Something Breaks, Floods or Needs Repair Right Before Closing… Now What?

Thus far the transaction has been smooth and everyone has cooperated amazingly well.

Closing is scheduled for tomorrow morning and everyone is excited to finalize the deal. You suddenly get a frantic call from your seller who explains they were about to leave the house with the last few boxes when a torrential downpour blew through the area and they now have an inch of standing water in the basement. Now what do you do about the closing in the morning?

As with most transaction questions, the first place to start is by reading the relevant form. The Maintenance and Risk of Loss section of the Agreement of Sale states that seller agrees to generally maintain the property in its current condition. When something breaks or needs repairing, a seller has two options on how to proceed.

First, prior to settlement, a seller can repair or replace what broke. So if a built-in microwave dies two days before settlement, the seller can replace the microwave with a comparable microwave. Or if part of a fence blows down from a windstorm, the seller can repair that section of the fence. Movers put a hole in the wall when moving the couch, all is good if the seller patches over the hole and matches the paint. As the legendary Chick Hearn would have put it, “No harm, no foul.”

The second option is for the seller to promptly notify buyer of what happened and advise the buyer in writing whether the seller will credit the buyer at settlement the fair market value of the item or to not repair/replace nor credit the buyer at settlement.

If the seller refuses to repair, replace or offer a credit to the buyer, the buyer has five days or to the settlement date, whichever is first, to decide whether to continue with the transaction or terminate the deal. A buyer must notify a seller in writing of the buyer’s decision to terminate. A buyer’s failure to timely or appropriately notify the seller that the buyer is terminating results in the buyer accepting the property in its present condition, including the damaged portion.

In the situation above, which is based on a recent call to the PAR Legal Hotline, while the seller can probably clean up the water before settlement, there is probably not time to dry everything out. Nor is there likely time to determine the extent of the damage or complete repairs prior to settlement. Nor is there time to determine an appropriate credit amount to offer buyer.

This does not even consider any insurance coverage issues. The day after the remnants of Hurricane Ida passed through Pennsylvania this week, one property insurance company reported 80,000 claims in central Pennsylvania alone. With so many claims, having a carrier determine whether coverage exists, the extent of the damage and adjust the fair market value can take several days at best.

Nor does it consider an ability to secure a contractor and the necessary supplies to make a repair.

In short, there is no single answer to these situations. But complications like these are where Realtors^® really prove their worth to clients by providing guidance and advice through a stressful situation by drawing on their experience and resources.

The most effective way for a seller to respond is likely to promptly inform the buyer of the situation and negotiate a mutually acceptable solution. Options can include delaying settlement, assigning over to buyer any insurance proceeds, the buyer just accepting the property or a mutual termination.

For the buyers, it is important to also notify the buyer’s lender and insurance company of the situation. The damage to the property could impact the lender’s willingness to fund the loan or the premium for the insurance policy. A seller offering a credit at closing may run up against a seller’s credit limit a lender allows. And if, like the situation above, the event occurs the day before closing, a seller’s credit may impact whether a new three-day review period is required for the closing disclosure.