WE’RE HEARING from Long Island, N.Y. where a million dollar residential closing has been postponed because of problems obtaining homeowners insurance. I had never heard of this specific problem before but of course there is always something getting in the way of a deal closing. This story also highlights a number of other issues. The main issue for me is that you need to have the homeowners insurance lined up early in the process rather than at the last minute.
The home in question was 15 years old and selling for over $1 million. In New York, this means the buyer is also paying something known as a “mansion” tax of 1% of the purchase price. This is old news in N.Y., but maybe folks in other areas have never heard of it. McMansions are not subject to this tax. Ha ha ha.
According to the seller’s attorney the exterior of this home was made of “some kind of synthetic stucco.” The technical name for the exterior is EIFS or exterior insulation and finishing system. Chubb insurance declined to insure the home after they inspected it because of the EIFS.
Well we all know the drill about homeowners insurance which is no insurance means no closing. Funny thing about this deal was that the lender, the appraiser and the home inspector all had no problem with the EIFS. Maybe now they will all be afraid of EIFS. The home in question was currently insured by Allstate. Someone should probably give them a call and have them write a new policy for the buyer and get the deal closed.
The typical sales contract for a residential home purchase does not address the issue of what happens when you cannot get insurance. Maybe now it is something to be concerned with especially when a substantial downpayment is involved. No sense in losing your downpayment if you cannot get insurance.
Moving south we visit a case out of the Alabama Supreme Court decided two weeks ago. The 32-page decision was mostly about the seven year procedural history of the matter which involved protracted litigation and a related bankruptcy case. The case involved a lender suing a title company, a default on a $2.8 million mortgage loan, and of course the bankruptcy.
The loan was secured by a mortgage on a lot which apparently did not exist at the time of the closing. Hence the claim by the lender against the title company which insured the lender they had a valid first mortgage lien on the property. The underlying property was part of a new subdivision development. The title company’s attorney had made allegations about collusion between the attorneys for the lender and the bankruptcy trustee and its attorney.
While the lender was litigating its claim against the title insurer, the loan borrower had filed for bankruptcy. The bankruptcy trustee asked to have the lot sold free and clear of the mortgage loan. How is that for aggressive advocacy? The bankruptcy court denied that request. The lender ended up getting the property back. Also the lender had its claim against the title insurance company denied.
The funny part of this whole mess was a comment made by the bankruptcy judge. He said the lender was probably not happy about getting the property back because of the decline in value of the property. Rather he said the lender would have been happier with a claim against the title company. It just goes to show that these foreclosure cases always have an underlying related story to them.
Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses. He can be emailed at firstname.lastname@example.org.