In Part II of the series, we are asking and answering the following question:

What happens when there is damage to a home after acceptance of an offer to purchase?

Notifying the Buyer About the Damage:

Wisconsin’s Residential Offer to Purchase differentiates what happens when the property is damaged in an amount less than 5% of the purchase price and what happens when the cost of the damage is over 5% of the purchase price. Regardless of the amount of damage, the seller is under an obligation to notify the buyer of any damage to the property after the offer is accepted.

The seller can notify the buyer of the damage in a few different ways. The first and most common option is to supply the information on a Notice form disclosing the damage. The second option is the seller amending his/her Real Estate Condition Report to disclose the damage. The second option is generally not recommended, as it can trigger the buyer’s 2-business day right to rescind the offer under Wis. Stat. 709.05(2)(a)(2). When a buyer rescinds the contract based on this statute, the buyer is entitled to a refund of their earnest money deposit. The second option is only recommended if the seller understands and agrees to the prospect of the contract falling apart and/or if the seller wants to give the buyer a way out of the contract. The third way of disclosing the damage is for the seller’s real estate agent to complete a Disclosure of Material Adverse Facts.

Damage Less Than 5% of The Purchase Price:

If the damage to the property is something relatively minor, such as one broken window, then the cost to repair the damage is likely less than 5% of the purchase price. The Offer specifies that when the damage is less than 5% of the purchase price, sellers must first notify the buyer of the damage. After notifying the buyer, the seller has a duty to repair the property. Specifically, the seller has to restore the property to the same condition it was in when the buyer made his or her offer.

It is the seller’s responsibility to bear the cost of the repairs. The seller may choose to pay for the cost of the repair by including the contractor’s invoice on the closing statement, entitling the contractor to be paid from the sales proceeds. Alternatively, if the seller pays for the repair before closing, he or she must supply the buyer with a lien waiver for any lien-able repairs.

If the seller cannot repair the property before closing, then the parties can mutually agree to one of the following options:

(a) extend/postpone the closing date to give the seller time to repair the property; or

(b) the seller can give the buyer a credit or price adjustment for the cost of the repair; or

(c) Other options may be available depending on what stage of the repair process the seller is in, such as holding money in an escrow account for the cost of the repair.  An attorney should be consulted to ensure that all parties rights and obligations are clearly communicated to avoid disputes.

Damage More Than 5% of The Purchase Price:

Imagine a tornado striking the home you are under contract to either purchase or sell, resulting in the need for an entirely new roof and siding. This may likely be damage that exceeds 5% of the purchase price. In this situation, the Offer specifies that the seller must first notify the buyer of the damage and then give the buyer the option to terminate the Offer. A buyer who decides to terminate is entitled to a return of their earnest money deposit.

If the buyer decides to proceed with the purchase despite the damage, then the Offer states that the buyer is “entitled to the seller’s insurance proceeds, if any, relating to the damage to the Property, plus a credit towards the purchase price equal to the amount of Seller’s deductible on such policy, if any.”

Both parties should hire legal counsel to assist with negotiating and drafting documentation to specify who will complete the repairs, how the insurance proceeds will be allocated, what documentation the seller is required to provide, and any other considerations that may need to be arranged or put in writing, depending on the agreed-upon course of action.

Schedule a consultation with Wynn at Law, LLC today to discuss your home sale or purchase

Wynn at Law, LLC can assist you with either your purchase or sale, starting with a review of or assistance with drafting the initial offer, and ending with helping you reach a successful closing.

Contact Wynn at Law, LLC today at 262-725-0175 or visit our website’s contact page. Wynn at Law, LLC is based in Southern Wisconsin and has offices conveniently located in Salem, Delavan, and Lake Geneva, Wisconsin.

The post Part II of II – Property Damage During the Real Estate Transaction appeared first on Wynn at Law, LLC.

What happens when there is damage to a home after acceptance of an offer to purchase?

