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We do 10 to 12 stucco homes a year (in Houston), but never one that was under water. I would suspect that the water brought salts in the stucco to the surface, so a good power washing with a mild acid solution may be necessary. I would do some testing first to determine what, if anything, is on the surface.
I would also prime the bare stucco with a good quality masonry primer. The top coat would be Duration or an elastomeric, depending on the condition of the stucco.
You are right, you can't sand the stucco. There will be a visible ridge where the paint stops peeling. You may be able to hide this a little by applying an extra coat or two of elastomeric over the edge.
Also, depending on how many coats have been applied and the coarseness of the stucco, there may be very noticable texture differents between the peeled areas and the non-peeled areas. I would inform the customer of this.
If you could post some photos, that would help.
Brian Phillips
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