Property Insurance Question for y'all

[gardeneer]

I'm not sure how this would work so I thought I'd ask here in case any of you have some experience with home insurance claims and a property on the market:

We're looking at buying a property in NJ - 4 acres and perfect for our farm. However about 2 weeks ago the main house was burglarized and they took copper pipes, destroyed the AC units, took the radiators inside, and did some cosmetic damage. Luckily the police caught the thieves. The realtor tells us that the current seller will have the property repaired and "made full" before selling through their insurance.

We're now looking at using this damage to get the price down on the property. We thought making an offer minus the reimbursement from insurance would be the way to go. In other words we'd deduct the insurance amount from the offer, let the sellers be reimbursed by insurance (so they'd still get the price they want for the property), and then remodel the house as we see fit.

I'm not exactly sure how insurance reimbursements work in this type of situation, and if the insurance just usually cuts a check to the homeowners after inspecting the damage and getting estimates, or if it's more complicated than that. Maybe insurance usually pays direct to the contractor doing the work? Maybe they would allow the seller to sign over the payment to us? Any past experience or knowledge on home insurance for this type of scenario you could share would be appreciated.

 

[WVUBRU]

I can share knowledge. Problem is the topic. There is no one answer since there are so many possible moving parts to the question. Based on what state this is in (states are in charge of the insurance industry and it varies greatly), the insurance carrier, the underwriter, the type of policy, the lien-holders (property mortgage companies) and even the insurance adjuster assigned to the claim are some of the factors that can change the answer.

Typically, the insurance adjuster will follow the state law and the policy and the loss could be paid for replacement value or many other types of value calculations. Some of these type of calculations will not pay for the actual true cost of the replacement so the owner and/or contractor will make decisions to put in a less quality product or make shortcuts that will be found later. This is a problem you could face as a future owner of the property. Payment could be a one-party check (direct to the owner) or multi-party check including the contractor or the lien-holders or both. If the owner is behind in his mortgage payments, that will cause some major issues with delays and how much is available for the contractor which also could lead to shortcuts. Hiring the contractor could be dictated by the owner or the insurance carrier and that is a very shady situation if the insurance carrier is responsible for the contractor. So things like this can cause you as the future owner many sleepless nights.

Your best bet in my eyes would be have a contingency offer on the property and the repairs must be up to your standards based on your independent inspection. If it isn't, you can walk away with no penalty. Anything other than that, you are taking on an incredible risk. Good luck.

 

[dave]

It would seem to me that their insurance qould pay to bring the property back to previous value and any discount in the sale would be up to the seller. Maybe i misunderstood your question and if so i apologize.

 

[countryroads89_rivals]

In some states, regulations won't allow the seller to sell the property without the copper pipes being replaced (fresh water supply) and the AC being fixed and it also depends on your lending situation (HUD, FHA, lending institutions, etc). So you may be in a situation where the current owner has no choice but to get everything fixed prior to sale.

 

[gardeneer]

Thanks for the replies. This helps confirm that it may be a situation we want to stay away from right now. No need for possible risks. There are always other properties out there.

 

[Mntneer]

Your best bet in my eyes would be have a contingency offer on the property and the repairs must be up to your standards based on your independent inspection. If it isn't, you can walk away with no penalty. Anything other than that, you are taking on an incredible risk. Good luck.

This would be the way I'd go if I had to. I'd spell out the level of the repairs, spec out the materials, craftsmanship, etc. and then require a inspections during the entire process. You wouldn't want them opening up a wall to replace piping, discover an unknown condition and then cover it back up.

The problem with taking on the repairs yourself is it will be harder for you to estimate the cost of those repairs and therefore come up with a reasonable number to deduct from the selling price, especially something as extensive as replacing stolen piping.

 

[WhiteTailEER]

I would think that you'd have issues even getting a mortgage for a property like that as the mortgage company is going to require inspections to ensure they can recover their money if they have to foreclose and sell it.

I had a friend build a house that had covered porches, he still had the framing exposed on the underneath side and had to have soffits installed before it would get past the inspection and mortgage closed. (he did a construction loan) That doesn't even compare to the damage you're describing, but it was an issue for him.

You could possibly start with a construction loan given the state of the property?

I'm absolutely not an expert. I've purchased 3 homes and am just recalling all of the inspections and everything that had to be completed to get the deal done.