Buyers walking away from deals over flood risk

Questions from buyers, including investors, around flood risk have soared in recent weeks and some are walking away from purchases.

Monday, March 13th 2023, 5:38PM

by Sally Lindsay

CoreLogic senior property economist Kelvin Davidson says recent discussions with real estate agents show the flood risk of a property is becoming a major concern.

“Anecdotal evidence is some people are looking at a property, assessing its flooding risk and not going ahead with a purchase. This will probably become common.”

He says house prices may lift a little in the wake of the floods as they did after the Christchurch earthquakes. “It’s economics 101 – supply and demand. It depends on how the banks, insurance companies and the Government handle the situation where some places have flooded repeatedly over a number of years when there is heavy rain.

He says another issue that may rear its head is the cost of insurance. “If premiums rise on particular properties that are at risk of flooding, it may deter people from buying them because of the expense.”

Answers to common questions about real estate and rentals in the wake of the floods have been provided by Government website Settled.

It says the real estate buying and selling process in flood-affected areas can also be challenging to navigate.

What should I do if I’m in the middle of selling my property and it has flood damage?

If your property is listed with a real estate agency and is damaged by flooding, it’s important to get the damage professionally assessed, and to speak with the agent about your situation as soon as possible.

A key decision is to determine whether and for how long to pause the sales process. You may need to allow time to have the damage remediated, or you might decide to proceed with the sale, while disclosing any issues to prospective buyers. If there has been damage, then this will need to be disclosed by the agent to potential buyers.

If a sale and purchase agreement had been entered into between yourself and the buyer prior to the floods, but settlement and possession by the buyer has not yet been reached, all parties should seek legal advice.

A sale and purchase agreement usually has provisions on risk, pre-settlement damage and insurance which will guide parties when there has been damage to the property before settlement.

It’s important that both parties discuss how these provisions will apply with a lawyer or conveyancer as soon as possible.

If the property for sale is a rental, these provisions may also address options available to the buyer and seller if the property has damage to the point where tenants cannot live there until repair work has taken place.

Should my sale go on hold while I assess flood damage?

Whether you put your sale on hold will depend on your situation. It would be a good idea for you to speak with a lawyer about any impacts a pause may have on your agency agreement, and the sales process.

The action to take will likely depend on the specific nature of any damage and the stage of the sales process. For example, if you still decide to sell, your marketing material may need to be updated so it accurately reflects your property.

The options available to you will also depend on the terms of any sale and purchase agreement that may have been entered into, and/or what may be agreed between the parties. If you need to urgently sell your property, you can sell ‘as is, where is’. Any sale and purchase agreement will need to reflect that the property is being sold under these conditions.

Should I sell ‘as is, where is’ if my property is flood damaged?

If you need to urgently sell your property, you can sell ‘as is, where is’. Even if a property is being sold ‘as is, where is’, you and your agent must still disclose any issues and answer questions about the property honestly.

This may include acknowledging that the full extent of flood damage has yet to be properly determined. It’s important to know that if you do not provide permission to your agent to disclose issues with the property to potential buyers, the Code of Conduct overseen by the Real Estate Authority requires the agent to stop acting on your behalf.

If you’re looking at ‘as is, where is’ properties you should seek legal advice and speak with your lawyer and insurance provider before signing a sale and purchase agreement.

What do I need to disclose when it comes to selling a home that has/had flood damage?

It is important that any defects or other issues relating to the physical condition of your property are disclosed to prospective buyers.

This applies at all times, not just following a natural disaster.

If you’re unsure about what you should disclose, put yourself in the buyer’s shoes and think about what you’d want to know about the property.

If you keep important information about a property’s condition private, you could be at risk of legal action in the future. Disclosure is an important obligation that all agents must manage very carefully.

You must also be prepared to discuss honestly with any agent you choose to list with – and with prospective buyers – matters relating to any repairs or alterations carried out. This is likely to include providing paperwork where necessary to confirm that any completed work is compliant.

How do I manage insurance if I’m still planning to sell?

If you’ve suffered damage from a natural disaster such as flooding, you may have filed an Earthquake Commission (EQC) claim.

If this claim is still in progress, it may be possible to transfer this claim to a buyer. In this situation, both you and the buyer(s) should seek legal advice regarding this process.

In addition, buyers should speak with their own insurance provider about whether the property they wish to buy can be insured.

I’m looking to buy a house in an area that experienced some flooding recently, but I’m worried about buying a house with flood damage – what sort of information do I need to see?

It is important to do thorough due diligence on any property you are looking to buy, and this is all the more essential if there is a genuine risk of damage from a natural disaster or similar event.

You may be given a property inspection report from the vendor, but we strongly encourage you to obtain your own property inspection/building report.

Key documents that you should obtain prior to purchasing a property include a land information memorandum (LIM), the record of title (title search) and an accredited property inspectors’ report. You can also request EQC claim information from the agent selling the property, or you can request information directly from EQC if you believe a previous claim was lodged on the property.

You should also ask whether the property is currently insured and whether there have been any issues with the property that could affect its chances of being reinsured in the future.

If you are considering buying a property with previous flood damage you should ask to see paperwork relating to any repairs or alterations, including proof that any completed work is compliant. This information can be requested from the real estate agent.

If I want to buy a property in the future in an area that has had flood damage, what do I need to consider?

Natural disaster risk – both past and future – should always be considered when buying or selling land and property in New Zealand.

Similarly, the requirement for sellers and agents to disclose known defects and issues regarding the physical condition of the property is extremely important, as is thorough due diligence on the part of prospective buyers.

We encourage all buyers to obtain a LIM and the council file which will outline what consented works have been completed.

Tags: CoreLogic