In most cases, a real estate transaction will be completed with few hiccups in the process. If a transaction is terminated, it is often due to deficiencies discovered during the home inspection, a problem with the financing or appraisal, or other issues in the process.

Though it is a rare occurrence, the buyer and seller may also have to decide whether to proceed with the transaction if the property is damaged. A fire, severe storm, or other calamity can easily throw a wrench into the process if the damage occurs between the time the seller accepts a buyer's offer and the final transfer of the property to the buyer.

In some cases, the damage will be so severe that a buyer will no longer want to close the deal. If an accidental fire destroys the residence, for example, the buyer is unlikely to try to close a deal on a home that no longer exists. For less serious damage, a buyer and seller will have to work out whether the property can be repaired quickly and capably enough to salvage the transaction.

Most real estate contracts will include stipulations on what should be done if unexpected damage occurs during the closing process. Beckett Law, a law firm based in Glastonbury, says the contract may allow a buyer to collect a portion of the insurance proceeds and close on the transaction if the home is destroyed.

Alternatively, the buyer can elect to back out of the transaction and ask for their deposit back from the seller. The Connecticut Supreme Court set this precedent in the state with a 1935 case, where a buyer sought the recovery of his deposit after a residence burned down before the deal was closed. The court ruled that the fire made the seller unable to fulfill the contract, and that the buyer was consequently able to consider it discharged and seek the return of their money.

The party holding the property in escrow might also provide an added layer of protection against loss during the transfer of ownership. The Fisher Law Corporation, a law firm based in Woodland Hills, California, says this party can hold insurance that protects the seller against loss and protects the buyer before they acquire their own homeowner's insurance.

When a home is damaged but not destroyed, the question of proceeding with the deal often comes down to cost. Brendon Desimone, writing for the real estate site Zillow, says the contract typically states that the parties agree to move forward with the sale if the damage amounts to less than 5 percent of the agreed upon price. The responsibility for repairing the damage falls on the seller, since they retain ownership until the keys are turned over to the buyer.

Some contracts may set the cap higher. The Colorado Association of Realtors says a buyer often remains bound by the contract to purchase a property if the damages do not exceed 10 percent of the sale price, as long as the seller completes repairs by the closing date. For costlier damage, a seller is not obligated to repair the home but can choose to do so; the buyer, meanwhile, can decide to either continue with the sale or terminate the contract.

When a home is damaged before closing, the parties should take some additional steps to make sure there are no hidden issues. Desimone says that if you have completed a property inspection prior to the damage, it will help you distinguish which problems were pre-existing and which ones resulted from the damaging event.

It can also be helpful to have another property inspection after the damage occurs to see if it is more extensive than it appears. For example, the Colorado Association of Realtors says flooding can cause structural and foundational damage that may not be readily apparent. The inspection will also help you determine how costly repairs will be, thereby influencing the decision of whether or not the deal will proceed.

Buyers should let their lender know about the damage to the property and the estimated cost to repair it. Desimone says lenders often provide a credit of up to 3 percent. For more extensive damage, however, they may want to modify or even cancel the loan.

It is also important for buyers to complete the final walkthrough before the closing is finalized. This step gives you a chance to see that appliances, fixtures, and other items have not been affected by the damage to the home.

Sellers should be willing to both repair and disclose more minor damage to the home as well. Bob Hunt, writing for Realty Times, says these issues may include mishaps such as water damage caused by an overflowing bathtub. This disclosure will ensure that the buyer is fully knowledgeable about the property and that the seller does not face any unexpected complaints from the buyer in the future.