What is risk of loss, and how can it affect a home buyer?

A home is typically a person’s most significant investment. In fact, many people still view real estate as a wealth-building tool. To protect all parties in the process, numerous laws govern transactions, and there is substantial paperwork.

However, an accident could result in property damage during the sales process. When does the risk of loss transfer to the home buyer?

Understanding the risk of loss

As the words suggest, the risk of loss is the possibility that a person possessing an item is responsible for damages to said item. A person takes on the risk of loss at the moment of ownership of a good or piece of property or when borrowing or otherwise taking control of the item.

The potential for loss is why people purchase insurance for expensive items, such as a home or vehicle. During a home sale, the seller holds the risk of loss until ownership transfers to the buyer.

Understanding the types of ownership

The equitable title of a piece of real estate provides a buyer the right to take ownership of the property. This transfer occurs when the buyer signs the sale contract. The legal title is the deed or document that the seller passes to the buyer upon completion of the transaction.

Though the sales process is not complete until the buyer receives the legal title, a buyer accepts the risk of loss upon signing the real estate sale contract. Any damage to the property between contract signing and receipt of the deed is the buyer’s responsibility.

The elements of a real estate transaction can be complex or confusing. Completing paperwork quickly yet carefully can prevent unnecessarily challenging issues, such as dealing with property damage when the buyer does not yet have the deed.



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