Buying and Selling "As-Is"
I recently overheard a person who is buying a home state that they would never want to buy a home "As-Is". While I understand the concerns, I suggest that a home buyer or seller should review the contracts and work with appropriate professionals. I've come to realize that this is one of the most confusing points that exist in Florida real estate. I've heard buyers, sellers, experienced real estate professionals, and even attorneys misstate the benefits and woes of the "As-Is" contract. I'll try to simplify this very confusing concept and hopefully reduce some unneeded stress.
One important thing to understand is that an as-is transaction is very similar to a traditional transaction but is either (a) agreed to using a different form or (b) agreed to using the traditional contract for sale and purchase with an addendum that modifies the original contract. In other words, the vast majority of the terms and conditions are the same.
Florida Association of Realtors Contracts
Let's discuss the most common Florida's home sales contracts. The Florida Association of Realtors has approved multiple contracts for use in Florida. Some of these were created in conjunction with the attorneys from the Florida BAR Association. The contracts are known by acronyms:
- FAR Contract - standard contract approved by the Florida Association of Realtors
- FAR As/Is Contract - As-Is contract approved by the Florida Association of Realtors
- FAR As/Is Addendum - Addendum to the FAR Contract that effectively converts it into an As/Is.
- FAR/BAR Contract - traditional contract approved by the Florida Association of Realtors and the Florida Bar Association
- FAR/BAR As/Is Contract - As-is contract approved by the Florida Association of Realtors and the Florida Bar Association
- FAR/BAR As/Is Addendum - Addendum to the FAR/BAR contract that effectively converts it into an As-is.
Adams, Cameron & Co. operates in Volusia and Flagler Counties on the east coast of Central Florida. In these areas the FAR/BAR contracts are far more common so I will use them in my examples. However, the same comments should apply to both agreements. In the FAR/BAR contracts, there are four pages. The first two pages contain a number of areas that can be filled in by a real estate professional. They contain the meat of the agreement and most of the terms that are likely to be negotiated. The remaining two pages contain additional terms and conditions which are intended to outline the specifics.
The primary differences between a traditional contract and an as-is contract revolve around two of these paragraphs. Paragraph D of the contract deals with wood destroying organisms. Wood destroying organisms include termites and other pests which can damage a home. To summarize the paragraph, it says that if, after the contract has been signed by both parties, the buyer has a licensed inspector or Florida certified pest control operator review the property and find wood destroying organisms then the seller will be responsible for paying to get rid of the pests and correcting any resulting damage caused by the infestation. It also provides for a maximum amount the seller will have to pay (typically 1.5% of the purchase price).
Since the seller will probably have to correct the problem regardless of who the buyer is, and since the seller is obligated to disclose the fact that the wood destroying organisms exist, it is likely that they will go ahead and have the pests dealt with anyway. However, this solution allows for an out for both buyer and seller in various situations.
Similar to paragraph D is Paragraph N of the FAR/BAR contract. Paragraph N says that there may be other damage to the home which the seller will have to repair. For example, if a buyer's home inspection shows material damage to the roof then the buyer may demand that the seller fix those problems up to a fixed price (typically 1.5% of the purchase price again). Again, it is usually in the seller's best interest to go ahead with the repairs.
An as-is contract is effectively an alternative to the rules listed in the paragraphs D and N of the traditional contract. In fact, if you look at either of these paragraphs in an as-is contract they will show "DELETED". Instead of the strategy outlined above, an as-is contract includes a broader inspection period. The inspection period can be set for any period of time and is typically up to 15 days for a residential contract. During that time the buyer should have any inspections performed that they feel are necessary. That includes a traditional home inspection, a pest inspection for wood destroying organisms and anything else that they feel is important. Here's the kicker: at any time during the inspection period, the buyer "in the buyer's sole discretion" can determine that they are not satisfied with the results of the inspections and can cancel the contract.
If defects in the home are found, the buyer can cancel or the buyer and seller may renegotiate the contract in order to find an appropriate solution. The seller is not obligated to fix anything but he or she may be willing to make certain concessions in order to see the contract to closing. In addition, once the seller is aware of any material defects, they will have to be disclosed to future potential buyers. The buyer has a guaranteed out and loses only the cost of the inspections.
First, it is important to understand that buying a house is not like buying something at a garage sale. An as-is sale does not mean that the seller can hide known damage from a buyer. A seller and their agent are required by Florida law to disclose all known defects that could materially affect the value of the house. A seller who withholds valuable information can be held liable for his actions regardless of whether the transaction is conducted "as-is".
