Fire at an 18-unit complex I'm set to purchase in 3 weeks, help!

[Tony S.]

There was a fire yesterday evening in one unit with injuries at an 18-unit property I’m under contract to purchase 3 weeks from now. How should I proceed?

My diligence period ends this Saturday, though Seller has already agreed to extend the diligence period to allow us all to react to this new development.

There are substantial tax considerations to close on this property by year end from both the seller’s and my perspective. Almost all of the tenants are month-to-month, this is a big value-add project ($20,000 renovations for each unit) and I’m getting these properties at an attractive price with great seller-finance terms. I was going to strip these units down to the studs anyways to fully rehab them, but it appears the fire has damaged some of the trusses in this unit.

I’ve never dealt with a fire before. The tenant was found unconscious by the fire department at the property (suspected smoke inhalation), was conscious on the way to the hospital in an ambulance, though was subsequently put into an induced coma due to soot in lungs. I’m unsure of the tenant’s condition now.

The fire department is saying it’s a stove fire, though admittedly they have a lot of questions since the properties still have some knob and tube wiring, and this is the second fire originating from a stove at this complex this year. Out of the 15 years the seller has owned the complex, there has never been a fire incident under their ownership until this year.

I was planning to upgrade all the electrical anyways in each of these units, but how should I approach handling this fire incident in light of closing? Because this is the second fire this year, I think maybe this property now has the city’s attention (not in a good way), so the risk profile may have increased for me now.

Questions:

1. Should I forget about closing this year? Or can I still make it happen?
2. How do handle processing this with the seller’s insurance if we close next month? Can the seller assign the insurance claim to me as the buyer?
3. The purchase contract states that the seller will indemnify me as the buyer for any claims arising from anything that happened before closing. Should I be worried abiout anything from a liability perspective?
4. If I estimate about $40,000 in damage and the unit being offline for a couple of months, how much of a purchase price reduction should I request.
5. Any other considerations I should be thinking about?

Any help or advice from anyone that has gone through this or has any experience would be greatly appreciated! I’m set to have a conversation with the seller about this issue tomorrow and want to have thought through everything ahead of time.

[Charles Seaman]

@Tony S.  I bought a property with an open fire claim earlier this year.  My replies to your questions are below in Italics.

1. 1. Should I forget about closing this year? Or can I still make it happen?  It's possible that you can still close this year.  Are you obtaining traditional financing to acquire the property or is the seller financing the sole source of debt?  If you are using traditional financing, then it might make it tougher, but it's still possible.
2. 2. How do handle processing this with the seller’s insurance if we close next month? Can the seller assign the insurance claim to me as the buyer?  The seller can assign the insurance claim to you, however it'll likely be easier just having them keep the proceeds from the claim and giving you a credit to the purchase price now.
3. 3. The purchase contract states that the seller will indemnify me as the buyer for any claims arising from anything that happened before closing. Should I be worried abiout anything from a liability perspective?  Your best bet is to speak with your insurance broker or attorney about this.  If the seller has already filed the claim or will file it prior to closing, then your liability should be limited.  While indemnification provisions are good in theory, there are times where it can be tough to enforce them in practicality.
4. 4. If I estimate about $40,000 in damage and the unit being offline for a couple of months, how much of a purchase price reduction should I request.  $40,000 + whatever lost rent you'll incur.  Keep in mind that your insurance premium will also most likely increase if you provide your insurance broker or carrier with updated loss runs that reflect this claim, so you'll want to include a further reduction to reflect that.
   5. Any other considerations I should be thinking about?  If you haven't already done so, then you probably want to have an electrician and a structural engineer inspect the property to evaluate any further issues that you might encounter.  If you're getting the deal at an attractive price and you're planning to bring the units down to the studs, then you'll likely be fine.