Home we're buying had insurance claims & repairs were never done

lprofancikOctober 18, 2010

We put an offer on a house that we love about 2 weeks ago and in the process of getting our insurance lined up found out some interesting info.

Apparently the home owner filed a claim on the roof for hail damage in 2006 for 24K and again in in 2007 for lightning damage for the amount of 8.5K. Our inspector noted mild hail damage, but not enough to ask that the roof be replaced. Before we knew this, we point blank asked the home owner if the roof had ever been replaced or repaired and he said no, they never did anything to the roof. They've owned the house since 1998 so obviously they took the money from the claims and never did the repairs.

We're not sure what will happen now. Our REA suggested we simply ask for work receipts regarding the insurance claims and see what happens. We're a little at a loss as to what to do and not at all sure what his response will be. Has anyone ever dealt with something like this?

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sounds like insurance fraud...

realistically I'm not sure where it puts you. It could be a misunderstanding or could be real.

I think you have two ways to look at it if it is real:

a) you have mild hail damage, you're buying it like that, if thats ok, then why be concerned about the roof? it doesn't really matter what they have claimed for in the past or how it was fixed so long everything is in good condition now.

b) owner defrauded the insurance company, what else are they hiding? what else is wrong with the house, how are they going to try and screw you in this sale?

personally i would pass, I wouldn't buy something that large from a person that I find distrustful, even if I didn't have evidence there is something wrong with the house.

    Bookmark   October 18, 2010 at 1:45PM
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Well, we're certain the owner didn't repair or replace the roof. Our inspector said the roof was nearing the end of it's life and had about 4-5 years left. So there is no way it was replaced 4 years ago. Also, the home owner said no claims were ever filed and they had never done any work on the roof. He even stated that it was the original roof.

My gut feeling is to consider walking because I hate dishonesty like that. But we love the house and it took us a long time to find something that we really loved. I guess our concern with buying the house as is would be that we may have issues filing a claim on the roof if we ever needed to.

    Bookmark   October 18, 2010 at 1:57PM
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Ask your lawyer! This isn't something you want 'opinions' on, but definitive knowledge.

    Bookmark   October 18, 2010 at 3:10PM
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You do need professional advice.

Personally, I'd ask for a new roof citing the found insurance claims or walk. We had to have our roof replaced after a major hailstorm a few years ago. We forgot to notify the insurance company so we got notice that our roof and any subsequent damage was uninsurable until the roof was replaced. I'm not a professional, but I'd guess that it is possible that the current roof might not be insurable until it is replaced. I think you would be buying into his problem.

    Bookmark   October 18, 2010 at 5:54PM
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They were paid by the insurance company...it was up to the insured/homeowner to either have the repairs done or not. He chose to keep the money. I don't think that is insurance fraud.

    Bookmark   October 18, 2010 at 6:31PM
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I have friends that went through a very similar situation. The home had an insurance claim filed for a new roof, sellers pocketed the money without replacing the roof. The roof was found to have a few years left on it, but when my friends discovered that the sellers had been compensated for the roof without repairing it they decided to back out unless the roof was replaced. The roof was replaced.

    Bookmark   October 18, 2010 at 7:16PM
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I agree with seeing what your lawyer says. However, if once you do that, you end up with what cordovamom has described, I'd ask for a credit on the price and then get the work done myself. I can only imagine that the seller might be just a tiny bit peeved and would get a shlocky roofer to do the work.

    Bookmark   October 18, 2010 at 8:22PM
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Your insurance company will probably not insure the house unless they see proof that the repairs were made. Your insurance company got the info from the comprehensive loss underwriting exchange (also known as the CLUE database). All insurance companies use it. I think any buyer will be unable to get insurance on the house until the repairs are finished.

This is from a state insurance website:

Can an insurance company use loss history from the prior owner of a home in determining my eligibility to get insurance on the home?

If a company can show a relationship between the prior ownerâÂÂs loss and the probability of a future loss to the home, they may use the information. There are no laws that specifically govern the use of the prior ownerâÂÂs loss history in determining your eligibility for coverage.

Here is a link that might be useful: FAQ about C.L.U.E.

    Bookmark   October 18, 2010 at 8:40PM
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Sometimes a house may not be insurable if too many claims have been made by the owners. You will be unable to get insurance for the house.

    Bookmark   October 18, 2010 at 9:44PM
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I once worked as a secretary for a RE company and a similar problem came up....turned out that a dishonest insurance AGENT had fraudulently filed some claims on his policyholder's homes and misappropriated the funds to his OWN bank account.

    Bookmark   October 18, 2010 at 10:49PM
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Is the price you would be getting the home for a "fair market price" for a home with the roof in the condition it is? Do you have the money to replace the roof when it needs it? Can you get regular insurance rates for the policy you would obtain? You love the home. If the answers to these questions are yes and you had a very thorough home inspection, you shouldn't necessarily walk away. People sometimes take insurance money on their car, and then don't get the body work done. When they sell it, they will get less than they otherwise would to compensate for the state of the body work. Are you paying the sellers less than you otherwise would have if the roof was only four years old?

    Bookmark   October 18, 2010 at 11:33PM
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Years ago insurance companies did not stipulate that they had to see receipts for work done. They assessed damage and awarded payment if the damage was covered by the policy. Period.

This happened to us. We had bought a lot and planned to put our house on the market, timing the sale to our build. That winter we had ice dam damage to the ceiling and exterior walls along the south side of two rooms. We filed a claim. We were awarded payment.

Suddenly we had a walk-in buyer for our house. They wanted to tear down most of our ranch and build a two-story home. We kept the damage payment and sold the house.

Our *current* homeowner policy is written differently. The company wants to see receipts for the work they've paid for within "X" amount of time.

