Buying an as-is property
Mortgage loan professional and ActiveRain blogger Brent Kluge provides some very good advice for prospective home buyers and their buyer agents. If you want to be successful with the purchase of an as-is property, you need to understand the options and the odds.
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When you represent a buyer and they are interested in offering on an "As-Is" property, should you do your inspections to figure out what is wrong first, or just make an AS-IS offer?
This is the quandary...
All too often, I hear this question and the answer is... THE BUYER WILL DICTATE.
I would advise you to counsel your buyer that there are two main options:
1. Do inspections/estimates before making your offer.
2. Make the offer and contractually, give yourself some time to do your due diligence.
Lets look at some of the PROS / CONS of each:
Option 1: Do Inspections/Estimates before making your offer
"How can I make an offer on a house when we have no idea what is wrong with it?" Tough one to answer. In this environment, there is an abundance of foreclosed properties in some form of disarray. The BPO that was done set the price very close to the value of a property in great condition, so we know not to offer that much, but just HOW MUCH LESS?
You start your battery of inspections:
- Home Inspection
- FHA 203k Consultant or Project consultant
- Mechanical (Electric,plumbing,hvac)
- Contractor (you want to get some estimates to know how much someone would charge to remedy these issues)
Do some quick math and just figure out how much money you spent and time for all parties involved... INCLUDING THE AGENT, opening the doors!
Option 2: Make the offer and contractually, give yourself some time to do your due diligence.
All contracts have some form of an "AS-IS" addendum. This says Buyer is buying the home AS-IS and has the right to do all necessary inspections for ____ amount of days after contract ratification. Additionally, I would look for language that gives the buyer the right to withdraw from the contract with no recourse, during this contingency period, and have all earnest money returned.
In this example, my advice would be to ASK for at LEAST 14 days, and if the property is unique (multi-unit, known major deficiencies), I would ask for 20 day contingency period. You will find most asset managers want to counter with a smaller time frame, sometimes 7 or 10 days. Just know, if you don't have a chance to fully do your due diligence, you can do an addendum that extends the contingency for that specific inspection item.
PROS / CONS:
- You have a thorough knowledge of what needs to be repaired to make an completely educated offer.
- Project planning is completed upfront, so you are ahead of the curve - could settle sooner (30 days).
- You have inspection reports to submit with your offer to justify a lower sales price.
- Seller not likely to cooperate (turn on utilities, de-winterize).
- NO GUARANTEE you will get ratified - Wasted time, inspections, money - VERY frustrating.
- Wasting time - While doing all these inspections, another offer could come in and you are out.
- You're not spending time/money without being under contract - No chance of someone else getting the contract / A LOT LESS times agent has to open the doors!
- Seller more likely to cooperate with inspections - Utilities on, disclosure, allowing specific inspections.
- You can "RE-NEGOTIATE" a lower offer price and substantiate with inspection reports - NOW known issues are material fact!
- You are under the clock - GET THE INSPECTIONS STARTED IMMEDIATELY!
- Lots of moving parts required in a short period of time - Be prepared, Plan, Communicate, Set Expectations BEFORE you are ratified.
- Contractually, a slightly "weaker" offer in the eyes of the asset managers compared to another offer with ZERO inspections or Cash AS-IS offer.
Moral of the story:
In my experience, Option 2 seems to have worked best for all parties involved, however, you must never forget : REPRESENT YOUR CLIENT - PROTECT YOURSELF!
INFORM THEM OF THE OPTIONS AND LET THE CLIENT CHOOSE!
Go buy houses, renovate, make equity, enjoy life! :)