There is no such thing as "selling as-is". Before all the Realtors out there jump at that one, let me explain. Most multiple listing services have a way to mark that a seller would like an as-is contract. Also, an advertisement can say that a home is being sold as-is. However, a buyer can submit any offer. Further, it is the duty and responsibility of a listing agent to forward any offer that is presented. So, a buyer can submit an as-is offer on a home that has not been listed as-is. Likewise, a traditional offer can be submitted for a home that has been advertised as-is. By way of example, a seller who is trying to sell her home for $400,000 as-is may get two offers. One for $350,000 on an as-is contract and another for $400,000 on a traditional contract. The seller could determine that selling as-is is not worth $50,000 and accept the larger dollar amount. The seller could also make a counter offer to the higher contract and include an as-is rider if she feels very strongly about it. At the end of the day, marketing a house as as-is is a request from the seller to the buyer as to the type of offer she would like to see.
Another common misconception is that an as-is sale means something is wrong with a house. It is often the case that buyers assume that sellers are trying to hide defects by selling as-is. As such, they may be wary of buying a house marketed as-is. In reality there are occasions that fine houses are marketed as-is and there are situations in which houses with greater needs are marketed traditionally. In common practice it seems that the as-is moniker is simply used in some marketing and not in others.
While the traditional contract does include language to provide a warranty from the seller to the buyer that an as-is contract does not, the strength of it is rudimentary. It says, in effect, that the structure of the house (roof, walls, foundation) does not have visible leaks or structural damage and that the mechanics of the house (plumbing, electrical, etc.) are in working order. On the whole, the variance between these types of damage and those that must be reported when disclosing material defects is not that great. Furthermore, it is likely that a home inspection would find the type of defect which would be covered by this seller's warranty.
Another common point of confusion is between a seller's warranty and a home warranty. A home warranty is an insurance policy that may be included with a sales transaction. The buyer, seller or both can purchase the policy. These small insurance policies are offered by companies such as American Home Shield and 2-10. The policies typically cost less than $500 and insure the plumbing, electrical, appliances, pool, etc. against breakdowns. A seller can get coverage from the time the house is for sale, through closing, and for another year for the buyer. The policies offer a safety net for the buyer and can help smooth the transaction. They are not all inclusive but they can also reduce the likelihood that there will be large problems after the closing for the buyer and seller to end up arguing about.
As a buyer, there is a certain amount of comfort in submitting an as-is contract. Because of the inspection period there is an absolute out during the term of the inspection period. In fact, by putting up a deposit and entering into an as-is agreement with a seller, the buyer has effectively placed an option on the purchase of the house for the term of the inspection period and for the cost of any interest lost on the deposit. As a buyer, this gives an opportunity to become intimately familiar with the property while being sure that the terms of the contract will not be adjusted and that the seller will not sell to someone else. Therefore, despite the stigma that comes to mind when a buyer hears "as-is" it is typically a good way to go.
From a seller's perspective, as-is initially sounds great. It brings to mind the idea that I can ignore disclosing all of those little issues associated with the house and find a buyer who can deal with them. That is simply not the case. Caveat emptor ("Let the buyer beware") does not apply. In reality, marketing a property "as-is" may have a negative effect on buyer's perceptions. In addition, the as-is contract puts the buyer in a position to act on any buyer's remorse that they may feel after the contract is inked. The inspection period on the contract becomes a waiting game while we hope that the buyer is satisfied. In most Realtor Associations the property can not be marketed as active in the Multiple Listing Service but needs to be flagged as either "Pending" or "Contingent" or some other designation that will remove it from many searches.
At the end of the day, there are always going to be defects of some type in a house. As-is contracts do not solve the problems. As a seller the contract doesn't have the magic bullet that will pass them along to the buyer. From a buyer's perspective, neither a traditional contract nor an as-is contract will guarantee that I have a perfect house or that the seller will fix everything.
When selling a house, it is not typically in your best interest to market the house as-is. The protection that you would think to gain from those two little words just isn't there. It may be a turn off to concerned buyers who will never make an offer. Further, the contract hands the buyer much more power than they would otherwise have. Instead, offer a home warranty, disclose material facts, and market it in the best light possible.
As a buyer, an as-is contract is nothing to be afraid of. Regardless of the type of contract, home inspections should be performed. A qualified professional who inspects homes will likely be the best way to find the issues of which you need to be aware. You should always request and review the seller's disclosure statement which lists their knowledge of defects. In addition, ask for a home warranty in the contract. Even if you never need it, it's a nice feature to have.
For more information regarding Real Estate in Volusia and Flagler Counties, or to search homes listed through any of the four local Realtor Associations, please visit our website at www.adamscameron.com.