergency-management/preparedness/prepare-your-home

Note that retrofitting isn't just for The Big One.  It will help reduce damage during the minor quakes that we have on a regular basis, as well.

I'm about to get started on this process as well (for my own home), since we're renovating the basement anyways.  Good luck!

dilinger

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #17 on: August 03, 2016, 03:09:27 PM »
Also, I question the utility of earthquake insurance in The Big One.  Seattle alone has over 300,000 housing units, and that's not even looking at surrounding cities.  We're talking about hundreds of billions of dollars in damage, if not more.  Katrina was a great example of what a bad idea it is to rely on insurance companies: http://www.nytimes.com/2007/09/02/business/worldbusiness/02iht-orleans.4.7353442.html

tonysemail

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #18 on: August 04, 2016, 02:00:26 PM »
there are a lot of good threads on the forum about this.
http://forum.mrmoneymustache.com/ask-a-mustachian/earthquake-insurance-44498/
http://forum.mrmoneymustache.com/ask-a-mustachian/thoughts-on-earthquake-insurance/

I prefer to buy earthquake insurance due to the correlated risk... same reason as you.

regarding LLCs, I found this thread very informative.
http://forum.mrmoneymustache.com/real-estate-and-landlording/llc-5148/

I discussed it with my wife and we decided to purchase commercial umbrella insurance instead of forming a LLC.

Sammiecakes

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #19 on: August 05, 2016, 02:56:56 AM »
I live in the area and actually have a few friends who know a lot about this stuff. It really sounds like things won't be as doomsday as has been suggested in some articles. But now that everyone is scared hopefully we can actually get new laws passed to mitigate the damage when this does finally happen. Even in the M9 scenario most stick built dwellings will survive but some older brick buildings and some older skyscrapers are at risk (Portland is worse of than Seattle for this because of the history of building codes in the two cities). Those buildings can be retrofitted to minimize the damage. If that is done the major risk is from damage to infrastructure. However it is possible to build so that major infrastructure is less severely damaged after such an event so that it can be repaired more quickly.

Two of the five largest companies on US exchanges by market cap are headquartered in the area, and a third has a major and growing presence in the area and those companies have been donating to increasing earthquake preparedness. Things aren't so hopeless, but just remember when you vote in local elections that as a property owner you have a selfish interest in doing things like replacing really old roads, bridges, sewers and water pipes before a quake happens.

Get your rentals examined for earthquake retrofitting if you want, and look at the liquefaction and landslide risk maps. 

Sammiecakes

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #20 on: August 05, 2016, 03:09:28 AM »
The clock is ticking on when a major earthquake will next strike, said Jay Patton, an OSU doctoral student who is a co-author on the study.

“By the year 2060, if we have not had an earthquake, we will have exceeded 85 percent of all the known intervals of earthquake recurrence in 10,000 years,” Patton said. “The interval between earthquakes ranges from a few decades to thousands of years. But we already have exceeded about three-fourths of them.”

As a software engineer who has in-laws in Portland and who lives about as close to a "Portland-like" lifestyle as it's possible to get in Atlanta, you'd think I'd be an obvious candidate for moving to the pacific northwest. I had been considering it, but with the cascadia subduction zone in it's current state? Nope!

If I were you, I'd sell ASAP and either find new rentals in a different market (such as Atlanta, actually) or just invest in the stock market instead. Granted, "the big one" will probably cause a nationwide recession, but that's better than the gigantic wipe-out risk.

(Here's another article about it I particularly enjoyed reading: http://www.newyorker.com/magazine/2015/07/20/the-really-big-one)

That New Yorker article is a big mess. The stuff about Tsunami's doesn't apply to Seattle or Portland at all but to cities on the coast. Seattle is protected from Tsunami's by the Olympic peninsula to a great extent. Additionally the distance will reduce the shaking intensity except in areas where the soil is such that liquefaction occurs. It will not be blanket destruction.

Jack

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #21 on: August 05, 2016, 08:11:51 AM »
Okay, I'll accept that I was misinformed about the severity of the issue. But still, the question remains: why accept that risk (or pay to try to compensate for it) when you could simply avoid it in the first place by investing elsewhere?

Kroaler

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #22 on: August 05, 2016, 09:18:37 AM »
That article has been scared now and I dont even live in that area! lol

Sammiecakes

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #23 on: August 05, 2016, 12:40:51 PM »
That article has been scared now and I dont even live in that area! lol

Interesting that you should say that because South Carolina is actually in a high earthquake risk region as well. Historically there have been some rather large quakes there. I have some friends from SC who said they never knew that until moving to the west coast and learning about earthquakes. Similarly I am from the midwest and never realized there was earthquake risk in some areas there too!

http://earthquake.usgs.gov/hazards/products/conterminous/2014/HazardMap2014_lg.jpg

Anyway this map shows the best estimate for seismic risks around the country.

dilinger

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #24 on: August 05, 2016, 12:44:15 PM »
Similarly I am from the midwest and never realized there was earthquake risk in some areas there too!

http://earthquake.usgs.gov/hazards/products/conterminous/2014/HazardMap2014_lg.jpg

Anyway this map shows the best estimate for seismic risks around the country.

Whoa, that's an incredible map.  I've lived in MA and NY (before moving to WA) and had no idea that there was any earthquake risks in those east coast states.

Glenstache

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Re: The Big Earthquake + 2 rental properties destroyed = ???
« Reply #25 on: August 05, 2016, 01:46:40 PM »
Similarly I am from the midwest and never realized there was earthquake risk in some areas there too!

http://earthquake.usgs.gov/hazards/products/conterminous/2014/HazardMap2014_lg.jpg

Anyway this map shows the best estimate for seismic risks around the country.

Whoa, that's an incredible map.  I've lived in MA and NY (before moving to WA) and had no idea that there was any earthquake risks in those east coast states.

The New Madrid EQ was pretty big, and really fascinating (as a geologist).
https://en.wikipedia.org/wiki/1811%E2%80%9312_New_Madrid_earthquakes

A quake south of St Louis that made church bells ring in Boston.