Water Damage May Soak Lender-Sellers Home

Several years ago, recent empty-nesters sold their Glendale home for $260,000. They had owned this home free and clear and, after the buyer paid $15,000 down, they gave the buyer seller carryback financing for the balance of $245,000. Under the loan documents the buyer was required to pay for homeowner’s insurance. Last year however, the buyer stopped making the loan payments to the seller and recently moved out. Upon inspection the home was in terrible condition. The main problem was extensive water damage throughout the home because the buyer had not fixed the storm damaged roof. The cost to repair the damage will be $50,000 and the seller recently learned that the homeowner’s insurance was cancelled because the buyer did not make the payments to the insurance company.

The seller needs to immediately begin foreclosure proceedings on the $245,000 loan. If the home is now worth less than $245,000, in Arizona real estate law normally one would not be entitled to sue for this deficiency after foreclosure. If there is damage to the home due to “waste,” however, one would be entitled to sue for this damage. The failure to repair the roof coupled with the failure to pay the homeowner’s insurance payments is probably waste. After the roof is repaired, the sellers should contact an Arizona real estate attorney to file a lawsuit against the buyer for the $50,000 damage to the home. Unfortunately, however, if a homeowner loses a home to foreclosure, the homeowner rarely has any assets to pay a judgment for any damage to the home.

Note: The sellers as the lender should have been named a “loss payee” under the homeowner’s insurance policy. You would then have been entitled to receive notice from the homeowner’s insurance company when the buyer failed to make the payments, and the seller could have made the payments to keep the homeowner’s insurance effective. A real estate law attorney should be able to help the seller review the homeowner’s insurance policy to see if they may have coverage for the damage to the home.

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