When you’re buying a property, you might — justifiably — feel like you’re in limbo while it’s under contract. There are many “what if” possibilities that, while unlikely, you still need to consider. In light of the recent winter storm in Texas, which wreaked havoc on thousands of properties across the state, many buyers may currently be facing such scenarios. Specifically, what happens when damage occurs to a property before closing?
Casualty Losses and Your Contractual Rights
In Texas, so long as you are using the most up-to-date Texas Real Estate Commission (TREC) promulgated One to Four family resale contract, paragraph 14 (see the end of this post for the full text*) addresses casualty losses and will protect you as the buyer in the event of damage to the property while it’s under contract. (A “casualty loss” refers to the results of an unexpected event, such as last month’s winter storm.)
Depending on the type of damage the property has suffered, the buyer has the following options:
- Terminate the contract and get their earnest money back.
- Allow the seller to perform the necessary repairs.
- Accept the home in its damaged condition.
What is Your Best Option?
In many cases, it is in the buyer’s best interest to accept the home in its damaged condition and utilize the seller’s insurance policy to make the repairs. In order to move forward with this option, you will need a carefully drafted limited power of attorney coupled with an Assignment of Benefits (AOB) that will allow you to deal directly with the seller’s insurance company. Some of the specific powers that need to be given to the buyer include:
- Challenging damage appraisals
- Signing checks
- Hiring contractors and other third parties
- Coming to an agreement with the insurance company on the value of the loss
- Accepting the check
A real estate attorney can draft this power of attorney for you. In order to ensure the seller’s cooperation, sometimes we can also utilize an escrow holdback. Escrow will then only be released once the insurance claim is finalized to your liking.
Even Storm Clouds Have Silver Linings
Given the amount of time it takes to find the perfect home, secure financing, perform inspections, wait for titles searches, and prepare for closing, many buyers would rather handle repairs themselves than start the process all over again. Oftentimes if can even turn out to be a blessing in disguise for the buyer, since they get a freshly repaired home that can done to their individual taste.
Let’s say you were a buyer and invoked paragraph 14 to get a new roof that suffered hail damage while the property was under contract. You would get the benefit of a new roof and no claims on your own new insurance policy, and the seller shouldn’t have much pushback since they will no longer own that policy once the closing is finalized (and therefore shouldn’t face any insurance rate hikes due to their claims history).
In the words of Michael Scott, “Looks like a win-win-win situation!”
In cases when damage occurs before closing, insurance coverage is determined by the date of loss, not a subsequent transfer to a new buyer. Therefore, having a current insurance claim pending on a property does not prevent a sale. In many cases, the seller and buyer both benefit, since the buyer will have work performed at almost not cost to them, and the seller is able to close on the property on time and with reduced holding costs and won’t have to re-list it only to face the same dilemma with a different buyer.
Need Damage Control? Turn to a Real Estate Attorney
Before invoking paragraph 14, we strongly recommend that you only do so under the guidance of an experienced real estate lawyer. A contract amendment must be executed at the same time as the Assignment of Benefits and other claims documentation. Failing to do so properly can have dire consequences. The definition of a “casualty loss” is the subject of a great deal of litigation and differing interpretations. Contact our real estate lawyers to get assistance before negotiating this type of contractual agreement. When damage occurs before closing, we’ll help ensure your rights are protected and that you’re able to take advantage of all the benefits of paragraph 14.
