Buying "AS IS"

Posted at 1:12 PM, Jan. 17, 2007

I have recently come across a trade article where a lender was advising investors, namely new ones, about what not to buy.  As you may have guessed, properties listed “AS IS” were one of them.  I find this to be a serious misrepresentation about what buying "AS IS" is really about.  Allow me to elaborate.

First, let us define what selling "AS IS" means, which is, the seller of the property is not open to negotiating any credits or repairs.  What is critical for buyers to understand is how it translates to their rights.  You as a buyer still reserve the right to get a home inspection.  This is a separate contingency, which I would never advise a buyer to waive unless they were buying for the land only.  When you buy "AS IS", you can still get the home inspection and determine whether or not based on what is found, if you wish to continue with the purchase.  And let me tell you, I have been in transactions that even thought there is an "AS IS" clause, if something is found that could be a deal-breaker, many a seller have made exceptions to that particular item.

Representing several modest investors and buyers I have found "AS IS" properties to be no or more less scary then other properties on the market.  Part of what needs to be taken into consideration is each properties individual circumstance. 

For example, understanding why a seller is listing the property "AS IS" is a useful first step.  What buyers need to know is that most estate sales will be sold this way.  Since the seller has passed on, or is no longer able to make executive decisions regarding the sale of their home, selling becomes the responsibility of the executor and/or children of the seller.  In all fairness, the person who is now selling the home cannot in good faith represent the condition of the home, which is why Illinois Property Disclosure Law exempts estate sales from having to disclose any know latent or material defects.  The same applies to foreclosures.  Banks and other lending institutions are not required to be held accountable as to the condition of the home because they have only a monetary interest.  Simply put, they haven't lived in the home to know the sink in the kitchen leaks or the water heater is on its last leg.  This is what is known as selling "AS IS".  

In cases other than the two listed above, you have sellers who may already be marketing their property at a very reasonable price, therefore, do not want to take a hit with any additional costs that cut into their bottom line.  For example, if a home is older you can pretty much anticipate that there is going to be things in need of attention.  But this is true for any home, even new construction.  As a buyer, it is up to you to determine how that relates to your overall costs.  I have had cases where sellers offered home warranties, and unless it’s an item that is outside the scope of the warranty, they did not want to have to factor additional costs for repairs or credits.  Or, an "AS IS" clause can pop up if there is a gap between what the buyer is willing to pay and what the seller is willing to sell at.  Quite often, the seller will concede to the drop in asking price, but will make sure the buck stops there!  Lets not forget the buyers who ask for things such as decorating credits and light switches to be installed.  No one likes to feel taken advantage of.

So here are some helpful tips to buyers with "AS IS" properties.

1.  First and far most, what is the asking price?  Is it below market value?  Is it representing only the value of the land and not the home on it?  If you come across a really good price on a home like that, be prepared the seller is not going to leave a door open to credits or repairs. 

2.  What is the overall condition of the home?  When you walk through the home, does it look like it’s been well cared for?  Is there anything that stands out as a red flag such as watermarks, a roof in disrepair, etc?  If a seller has been diligent about the upkeep of their home, you can feel better about structuring an offer and paying for an inspection.

3.  Don't skimp on the inspection.  Choose an inspector that has experience with older homes (if that's the case) and make sure you purchase all eligible options such as roof (if its not included) etc.  You can even choose to hire a structural engineer and/or architect, to act as an additional opinion as to any serious problems the home might have.  I find it can be worth the additional expense.  However keep it mind, none of these people are Superman and can see through walls.  If the potential problems are not reasonably accessible, they will not be inspected.

4.  Make sure your agent structures the terms of your offer to allow sufficient time for the inspection.  10 days is ideal especially if you consider bringing in other professionals.

5.  If something of concern does pop up in the inspection, have your agent ask for an extension to allow time to get some estimates for repairs.  More often than not, buyers perceive smaller issues to be more costly and grossly under-estimate others.  When you have tangible figures to work with, you can get a better idea if the property will fit your budget.

6.  Is the seller offering a home warranty?  If it’s an older home, consider having your agent ask for it.  If one is provided, ask for a copy to review exactly what is and is not covered under the policy. 

7.  If you are tight on cash, focus on properties that need only cosmetic updating.  If they are in livable condition, you can make your updates along the way without going broke.  Think of it this way, your electrical, plumbing and structural issues will run you the most money.  So if you pick a home that has many flags in those areas that need immediate attention, you better have a very deep pocket.

8.  Lastly, keep in mind that all deals are not for everyone.  Other investors such as developers and tradesmen can afford to take on properties in serious disrepair without the same overhead expense as you or I would experience.  Know what your plan is and be prepared for unexpected surprises.  Check out future blogs on investing and fixer-uppers for more details.

Overall, buying a property marked "AS IS" can be a very good fit as long as you do your homework first.