In case of disaster

The coming and going of Hurricane Sandy brought questions from my buyers about what happens if a disaster damages a house in the middle of the process them buying it. The rules are the same whether the damage to the house is minimal or huge. In short, the contracts govern what happens if the sale does not go through because of damage to the house. The penalties for failure to buy or sell are laid out there, in writing.

The disaster I am using as an example is that a twister comes through and takes the house to Oz.

A buyer and seller agree to price and terms in an Offer to Purchase. That Offer is contingent on a home inspection, a specific mortgage being approved for the purchase, and the signing of a Purchase and Sales Agreement that governs the transaction until closing. All of these conditions have a deadline attached to them.

If the house is taken to Oz before the home inspection, the house will fail home inspection because it came off its foundation. The buyer gets their deposit back. 

If there has been a home inspection, but no Purchase and Sales Agreement, the Offer is still the governing document. The buyer’s deposit could be in jeopardy if the seller wants to continue and the buyer doesn’t. However, practically speaking, the seller would need to be able to get the house back from Oz and into the same condition it was in at inspection in order to close. If the problem were tree damage or a need to repair the basement floor, the transaction could go on. 

Once there is a the Purchase and Sales Agreement, there will be a clause that states that the house will be in the same condition at closing as it was at the home inspection, except that the house will be empty and --most commonly—the term “broom clean” is used. Since Hurricane Katrina, some attorneys have gotten a lot more specific about how much damage a house can sustain and still close. 

Lenders also come into the act. The Purchase and Sales Agreement includes the same mortgage contingency that was in the Offer to Purchase. In order to get a mortgage, the lender will need to appraise the house. If the house is in Oz, the appraiser will not consider it adequate equity for the loan. (If the house is damaged, that could also cause appraisal problems.) If the appraisal fails before the mortgage contingency date, the buyer doesn’t get their mortgage, so the buyer cannot buy the house. The buyer can notify the seller; the sale does not go through; the buyer gets his or her deposit back.

What happens if the mortgage contingency date has passed, and then the house goes to Oz? If the lender requires a re-inspection by the appraiser, the buyer’s deposits are in jeopardy if they cannot get the mortgage to buy the house. What happens to the deposits will depend on the language in the Purchase and Sales Agreement. 

I got notification from some of the lenders about Sandy-damaged areas. The lenders will require re-inspection by appraisers and a “hold harmless” letter from the seller, stating that the property was not damaged. Because of the volume of re-inspections, some transactions will be delayed, even if the property was not damaged.

With Sandy on everyone’s mind, do you know what’s in your Purchase and Sales Agreement? If not, ask your attorney.