What to do When Natural Disaster Strikes

Arizona is not a stranger to natural disasters. According to the Arizona Department of Emergency and Military Affairs (DEMA), Arizona has had multiple federally declared disasters. Regardless of an event being federally declared a disaster, natural disasters can be devastating.

As real estate professionals, what do you do when natural disaster strikes a property during a pending real estate transaction? The National Association of REALTORS® answers that question by advising members to be aware of the following five issues, so you can help your clients navigate their way through a difficult time.

  1.  Clients
    • Speak with your clients as soon as possible. Keep everyone advised as much as possible, both as to what is known and what is not known.
    • Don’t panic, be patient, and try to encourage clients and customers to do the same. Many people are involved in this difficult situation, and you’ll all need to work together to figure it out.
  2.  Contracts
    • Review the purchase agreement as most have provisions addressing damages that occur to the property prior to closing, and whether such damage occurs “in the ordinary course” or due to dramatic events like those you are now experiencing.
    • Contracts also ordinarily contain provisions addressing what happens when one or both parties cannot perform for reasons beyond his or her control. Typically the provision holds that such non-performance is not a default. This provision is sometimes called “Force Majeure” or an “Acts of God” clause.
    • The purchase agreement may also address under what circumstances a buyer or seller may change the closing date.
    • The seller and buyer are always free to work together to amend the contract and obligations thereunder based on any new circumstances.
  3.  Law
    • Apart from contractual provisions regarding loss or damage to property, state law may dictate which party – seller or buyer – bears the risk of loss during the pendency of a transaction. Check your state law (sometimes referred to as the Uniform Vendors and Purchasers Risk Act).
    • Consult an attorney if there is any ambiguity as to interpretation of the purchase agreement, compliance with the purchase agreement given the change in conditions, a desire to amend the existing agreement, or a question about compliance with state law.
  4.  Insurance
    • Advise your client to file a homeowners insurance claim, or at least notify the carrier of the claim, as soon as possible.
    • Document and inventory all damages in writing, photos, and video.
    • Keep records of everything you spend on repairs and replacements.
    • Helpful insurance filing tips are included in this article: After Hurricane Harvey: Tips for filing an insurance claim — Paul Davidson, USA Today
    • For details on the National Flood Insurance Program (NFIP) claims process, visit File Your Claim on www.fema.gov.
  5.  Lending
    • Buyers should check with the lenders to determine how they will handle re-inspections or re-appraisals that may be required.
    • Sellers should notify their lender and inquire about fee waivers and deferment options.
    • Both parties should ask lenders about additional costs and or timeframes caused by the disaster, even if the property is not in a designated Federal Emergency Management Agency (FEMA) disaster area.

What happens when a real estate transaction is in escrow and a natural disaster occurs in Arizona?

Q: Does AAR’s Residential Resale Real Estate Contract (“Contract”) address natural disasters?
A: Section 8b titled Risk of Loss states “If there is any loss or damage to the Premises between the date of Contract acceptance and COE or possession, whichever is earlier, by reason of fire, vandalism, flood, earthquake, or act of God, the risk of loss shall be on the Seller, provided, however, that if the cost of repairing such loss or damage would exceed ten percent (10%) of the purchase price, either Seller or Buyer may elect to cancel the Contract.”

Q: What if the parties cannot close escrow by the agreed upon date?
A: The parties should engage in discussions to determine how long of an extension the parties need and then extend the agreed upon closing date in an addendum to the contract.

Q: What happens if the property is slightly damaged?
A: Section 5a states that the premises will be in “substantially the same condition as on the date of Contract acceptance.” Therefore, the seller must correct any slight damage to the Premises prior to close of escrow.

Q: How much damage must occur for the buyer to cancel the contract?
A: Pursuant to Section 8b, either party may cancel the contract “if the cost of repairing such loss or damage would exceed ten percent (10%) of the purchase price.”

Q: If the buyer cancels the contract due to an excess of ten percent (10%) damage from a natural disaster, does the buyer receive their earnest money back?
A: Yes. Section 8b allows the buyer to cancel the contract. Therefore, the buyer would receive a return of their earnest money deposit upon cancellation.

Related articles:
Study: FEMA Severely Lowballs Flood Risk – REALTOR® Magazine (Mar. 19, 2018)
7 Steps for Protecting Clients From Disasters – REALTOR® Magazine (Sept. 29, 2017)

Tags: , , , , , , , , , , ,