You've found the perfect home and put down an offer. All is in order, and you just need to get the admin done. For now, the home is in escrow. The processes of securing the mortgage, getting all the documentation in order, and finding the right homeowners insurance are all underway. Then, a natural event or accident causes major water damage to the home.
In terms of who is able to claim from insurance, the answer is simple. The seller still owns the home and is still covered by their homeowners insurance. Does homeowners insurance cover water damage? In most cases, yes, although there may be deductions. But does the seller have to fix the damage? And what happens if the damage cannot be easily fixed?
The status of a home in escrow is an interesting one. This is not because the ownership is under question, but rather because the buyer has made certain agreements. Let’s take a look at the factors which influence this situation.
What Escrow Means
To understand who is responsible for the damage, we need to understand what escrow means. Escrow occurs after an offer is made on the home. The buyer usually has preapproval for a mortgage at this point but has not yet secured the mortgage.
An offer is a legal commitment and can only be withdrawn under certain circumstances. However, ownership of the home has still not changed hands in any way. Escrow is the time in which documentation is being sorted out.
Escrow admin includes:
- Home inspections
- Mortgage financing
- Title insurance
- Schedule of exclusions
- HOA documents
- Property and liability insurance
- Good faith estimate
Usually, there will be a clause in the contract that allows the buyer to withdraw from the deal if they do not get financing or the home does not pass an inspection. Good legal documents are drawn up with both parties’ needs in mind. In most other cases, they are obligated to go through with the deal. So what happens if there is major water damage?
The Extent Of The Damage
For minor damage, there is usually no way (and no reason) for the buyer to pull out of the deal. After all, this can be fixed without incurring huge expenses. In most cases, the seller is able to claim from the insurance and pay for repairs. However, if the extent of the damage adds up to more than 5% of the value of the contract, the buyer is usually given the chance to pull out of the deal.
If the house is now unlivable, this is fairly straightforward. But even if the damage can be repaired, it can still lower the value of the home, which gives the buyer cause for objection.
The buyer can also take this as an opportunity to negotiate a new offer. With the leverage available now that they have the chance to pull out of the deal, and the subsequent difficulty the seller may face in trying to find a new buyer, a better deal may be on the cards.
A New Assessment
If the buyer and seller have already had assessments done on the house, it is important new assessments are done after the damage occurs. This is even if the extent of the damage seems evident, as there may be future issues that occur because of this. In fact, it would be ideal for a new assessment to be done after repairs are carried out. However, a new assessment won’t necessarily void the offer on the house. It does give the buyer room to negotiate, but in most cases, it is simply due diligence.
A home in escrow still remains in the seller’s possession. However, that does not mean the buyer can pull out of the deal with no consequences. Only if the extent of the damage is significant can the buyer consider withdrawing or submitting a changed offer.