These two questions will be discussed in this two part series, where we will explore what a seller’s duties are, what a buyer’s rights and remedies may include, implications on the condition report that a seller may be required to complete, and ways the parties can come to a mutually beneficial agreement.

Part I of II – Damage Before the Real Estate Transaction.

The Real Estate Condition Report:

Most sellers are required to answer specific questions relating to their vacant land, commercial property or residential property on a form called the “Real Estate Condition Report” (RECR). The RECR directs sellers to disclose “defects” that the seller is “aware” of. Wisconsin statute 709.03 defines a defect as any of the following three conditions:

1. A condition that would have a significant adverse effect on the value of the property;

2. A condition that would significantly impair the health or safety of future occupants of the property; or

3. A condition that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises.

In essence, this is the form where sellers would disclose any damage that may have affected the property prior to being under contract. It is worth noting that under Wis. Stat. 709.035, if a seller had already completed a RECR prior to being under contract, and an answer to one of the seller’s questions change, the seller is under an obligation to either amend the report on file or complete a new condition report.

Timing of the Real Estate Condition Report:

A seller may supply a completed RECR to a buyer before a buyer makes an offer. Alternatively, a buyer can submit an offer and require the seller to provide a completed RECR within a specified number of days, or within the default 10 days under the standard contract language. It should be noted that the RECR is not meant to replace an inspection contingency, even though the condition report may disclose the same type of defects that an inspection report may find. It is recommended that a buyer have the RECR in hand prior to his or her inspection, as the report may disclose defects that a buyer directs an inspector to take a closer look at.

Why the Real Estate Condition Report is Important:

The RECR is a document that sellers should complete truthfully and in good faith. Buyers who discover that a seller intentionally answered the report untruthfully may sue the seller for misrepresentation among other legal claims, even after the transaction has closed. Real estate agents are precluded from providing a seller with advice as to whether something qualifies as a defect or not, as this is considered legal advice. If a seller is concerned about what to disclose, the seller should contact an attorney for help.

Buyers may have the right to rescind their offer if the condition report discloses a defect that the buyers were not aware of or if the condition report is incomplete. Specific time frames must be followed in order for a buyer to exercise these rescission rights.

Insurance Claims Disclosed in the Real Estate Condition Report:

One of the questions that a seller is required to answer on the condition report is whether any insurance claims for damage to the property have been filed within the past 5 years. If the seller answers “yes” to this question, the seller must explain why the insurance claim was filed. Buyers may negotiate with the seller by requesting a copy of the seller’s Comprehensive Loss Underwriting Exchange (CLUE) Report. A CLUE report is most often used by insurers when underwriting individuals for a policy, but under the Fair Credit Reporting Act, homeowners have the right to request one free CLUE report on themselves per year.

The CLUE report discloses insurance claims that have been filed on the property within the past 7 years and the amount that was paid out on the claim. Buyers should be aware that not all insurers report to LexisNexis, the provider of CLUE reports, and therefore a CLUE report that discloses nothing does not necessarily mean that insurance claims haven’t been filed on the property within the last 7 years.

You may now be wondering what happens when the need to file an insurance claim arises after acceptance of an offer and what a seller’s duties are in relation to the Real Estate Condition Report when confronted with damage to the property while under contract – both of these situations are discussed in part II – Damage During the Real Estate Transaction, along with other considerations for the parties to the transaction.

Schedule a consultation with Wynn at Law, LLC today to discuss how the Real Estate Condition Report affects your home sale or purchase

Wynn at Law, LLC can assist you with how to approach the real estate condition report – whether that be assistance with completing the report or advice on how to proceed based on what is disclosed in the report.

Contact Wynn at Law, LLC today at 262-725-0175 or visit our website’s contact page. Wynn at Law, LLC is based in Southern Wisconsin and has offices conveniently located in Salem, Delavan, and Lake Geneva, Wisconsin.

The post Part I of II – Damage Before the Real Estate Transaction appeared first on Wynn at Law, LLC.