House caught fire day before closing. What to do?

Question

I was set to close on my first home today. Last night, the tenants on the other side (duplex) caught the fireplace ablaze and caused substantial damage to their side of the house. The inspection report stated the fireplace was NOT safe to use and needed cleaning due to this specific reason. I was set to buy both sides of the house. I planned on getting the tenants out as soon as possible because I knew they were irresponsible and poor renters. Closing is obviously off the table until further notice. I imagine the owner will file an insurance claim, but it could take weeks to months until it’s fully repaired. It was a good deal for the property and my rate is locked until mid march under 6%. My realtor and lender have never seen something like this happen and are at as much of a loss for words as I am. Is there a chance to renegotiate the terms/price? I don’t want to lose my rate because it’s gone up significantly since I locked it. Any advice?

Account Closed · Answer

The seller can assign his insurance claim proceeds over to you if you are still interested in the property. That claim will forever follow the property and the insured. So, I wouldn't let my name be attached to the claim itself. I'd have an attorney handle how to transfer the proceeds.

Mike Dymski · Answer

Idk how this will play out but I'd find a way to get a renovated home for the same price as your current contract...this could be a blessing in disguise.

Jonathan R McLaughlin · Answer

@Taylor Robertson walk away man. The 2000 you spent is gone. I have a strong suspicion insurance won’t pay this guy. Smokes out of commission? Even if they pay you are going to wrangle with fees, problems etc. and it sounds like you wouldn’t get financing rate lock or no. Take the L, live to fight another day and have a fun story

Taylor Robertson · Answer

Thank you all for the insight. My worry with walking away would be the fact that I've already spent money on the inspection, as well as the appraisal & underwriting fees were due via closing costs as well. I'm not sure if I would be liable for all of this, which would add up to ~$2,000 in total. I'm don't believe there was structural damage but could easily be 30-50k it total costs. I would like to move forward with the house simply because there have been so few multifamily homes for sale in my local area (Wichita, KS) and I finally found this one after nearly one year of looking. The home was built in 2016 so it is still fairly new.There may be some legal disputes between the tenants and owner as well. Like I said earlier, the fireplace & chimney were deemed not safe for use and recommended to be professionally serviced per the inspector. The owner was given this report and chose not to service them but rather give me credit for the cost after closing. The tenant was also aware of this and chose to continue to use the fireplace despite orders not to from the owner. Also, the smoke detectors were found not to be functional per the inspection. Again, seller was fully made aware of this. However, on the seller disclosure report I was sent before inspection, she stated that everything was in good condition. Lastly, from looking at the tenant's social media, they are already looking for a new place to rent. My loan was contingent upon proof of rental income in order to qualify for the loan. If the tenants do vacate, I wonder if the lender will disqualify me from the property even though my initial plan was to get new tenants in there at market rent. A lot to unpack, I know. Hopefully I get some good news from my agent next week. Thanks!

Steve Vaughan · Answer

Better than this happening the day after closing! No lender will fund this, so no choice delaying until repaired. To extend the contract, I'd ask the seller to buy my rate down to my current rate lock at time of closing. It may not be necessary, but I'd need that backstop to extend.

Aaron Porter · Answer

This topic has been discussed quite recently on the forum, damage right before closing. I believe that the most recent one was flood damage due to freezing pipes. That being said, there are a few options available to you: the 1st being walking away from the property. Next option is to postpone the closing until after the "permitted and inspected" repairs are made to the property. 3rd renegotiate the purchase price of the property to reflect the damage to the property. 4th create a contract between you and the seller where you take possession of the property and the original owner pays for the cost of repair, this is usually through proceeds from the insurance claim. The insurance company will not make the purchaser of the property the "payee" of an insurance claim. So you will have to work with the current owner of the property through the entire renovation period to make sure that everything gets fixed properly and paid for by the current owners insurance policy. There is a good chance that you will need to get a renovation risk policy on the home if you decide to go through with the purchase. Make sure that your insurance agent knows what is happening to make sure that you are covered and not left with any lapses in coverage.