What Does an "As Is" Contract Really Mean in Real Estate Investing?
The issue of what problems come with a property is critical in making a good investment decision.
If there are defects that the buyer didn't see or wasn't properly informed of, his investment can become a total loss.
Many investors believe that because they use an As Is contract for the buyer, they are allowed to sell any defective property to any unsuspecting buyer, and this is not the case.
In real estate there are two basic types of purchase and sale agreements, the "As Is' contract and the regular contract.
In the regular contract, the amount of estimates of repairs that the seller is willing to pay are itemized or given a default amount as a percentage of the purchase price.
For example, if the purchase price of the property is $100,000 and the default repairs for wood-destroying organisms is 2%, the credit to the buyer at closing would be $2,000 whether or not there was wood damage.
In the As Is contract, there are no default amounts for repairs and this clause is omitted.
The question becomes what items are acceptable to the buyer when he closes on the property and accepts it as is.
Sellers give a perspective buyer an inspection period to allow the buyer a due diligence period to check out what is good, bad and ugly about the property.
If the buyer uses a professional home inspector, he has a good belief that any unforeseen problems will come to light.
Unforeseen issues can be the likes of wood-destroying organisms where the damage has been cosmetically covered-up by the seller and only comes to light after the closing.
This is a defect that is not covered by the As Is contract as it was intentionally hidden from the buyer.
Poor soil issues, foundation problems, and zoning changes that a seller is aware of but fails to disclose to a buyer will not likely be covered by the As Is contract.
The other potential problem with purchasing a property in As Is condition is whether the property has lien or judgment issues that cannot be resolved before the closing.
The buyer would inherit these potentially catastrophic problems.
Currently, many Asset Managers selling REO (bank-owned) properties are selling them with all liens and code violations attached.
They are able to do this because they disclose in writing that code or liens exist on or against the property and the buyer must sign a waiver of his rights to purchase the property.
Some properties selling for $35,000 have liens against them of $200,000+ which the cities will not negotiate and the property is ultimately deeded to the city or county by the REO lender because the property can't be sold for enough to even pay the liens due.
A reasonable guideline as to whether an issue should be disclosed separately to a buyer is whether the seller would purchase the same property for the same price knowing what he does about the property.
This is subjective as some buyers will complain about anything because they get buyer's remorse at the last minute before closing to get a price reduction.
It is always prudent as a seller to disclose any problems to a buyer no matter how insignificant they may seem and let the buyer decide how important they are - just to keep the seller out of trouble.
If there are defects that the buyer didn't see or wasn't properly informed of, his investment can become a total loss.
Many investors believe that because they use an As Is contract for the buyer, they are allowed to sell any defective property to any unsuspecting buyer, and this is not the case.
In real estate there are two basic types of purchase and sale agreements, the "As Is' contract and the regular contract.
In the regular contract, the amount of estimates of repairs that the seller is willing to pay are itemized or given a default amount as a percentage of the purchase price.
For example, if the purchase price of the property is $100,000 and the default repairs for wood-destroying organisms is 2%, the credit to the buyer at closing would be $2,000 whether or not there was wood damage.
In the As Is contract, there are no default amounts for repairs and this clause is omitted.
The question becomes what items are acceptable to the buyer when he closes on the property and accepts it as is.
Sellers give a perspective buyer an inspection period to allow the buyer a due diligence period to check out what is good, bad and ugly about the property.
If the buyer uses a professional home inspector, he has a good belief that any unforeseen problems will come to light.
Unforeseen issues can be the likes of wood-destroying organisms where the damage has been cosmetically covered-up by the seller and only comes to light after the closing.
This is a defect that is not covered by the As Is contract as it was intentionally hidden from the buyer.
Poor soil issues, foundation problems, and zoning changes that a seller is aware of but fails to disclose to a buyer will not likely be covered by the As Is contract.
The other potential problem with purchasing a property in As Is condition is whether the property has lien or judgment issues that cannot be resolved before the closing.
The buyer would inherit these potentially catastrophic problems.
Currently, many Asset Managers selling REO (bank-owned) properties are selling them with all liens and code violations attached.
They are able to do this because they disclose in writing that code or liens exist on or against the property and the buyer must sign a waiver of his rights to purchase the property.
Some properties selling for $35,000 have liens against them of $200,000+ which the cities will not negotiate and the property is ultimately deeded to the city or county by the REO lender because the property can't be sold for enough to even pay the liens due.
A reasonable guideline as to whether an issue should be disclosed separately to a buyer is whether the seller would purchase the same property for the same price knowing what he does about the property.
This is subjective as some buyers will complain about anything because they get buyer's remorse at the last minute before closing to get a price reduction.
It is always prudent as a seller to disclose any problems to a buyer no matter how insignificant they may seem and let the buyer decide how important they are - just to keep the seller out of trouble.
