The moment the seller accepts your offer and you are officially under contract, you may breathe a sigh of relief, thinking the end of your homebuying journey is finally in sight. But you haven’t crossed the finish line yet! The official escrow period — the time between signing the contract and getting the keys — can last up to 60 days. A lot can happen in 60 days, including unexpected damage to your new dream home due to natural disasters, house fires, or vandalism. What happens if a house is damaged before closing?
We spoke with Pat Tasker, a real estate agent in Milwaukee, Wisconsin, who works with 71% more single-family homes than the average agent in her area, to provide some valuable tips on how a homebuyer can best navigate the challenges ahead when a house is damaged before closing.
Call your agent
If the sellers or the listing agent contact you to report damage to a home you are in the process of purchasing, then your first step is to call your real estate agent.
Together, you will review the terms of the purchase agreement to determine your options.
“It’s all going to come down to what you have in your contract,” Tasker explains.
“In Wisconsin, we have a 14-page offer with addendums, and one of the provisions specifically covers this topic. If the damage is 5% or less of the amount of the offer, the buyer is obligated to proceed to closing.”
But what if the damages exceed that 5% threshold?
“If a tornado came and took out half the house, or there was a fire and the whole kitchen was demolished, in our state, the buyer doesn’t have to go to close,” Tasker says.
According to Tasker, if the deal is going to move forward, the buyer and seller must come to an agreement about how to manage the repairs. Throughout that process, both the buyer and seller will have decisions to make, and there could be complicated negotiations to bring the transaction to a successful close, so it’s important for you to be aware of what steps you should take.
Get an assessment
If there is significant damage, Tasker says, the first concern is what the lender’s position will be.
“A lender is not going to let a buyer purchase the house with a major defect,” she explains. “They’re probably going to want it fixed before closing.”
In the meantime, the seller will contact their homeowners insurance company to have an estimator review the damages and provide an insurance settlement.
One issue that could arise is a dispute over what the exact cost of those repairs will be.
Tasker says the buyers should not just rely on the sellers’ insurance estimate. They should also engage a home inspector and contractor to provide a second opinion regarding the cost of repairs.
“Our contract is pretty clear-cut on the numbers,” Tasker notes. “If it’s 5% or under, the buyer has to buy it, and the seller has to fix it or give the buyer the insurance settlement. However, if you start to get opinions that vary — for instance, the sellers’ insurance company thinks the damage is only $X amount, but the buyers estimate a much higher amount.”
In these circumstances, “then I would think you’d have to get an attorney involved.”
Disputes could be especially contentious if the seller believes the damage is below 5% of the home’s purchase price, but the buyers’ assessment concludes the damage exceeds 5%, and they want out of the deal. But it also could be challenging if the buyer wants to go through with the transaction yet believes the costs are going to run much higher than what the seller or the seller’s insurance company is willing to pay out.
These are important issues you and your real estate agent will work through together with the sellers and their agent.
Negotiate the repairs
Once the two parties agree about what repairs must be made, Tasker says the sellers have two options. They can manage the repairs after obtaining an insurance settlement, or they can assign the insurance benefits to the buyer, and the buyer can then manage the repairs.
According to Tasker, one advantage to having the buyer handle the repairs is that they can often move forward with the scheduled closing date without any delays. Plus, there could be another silver lining for the homebuyer.
“Say that a tree falls on the garage, which happened to one of my buyers recently,” Tasker explains. “The buyer could take the assignment of the insurance settlement and rebuild it exactly as it was. Or maybe it’s a two-car garage, and now they can supplement the insurance settlement to build the three-car garage, which they really wanted anyways.”
Tasker says the same thing can be done with interior work. For example, if there was a kitchen fire, the homebuyer could take the insurance settlement, add some additional funds to it, and remodel the whole kitchen the way they want it.
There is one caveat to that, according to Tasker.
“I don’t know if the lender would allow those repairs to wait until after the transaction. They are not going to want to close the deal with no kitchen,” she emphasizes.
Tasker notes it could complicate the transaction timeline if the repairs are extensive and could substantially delay closing.
“If the closing date has to be adjusted, it might get more complicated,” Tasker says.
“If you don’t close on time, are you out of contract? That might be the time to talk to an attorney to see what your options are if you can’t close because of damages. However, most reasonable people will agree to an extension to allow the time for the repairs to be done.”
Although occasionally there may be a need for an attorney, in many situations, your agent can help determine what the best course of action is for you. Your agent will manage the communication with the seller and the seller’s agent or negotiate on your behalf if there is disagreement about what should be done.
Reasons to delay closing
Although a natural disaster is the most common cause of unexpected damage, in some cases, sellers or a third party might occasionally damage a house before the property is transferred to you.
If the damage was deliberate or caused by theft or vandalism, the seller should file a police report, Tasker advises.
“I had a seller who reported that her home was vandalized,” she says. “The vandals stole some stained-glass windows and did some other damage inside the house. The seller filed the insurance claim. When it came time for the insurance claim to be paid out, she took the funds and moved out of state. The buyers were told the money was going to be given to them to make the repairs, and then it turned out that wasn’t so. The buyer was left without the repairs being done and with no settlement.”
Tasker says this is why the buyers should consider very carefully before agreeing to close before necessary repairs are completed.
“You have to be aware and concerned about anyone with ulterior motives,” she adds. “Ask yourself, what’s your level of trust of the other party? If you have any hesitation on the honesty of the other parties, then I would not close until the repairs are done.”
An alternative strategy is to have your agent negotiate a deal where you proceed with the closing as planned, but hold back a portion of the purchase funds in escrow until repairs are completed.
Talk to your lender
As mentioned earlier, the lender will play an important role in determining whether to move forward with the transaction if the damage is extensive, as the lender will have to assess whether they are still willing to finance your mortgage.
But if the house can be restored to its original condition, the lender will most likely be willing to make alternative arrangements with you to delay the closing so repairs can be completed.
Unfortunately, if you have locked in your interest rate for a certain period of time, you could lose that lock if you delay the closing.
Make sure you understand what your lender will require to finalize the transaction after repairs are made. For instance, the lender may require a new appraisal before they will sign off on the mortgage.
Even if the lender does not require a new appraisal, you may want to get one for your own peace of mind, especially if there is a long delay. Even in a short period of time, home values can shift, and you will want to know that the home you are buying is still worth the price you are paying for it.
On the other hand, you may be pleasantly surprised to learn that a new garage or a major kitchen remodel increases the value of the home!
Take a final walkthrough
For any home purchase, your real estate agent will insist on a final walkthrough before going to the closing. This is doubly important when the home has had to go through extensive repairs.
You can also ask your home inspector or an independent contractor to accompany you if you feel you want a professional review of the repair work.
While there are a lot of challenges and frustrations for the homebuyer in these situations, there can be a bright side to it, according to Tasker.
“Getting the repairs completed before the move in can be in the buyer’s best interest,” she says, noting they will have an opportunity to review the repairs before they move in, and — depending on what repairs were made — they may find the home is now even in better shape than when they made an offer on it.
Situations such as these are a great reminder of how important it is to hire an experienced real estate agent when you set out on your homebuying journey. Our HomeLight agents have the local knowledge and experience to ensure a smooth and professional homebuying experience for you.