Wednesday, April 23, 2014

Unexpected property damage

From page HS3 | December 27, 2013 | Leave Comment

I don’t usually find myself marketing small entry-level homes in Sacramento but when my friend and past client Jack called, I willingly accepted the assignment. After all, how much trouble could it be selling a $150,000 house? Besides, at this time of the year, my business had started to wind down and small sales are better than none.

Jack had purchased the rental about 20 years ago. The house was built in the late 1960s and not too much had been done to it since. It still had the original kitchen counters, cabinets and flooring. The carpet and pad needed to be replaced and the house needed painting. The important components of the house — roof, siding and HVAC systems — were old but functional.

We had an acceptable offer within two weeks. The new carpet, pad and a few gallons of paint proved to be a good investment. The escrow and property inspections were uneventful. The buyer got his loan approval and his lender was preparing the loan documents. Jack had already found another replacement property and we were just waiting for the escrow to close on his rental before we could close on his new purchase. It was an easier deal than I had anticipated. The commission would be an unexpected end-of-year bonus.

It was barely 7 a.m. on Dec. 9. I was reading the newspaper with my second cup of coffee when the call came in.

“Hey, are you the guy that has the house listed for sale on Sunset?”

“Yes, I’m the listing agent. Why?”

“Because there is water running out the front door of that house”

The day I put up the For Sale sign I stopped by and visited with a few of the immediate neighbors. Vacant homes require more attention to security and I wanted to introduce myself and ask them to contact me if they noticed anything out of the ordinary happening with the vacant house. John lived next door and noticed the wet sidewalk when he went outside to retrieve his morning newspaper. Fortunately, he knew the location of the water main shut-off vale.

As is often the case when catastrophe strikes, it is the fatal combination of several otherwise unrelated factors: The house was vacant, the thermostat was turned off and temperatures dropped to a record 80-year low of 23 degrees. At some point the main water line running through the attic froze. The expansion burst the pipe which poured water into the house and out the front door.

Getting the water and moisture out of the house was the immediate concern. The insurance adjuster and contractor could later haggle about what else needed to be done but excess moisture is an incubator for mold. While the seller focused on the issues regarding the property, I needed to address some contractual and liability issues that affected both the buyer and seller.

While it is rare that a home will incur significant damage during the escrow period, stuff happens. Perhaps an appliance will need replacing, a small leak may appear in the roof after a winter storm or the kids put a deep scratch in the hardwood floor. Often sellers will dismiss these as ordinary or non-material and may not want to disclose these issues for fear of alarming the buyer and jeopardizing their sale. However, that would be in breach of the purchase contract that reads in part:

“In the event, seller prior to the close of escrow, becomes aware of adverse conditions, materially affecting the property … seller shall promptly provide a subsequent or amended disclosure …”

The new disclosure provides the buyer with the opportunity of moving forward and closing the transaction, canceling escrow or opens the contract again for further negotiations. A seller who makes their own determination as to what constitutes a “material condition” does so at their own peril. It is best to over disclose than to minimize any changes in the property’s condition.

The unexpected damage to the home allowed the buyer the option of canceling their purchase. The seller, however, cannot. Another section of the purchase contract commits the seller to maintaining the property through the escrow period until closing.

“The property is sold in its present physical condition as of the date of acceptance … and is to be maintained in substantially the same condition …”

This property was not in the same condition as when the buyer had made the offer. It was a wreck and repairs would take weeks. If the buyer would not extend the contract and accept the repairs, the seller could be liable for his failure to maintain the property.

Buyers can have a significant investment in a home regardless if it closes escrow or not. After the initial earnest money deposit, there is the cost of the appraisal, property inspections, loan and title costs and relocation expenses. In addition to any out-of-pocket expenditure, buyers usually become emotionally involved with their future home and sellers will make financial commitments well in advance of their sale closing. Both parties usually have a vested interest in closing the transaction; which is what happened to Jack’s house.

The buyer was pleased to discover that the insurance company would install new kitchen cabinets, counters and flooring. The seller was pleased that his only loss was his insurance deductible and I was relieved that both parties had decided to close escrow.

Happy New Year!

Ken Calhoon is a real estate broker in El Dorado County. He can be reached at


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