Can I back out of this deal ?

Question

I'll try to make a long story short here. We're in contract for a duplex in Queens, NY. My broker told us the house wouldn't need flood insurance before we made an offer. We're in the final steps before setting a closing date. We found out our mortgage was approved today and one of the conditions said that we needed flood insurance. I was already worried about the money we were spending and now this is getting to be too much. We were only able to put 5% down so the PMI is pretty high. Add on the $2776 a year for flood insurance. It feels like we're throwing a lot of money out the window. Now, no one ever told us we needed flood insurance. I did a little research online and I read about how the sellers have to disclose that the house is in a flood zone. Is that the case in NYC ? The house is in zone AE.

David Faulkner · Answer

You were given bad advice by your broker and missed a material fact that was readily apparent had you known how and where to look and frankly should have caught. Your inspection period, when you are supposed to perform all of your due diligence, is already passed. Can you back out? Probably, you could. I however believe that the right thing to do is own up and take personal responsibility for your mistake, keep your word, and close on the property. If you do choose to back out, you should at the very least be prepared to surrender your earnest money deposit ... that is what it is there for. Either way, let it be a lesson that will serve you well on your next transaction: trust but verify. I actually did the exact same thing as you, discovered the flood insurance last minute, and still closed.

One tip if you do close, is though flood insurance rates are not negotiable, I would not assume that any old insurance company would have the expertise to properly categorize the property. After I closed, I called a specialist at efloodquote dot com (I'm not affiliated, just a customer) and they were able to get my house properly categorized and cut my flood insurance rate in half. I've also heard of people who are on the border of the flood plane having their house surveyed, petitioned, and removed from needing flood insurance, but this costs some money, time, and is not guaranteed.

Also, I must say that if you are only able to put 5% down and an extra $2776 per year is going to make or break you financially, then you are taking on some really significant risk by buying a home that expensive ... if you've gone through all the numbers carefully, fully considered the risk, and are personally ok with it, then fine, but again that is something that should have been determined BEFORE you made an offer and took the owner's property off of the market with the promise to purchase it under the conditions of the contract.

Peter MacKercher · Answer

@Luis Rodriguez Your best bet is to check your seller's disclosure (as you mentioned the disclosure requirement, that's where it'd be listed). If it doesn't appear there then you'd have a basis to back out of the deal. Otherwise it's assumed that you read all the documentation and went in knowing that you'd be required to have flood insurance. Don't rely on verbal information!

Also, you'd possibly be losing your earnest money, not your downpayment, as the deal wasn't closed and therefore not financed. If someone tells you otherwise you need to press them for more information as I've never heard of that, but of course I'm in Missouri, not NY.

Wayne Brooks · Answer

We, not working in NY, do not know what disclosures are required there.  Also, it is quite possible the owners didn't know of any flood zone designation changes.

Luis Rodriguez · Answer

It's definitely not buyers remorse. We love the house.

I did a little digging and it looks like in Jan 2015 the house was changed from flood zone X to AE.

Who's job is it to disclose to us the house is in a mandatory flood zone ?

My agent is saying we can lose our down payment if we back out. My bank is saying they never had something like his happen. Im trying to get in contact with my lawyer.

I doubt they drop this bomb on you at the end of the process.

Wayne Brooks · Answer

Ask your agent.

Brent Coombs · Answer

Sounds more like you're having buyer remorse? You're already borrowing 95%, so your interest rate and mortgage insurance must be prohibitive. Hmmm. If you can blame your Broker, do so.

I just looked up Zone AE. Looks evident to me that flood insurance IS sensible anyway.

Even if it wasn't mandatory!...

Can I back out of this deal ?

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