Real Estate Risk of Loss: Are You Protected?

By: Matthew Denson, Esq.

When you are buying or selling your home, it's important to understand the potential risks and what protection you have in place. A real estate risk of loss is something that every seller should be aware of and take steps to mitigate. In this post, we will discuss what a real estate risk of loss is and how it can affect you.

Risk of Loss can often seem deceptively simple: it tells you which party is responsible for severe damages such as house fires. However, these clauses can often be confusing or misleading to the untrained eye, as the way a Court defines ownership of a home can be unorthodox or confusing. Being able to understand these clauses can help put your mind at ease about risks.

The Basics: What is Risk of Loss?

Depending on the State, Risk of Loss clauses are sometimes written in rather plain language: The Seller is responsible for any harm to the property until a certain date or event passes. Other States can have far more confusing language, instead looking at what percentage of the property has been destroyed. These longer, more confusing clauses often invoke the concept of “Equitable Conversion.”

Equitable what?

Equitable Conversion is the idea that there are two different types of title to a property: Equitable and Legal. Equitable Title is passed to the Buyer at the signing of the contract, yet Legal Title is only passed upon the conclusion of the Closing. This subtle distinction can mean a world of difference, depending on the State.

Many States follow the concept that if you hold Equitable Title, you are responsible for losses to the property. This can lead to what the average person would perceive as absurd. Imagine you sign the contract to buy your dream home, only for a day later for the home to burn to the ground. You are devastated by this, but you decide you can always find a new home. The Seller however has different plans. He cites the Risk of Loss provision to the contract, and he expects to see you at the closing table. “Surely he is wrong!”, you think. Yet many States will expect you to go to closing and purchase the burnt remains of a home.

Many States follow the concept that if you hold Equitable Title, you are responsible for losses to the property.

How to prepare and better protect yourself

Getting an insurance policy for your new home is one of the first steps you can take, and it is often the most crucial. This will ensure that should any bad event occurs, you are covered. New Jersey for example takes the majority view, where the moment the contract is signed, the Buyer is now responsible for the property, even if they cannot live in the property until after closing.

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As with any legal issue, it is important that you obtain competent legal counsel before making any decisions about how to respond to a subpoena or whether to challenge one - even if you believe that compliance is not required. Because each situation is different, it may be impossible for this article to address all issues raised by every situation encountered in responding to a subpoena. The information below can give you guidance regarding some common issues related to subpoenas, but you should consult with an attorney before taking any actions (or refraining from acts) based on these suggestions. Separately, this post will focus on New Jersey law. If you receive a subpoena in a state other than New Jersey you should immediately seek the advice of an attorney in your state as certain rules differ in other states.