That's neither here nor there in this case. The issue isn't what was not done to repair or replace the roof. The issue is that the house needs a new roof NOW! As buyer, I'd want an allowance for putting on the new roof that is required. Once the house IS re-roofed, why would you anticipate problems insuring the place?

    Bookmark   October 19, 2010 at 11:35AM
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your agent made the offer contingent on an Insurance Affordability Addendum. If the quoted insurance premium for the new home is xxx % more than the standard, then the buyer can cancel the contract and receive their EMD back.
This scenario would not affect how I handled the repair negotiations.

    Bookmark   October 20, 2010 at 7:03AM
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i would ask the cost of the house be reduced to match how much it will cost to replace the roof. Then you can replace it if you feel it necessary, or pocket the money, too. As others have suggested, I'd make sure the house is insurable, I think the mortgage company will do that anyway.

    Bookmark   October 23, 2010 at 10:49PM
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You buy or do not buy the house based on the inspection report. Taking the money and not doing the repairs is not insurance fraud. People do the same thing with car insurance pay outs.

I assume there was no mortgage on the home at the time claims were made, or the check would have been made out to both the owner and the mortgage carrier.

    Bookmark   October 25, 2010 at 5:27AM
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Yes, there was a mortgage on the house when the claims were made. None of us are sure how the owner managed to get away with cashing those check. Except for the fact that he is a pastor who has plenty of contractors and insurance agents in his congregation. :-/

The problem isn't about the current condition of the roof, it's the fact that the roof is now unisurable. We would have bought the house with the roof in the condition it's in and budgeted to have it replaced in 5-6 years when it reached the end of it's life.
However, since the owner took out 2 claims on it totaling 32K and never used a penny to do any repairs, no insurance company we've talked to will insure it. One agent is calling around today trying to find some way to insure it, but we're not sure we'll be okay with whatever expensive policy they come up with.

    Bookmark   October 25, 2010 at 6:55AM
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You can still buy the house and get it insured if the seller drops the price to allow you to replace the roof NOW. I don't see any way around that -- for you or for him! Nobody will buy a house they can't insure.

Nobody can KNOW that a roof has another five years of wear in it. That prediction only means (to me) that I better get the house re-roofed now, before it most certainly fails and I have a much bigger problem.

How much money are we talking about, to re-roof this house? What percentage of the cost of the property is this?

    Bookmark   October 25, 2010 at 11:54AM
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Are the sellers flat out refusing to replace the roof? (Actually, I wouldn't trust the sellers with the repairs.) Will the insurance company allow the sellers to put the roof funds in escrow so you can use the seller's money to repair the roof after closing?

The sellers are not going to be able to sell to anyone now that the roof situation has come to light.

    Bookmark   October 26, 2010 at 8:03AM
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"They were paid by the insurance company...it was up to the insured/homeowner to either have the repairs done or not. He chose to keep the money. I don't think that is insurance fraud."

I think this is probably true.

The "cost" or "loss" he suffered was that you are (or should be) paying him a lesser price becaus his roof is old and has some hail damage.

So he's not making as much money as he would have if he'd gone ahead and replaced the roof.

Now, if your own insurance company is going to use the house's history against you, then I think you have something to complain about and negotiate over.

    Bookmark   October 26, 2010 at 11:36PM
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We decided to walk away. We spoke to about 8 insurance companies and all said the roof needed to be replaced now or within 6 months of purchasing the home. We would have been okay with that if the owner had reduced the price of the house even by a 3/4 of what the roof would cost, but he refused.
He said he would rather rent it out for a few years and then sell when the market rebounds. Okay...I don't know how easy it will be to rent a 6 bedroom home with 9 acres of land, but have fun!

We're back to searching for another house with less then 3 weeks to move out of ours. Should be interesting!

    Bookmark   October 29, 2010 at 8:27AM
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He said he would rather rent it out for a few years and then sell when the market rebounds

I just came to laugh at this. I have been renting a house out for going on 6 *years* waiting for the market to "rebound". Recent CMAs put my house at roughly 30% of what I paid for it. (not 20% less, mind you---it's current value is now 30% of what my purchase price was).

He's a fool and it's probably good you walked, assuming you have other reasonable options.

    Bookmark   September 27, 2012 at 3:18PM
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Sounds like he will end up putting a roof on it sooner or later anyway.

A 70% loss of value will take a LONG time to recover.

Hopefully the rental market is good enough to at least get a neutral cash flow.

    Bookmark   September 27, 2012 at 3:55PM
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Yea, I don't plan on ever recovering the 70% of lost value--that's lost. I was using that as an example of the foolishness of thinking the market is going to recover in any significant way in less than a decade (let alone in 6 months!) I had purchased the property in an area that was gentrifying in 2004, but with the real estate and economic collapse, the gentrification process not only halted but imploded and now the area is blighted with hundreds of vacant vandalized houses that have been foreclosed.

Fortunately, the house is cash flow positive, but I am not dealing with cream of the crop renters in this area and I would much rather not be wrestling with the responsibilities of being a landlord--but we do what we must. I'm just glad I have options.

    Bookmark   September 28, 2012 at 10:27AM
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"I assume there was no mortgage on the home at the time claims were made, or the check would have been made out to both the owner and the mortgage carrier."

It depends on how large the claim was.

Insurers also have also had a habit (for many years) of underestimating the cost of repairs and cutting a check for that amount.

They cut another check for the balance when the homeowner present the bill showing the work cost more than the initial amount estimated.

Either way, you may find that you cannot get insurance on the damaged item (in this case the roof).

The insurance company can claim it was previous damage and not covered (if they do not specifically exclude it from coverage).

It would be like buying collision coverage after the accident, or medical coverage after you have become sick.

    Bookmark   September 29, 2012 at 9:41AM
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