Dealing with Damage During A Home Sale
One of the most interesting things about living in Colorado is the weather. It’s not an uncommon occurrence here to see significant weather events, especially hail storms. Events such as these raise some interesting questions for folks currently in the process of buying or selling a home and I wanted to take moment to address some of them.
CONTACT YOUR AGENT
Your agent has been hired - by you - to represent and advocate for your interests and provide you with guidance. It is important that you reach out to them in a timely fashion to either notify them that your home was damaged or alert them that a home you are under contract to buy was (or might be) damaged. If you are a seller, you have both a contractual obligation to notify your agent of the damage and a legal obligation to disclose this damage to potential buyers. Your agent will be able to provide you with important information about how hail damage affects your transaction and resources on how to both inspect for and repair the damage. Remember however, that unless your agent is an attorney, they cannot provide you with legal advice. As such, you should consult with your attorney for any and all legal advice pertaining to this or any other situation that you may encounter.
IF YOU ARE A SELLER - HOME LISTED FOR SALE:
If you are a seller and your home is listed for sale but not under contract, you will need to disclose the damage to potential buyers - EVEN IF YOU HAVE THE DAMAGE REPAIRED. In real estate speak, this is called a “material defect” and by law a seller (as well as both a seller’s agent and buyer’s agent) are required to disclose known material defects in a property to all parties involved. This includes knowledge of hidden damage (known as “latent material defects”).
If the damage is significant, you may need to consider taking your home off the market until repairs can be made. However, in most cases this will not be necessary. Your agent can provide guidance on the best course of action and work with you to get a claim filed with your insurer and have the repairs completed. In some instances when the damage is minimal, your agent may suggest that no repairs be made and the list price of your home be reduced to account for the damage and associated disclosure of that damage. Be aware however that this might negatively impact a potential buyer's ability to retain financing for your home, as most lenders tend to dislike making loans for property with considerable damage. Each lender is different however, so talk with your agent about the potential impacts of going this route.
Remember though, no matter the course of action taken, you must disclose both the damage and, if applicable, repairs made, to all potential buyers of your property.
IF YOU ARE A SELLER - HOME UNDER CONTRACT:
If you are a seller and your home is under contract, the Contract to Buy and Sell Real Estate will dictate your obligations and options. In Colorado, unless you or your buyer had an attorney draft a sales contract, you probably signed the standard Contract to Buy and Sell Real Estate form approved by the Colorado Real Estate Commission. If this is the case, § 19.1, “Causes of Loss, Insurance” provides that:
If the loss is not more than 10% of the total purchase price, and the repair will be paid by insurance, upon receipt of the proceeds for the insurance claim, then you (the seller) must make reasonable efforts to repair the property before closing.
In the event repairs cannot be made before closing or proceeds for the insurance claim have not been received before closing, you and your buyer can agree to a new closing date or, at the buyer’s sole discretion, (1) you must assign your right to insurance proceeds to the buyer at closing or (2) you must escrow the amount for the repairs, withheld from your proceeds of the sale.
It is important to note that you (as the seller) CANNOT elect to terminate the contract unless the buyer is in default. This means that you are obligated to either make the repairs to the property or compensate the buyer at closing for the cost of those repairs. You and the buyer can mutually agree to terminate the contract, but the buyer is not obligated to agree to this and can in fact elect to file suit against you to force you as the seller to proceed with the sale (CBS1 § 21.2) and compensate them for repairs (up to the purchase price of the property).
If you are not using the state-approved Contract to Buy and Sell to complete your transaction, you will need to review your rights and obligations with your attorney.
As a seller, you have a legal obligation to disclose damage to you property that you are aware of. Also, be aware that your agent has the same obligation, meaning that they must disclose damage that they are aware of to both you and the buyer, regardless of whether or not you choose to do so. Additionally, when you enter into a contract to buy and sell real estate, you state that you are doing so in Good Faith. Failing to disclose known damage, or even the fact that damage may have occurred, violates this covenant of the agreement and can lead to serious legal ramifications for you, even after closing has occurred.
If you determine that completing the repairs are feasible prior to closing, work with your agent to closely monitor and document the repairs. Also, this is a situation where over-communicating with your buyer and their agent is highly encouraged. This creates transparency and strengthens mutual trust, which in turn helps minimize the possibility that the buyer will raise issues with the repairs at the closing table. Plus, this is the decent thing to do - and it’s what you would want if the shoe were on the other foot, so just do it. Remember though, your agent is your representative and you should not be negotiating any aspect of the sale of your home with the buyer (including handling of damage and/or repairs) without their full knowledge.
When the repairs have been completed, ensure that you receive specific documentation of the work that was completed and paid for. Also, depending on the extent of the damage and what work was done, you may need to have permits pulled and work inspected. If this is the case, document it carefully. Your agent and your insurer will help you compile all of this information.
