Flood-damaged properties may create transaction issues

What do you do if you’re involved in a transaction with a home that was just flooded?  If you’re working with a seller or buyer in a transaction involving a flood-damaged property, a thorough knowledge of the PAR Agreement of Sale will help you to properly represent your client.

The most obviously relevant provision of is Paragraph 17 – Maintenance and Risk of Loss.  Paragraph 17(C) states that “Seller bears the risk of loss from fire or other casualties until settlement,” and goes on to state that if the property was damaged and not repaired before settlement, the buyer may choose between accepting the property and any insurance proceeds, or terminating the contract with the return of their deposit monies.

In a “normal” flood it might be reasonable to expect that some transactions could be saved if buyers were willing to delay their purchases while sellers worked through the flood insurance process. But the recent flooding will offer substantial challenges because of the number of damaged homes and the severity of the damage. And even worse, the reach of the flooding was so wide that many homes outside of traditional flood zones were affected – many of which were not covered by flood insurance, meaning that there are no insurance proceeds to be had.

Even if the home itself wasn’t substantially damaged, flooding might have caused other less serious damage to a home’s systems or appliances.  For example, a washer, dryer or refrigerator included in the sale may have been damaged beyond use, or there may have been damage to the HVAC air compressor outside the home even though no water made its way into the basement.  In those scenarios, the parties will need to work through Paragraph 17(A) of the Agreement, which gives sellers the right to repair or replace damaged systems or appliances prior to closing.

Other provisions of the Agreement not obviously related to property damage may also come into play.  For example, in transactions that were recently executed, buyers may still have time to terminate based on the property inspection contingencies.  Also, lenders and insurance companies may decide that they want to re-inspect – or even reappraise – properties that have suffered flood damage.

In transactions with a mortgage contingency, the buyer can likely terminate and get back his deposit if the lender decides to back out of its financing commitment – even if the lender’s change occurs well after the mortgage commitment date.  And given the sheer number of properties affected by the back-to-back storms, even transactions involving homes that have suffered little or no actual damages may be held up if a new inspection is required, simply because of the backlog of inspections required by lenders.

You’ll also need to keep in mind that even if the home in your particular transaction hasn’t been flood-damaged, a buyer or seller may be relying on the closing of another transaction that may be affected.  For example, if the seller can’t move into his new home, or the buyer can’t sell her current home, this transaction may not happen.  Be sure to ask how these other transactions may be affected to see if there is a need to amend your existing contract or add new contingencies to the contract.

So what have I missed? What scenarios have you come across in the last couple of weeks where the language of the Agreement has helped (or hindered) your ability to get a transaction to closing?