Just over two weeks ago, Hurricane Ian ravaged many areas of Southwest Florida with devastating winds and historic flooding. As the impacted communities struggle to regain some sense of normalcy through restoration of power, water and communications, we are starting to field questions about how this storm will affect the local real estate market. I will address some of the immediate impacts that our Realtors are dealing with on pending sales contracts and the consequences of a hurricane event during the contract period. In addition, I will touch on the forward looking aspect of the real estate market and what impact on home prices may result as we repair and rebuild from the hurricane’s destructive forces.
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Days prior to Ian’s landfall and continuing through today, several questions and concerns arose about the rights and obligations of both buyers and sellers under their pending sales contract. For the sake of simplicity, I will make reference only to the FR/BAR “As-Is” Residential Contract for Sale and Purchase (the “purchase contract”), as it is the predominant contract utilized in our residential real estate market, but by no means the only contract used in our market. As a management team, our managing brokers and in-house attorney found ourselves dusting off provisions of the contract that almost rarely, if ever, are utilized in the normal course of business. Contract clauses dealing with issues such as force majeure, risk of loss and the right to inspect became front and center when deciphering the rights and obligations of the parties to the purchase contract post-hurricane.
When a natural disaster such as a hurricane strikes, the legal term “force majeure” is thrown around sometimes prematurely. The term “force majeure” is a French term that means “greater force.” In a contractual context, it refers to an act of God (e.g. a hurricane) or some other disaster (e.g. a war) that prevents the parties of the contract from either performing the contract at all or at least unable to operate with timeframes originally set in the contract.
In the case of the purchase contract, timeframes relating to inspections may be impossible to comply with due to restrictions imposed by the hurricane (e.g. unable to access the property). Furthermore, certain conditions of a loan approval may not be possible due to the damaged condition of the property as a result of the hurricane. The force majeure provision of the purchase contract provides for an extension of those time frames in some instances, and the right to cancel the contract in other circumstances.
Some buyers were eager to cancel pending purchase contracts immediately before and after the hurricane based on nothing more than the uncomfortableness and uncertainty that the storm creates pre and post landfall. Many times, it is not that simple. The risk of loss provision in the purchase contract obligates the sellers to repair any damage to the property up to 1.5% of the purchase price. This provision of the purchase contract is seldom referenced, and will require some revision after the past few weeks of real life implementation. For example, who gets to determine the value of the repairs needed – the buyer or the seller? What if there is a disagreement on the amount of the necessary repairs? These are the gray areas that keep real estate attorneys gainfully employed and require further clarification in future revisions of the purchase contract.
Another provision in the purchase contract is the right to inspect, which generally states that upon reasonable notice, a seller will provide access to their property for the prospective buyers to conduct inspections and final walkthroughs before closing. Very reputable real estate professionals and attorneys have differing opinions on this provision when it comes to a buyer’s right to re-inspect post hurricane to satisfy themselves that the property is in the same condition as it was when they went under contract. Common sense would dictate that a buyer would have that right, but some argue that once a buyer passes their inspection period, then this area of the contract does not offer the right to revisit the property for further inspection.
The final area that has caused significant confusion that falls outside of the purchase contract, but still very connected, is the assignment of benefits under a seller’s homeowner’s insurance policy. Essentially, under certain circumstances, the seller can assign the proceeds of their insurance policy over to the new buyer so that they may proceed with the necessary repairs. I strongly urge anyone considering this path to consult with a knowledgeable insurance agent and/or real estate attorney to make sure the correct steps are taken.
So now that I have discussed some of the contractual issues for current pending real estate transactions, let’s shift to the future of the real estate market post Hurricane Ian. Generally speaking, prices tend to rise following a natural disaster. According to a recent article published by the Florida Realtors, “Veros Real Estate Solutions estimated that property prices topped the national average by 7% in five metropolitan areas over the 12 months following a hit by a major storm.” If we have witnessed anything in the past few weeks, it is that Southwest Floridians are a resilient bunch and I have no doubt that we will rebuild even better than before.
The most significant factor that could throw a curveball into the recovery of our local real estate market is the cost and availability of property insurance. Even prior to this hurricane (which was historic in its size and amount of destruction), the Florida property insurance market was severely battered and operating on shaky footing at best. It will likely take a combination of federal and/or state subsidies to attract the amount of private capital that will be necessary to maintain an affordable and sustainable property insurance market in Florida.
Regardless, we are back to selling homes and I am confident that our real estate market will prove as resilient as its citizens. We remain committed to helping those to our south that were so severely impacted by the storm and we will do all that we can to get them back on the road to recovery.
Peter Crowley is president of Re/Max Alliance Group.