If the repairs cannot be completed by closing, it is important that you work closely with your agent to communicate this fact with your buyer. Remember, as a seller you don’t have the option of just canceling the contract unless the buyer is in default. The buyer can compel you to complete the sale and compensate them for the damages up to the sale price of the property, so it’s in your best interest to play nice. That means it is very important that you openly and transparently communicate the circumstances of the damage to your buyer and work with them to establish fair terms for ensuring the damage is accounted for at the closing table.
IF YOU ARE A BUYER - HOME UNDER CONTRACT:
If you are a buyer and under contract to purchase a home, the Contract to Buy and Sell Real Estate will also dictate your obligations and options. § 19.1, “Causes of Loss, Insurance” provides that:
You have the right to terminate the contract if the repairs are not completed before the closing date or the damage exceeds the amount being offered by the seller’s insurer to repair the damage.
You have the right to elect to carry out the contract despite the damage and are entitled to a credit at closing for all proceeds received by the seller, plus the amount of any deductible provided for in the insurance policy, not to exceed the purchase price.
If the repairs cannot be completed before closing, then you have the option to have the seller assign their right to any insurance proceeds to you or have the seller escrow funds to cover the cost of the repairs, plus any deductibles, not to exceed the purchase price.
If you suspect that a home that you are under contract to buy has been damaged, you have both a right and an obligation to inspect the home to ensure that damages are properly accounted for and repaired before closing. If a seller refuses to allow you to inspect for damage, you can terminate the contract.
But remember, if you don’t inspect the property and damage is uncovered after closing, you will be required to demonstrate that the damage occurred before you bought the home and that the seller knowingly failed to disclose the damage to you in order to seek compensation for the damages. As such, you should be proactive in protecting your interests before closing to avoid the added headache of having to chase a seller for damages after the fact. Always err on the side of caution, and if you suspect that damage may have occurred, have the property properly inspected for damage. It may be the best money you ever spend on your new home.
As the buyer, you have the option of compelling the seller to either repair the damage or compensate you for the damage up to the purchase price of the home. That means that if a home is damaged and the seller wants to terminate your agreement rather than repair the damage or compensate you for it, you can sue the seller to force them to complete the sale of the home to you. While this is not an outcome anybody hopes for, it is your right as the buyer. If exercising your option to sue for specific performance (forced completion of the transaction by court order) is something you might be considering, it is imperative that you retain legal counsel immediately to ensure your interests are protected.
If the seller completes the repairs before closing, ensure that you independently inspect the work that was completed. Additionally, ask for and retain copies of all relevant paperwork. If there are any issues down the road, this documentation will be vital to you.
If the work cannot be completed before closing and you elect to have insurance proceeds assigned to you or the funds escrowed, you will need to ensure that you work closely with both the seller’s insurer and your lender as each will have their own stipulations regarding this arrangement that can impact one another. Some insurers for example, do not allow benefits to be assigned and some lenders may not be willing to make a loan under these circumstances. Sitting at the closing table is not the time to be working out these details, so plan ahead and document everything.
CONCLUSION
Buying or selling a home can be a stressful time with many moving parts and nuances. When damage to a property that you are under contract to buy or sell occurs, it is important that you act quickly and diligently to protect your interests and ensure that you are fulfilling your obligation to execute the transaction in Good Faith.
My managing broker always says, “Bad news is only bad news once.” and this is true. Yes, dealing with damage from a hail storm is not an ideal situation and making that initial call to your agent won’t be fun. But it’s only bad news once. After that, it just becomes an item on checklist as you move towards closing. The longer you wait, the harder it will be to deal with it in the best way possible. Also, it might be tempting to either repair the damage and not disclose it or just not say anything at all and hope the buyer doesn’t notice. But like so many other things relating to a real estate transaction, failure to disclose will only lead to more problems later on. Your agent should never, under any circumstances encourage you to withhold disclosure of material defects. Doing so is a violation of their licensure and the REALTOR® Code of Ethics.
This scenario, along with countless others, goes to show the value of hiring a qualified agent to represent you in any real estate transaction. Having someone who not only understands the marketplace, but also the business, can save you not only the stress of buying or selling a home, but also help you to avoid the other pitfalls that exist along the way.
If you have questions about any aspect of buying or selling a home, I’m always available to assist you in any way that I can. Feel free to call or text me at 970-420-1001 or email me at jamison@searsrealestate.com.
Legal Stuff
This post is strictly the opinion of the author and provided for informational purposes only. It is not meant to convey legal advice of any kind. Individuals should retain and consult legal and tax or other counsel to obtain advice with respect to any particular issue or problem.