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At what point does risk of loss pass to you as a real estate buyer?

by | May 18, 2021 | Real estate transactions

If you are about to purchase some commercial or residential real estate, you’ve already invested countless hours into the endeavor. You’ve sought out the perfect piece of property, checked the applicable zoning laws, negotiated a price and closing date with the seller and obtained financing for the purchase.

After such a large investment of time and money, you want to be sure that you know exactly what will happen in the unfortunate event that the property suffers vandalism, a fire, flooding or some other type of damage before you obtain the keys and become its rightful sole owner.

The two types of title

Before we answer this question, it’s important that you understand the two types of title that the seller conveys to the buyer during a real estate sale. These two types of title are called equitable title and legal title.

Equitable title passes to the buyer upon signing the sale contract, while legal title doesn’t pass until the seller conveys the final deed to the buyer. This is a legal principle called equitable conversion.

Risk of loss

The risk of loss is part of equitable title in a property. This means that, from the moment you sign the real estate sale contract, you receive equitable title in the property and take on the risk of loss.

Thus, even though you won’t completely own the property until you receive the deed, you will be responsible for any damage the property suffers in the time in between the signing of the contract and the conveying of the deed.

It’s an unfortunate truth about real estate that vandalism, floods, fires and all sorts of things can cause tremendous damage the value of a structure. Before you decide to obtain a property, it’s important to understand the risk of loss and what it means for your financial investment.