What is an ‘As Is’ Residential Contract?
What is an "As Is" Residential Contract?
The "As Is" Residential Contract for Sale and Purchase is a contract commonly used in the sale of real property located in Florida. The term "As Is" does not mean that a La-Z-Boy recliner and an unmade bed will be included in the purchase; rather, it means that the Seller is selling the property without a warranty from the Seller regarding the physical condition of the property. The Buyer takes the property in its present condition, and the Seller has no obligation to do anything to the property to make it acceptable to the Buyer.
Although most every real estate transaction contains a home inspection provision, this provision is even more important when using an As Is Residential Contract. Since the Seller does not intend to repair any part of the property, the Buyer would be well advised to get as much information regarding the property’s condition as possible.
The purpose of the As Is Residential Contract is to limit the Seller’s liability in certain types of transactions. The condition of the property in question may be unknown to the Buyer, and in other ways can be assumed by the Buyer as reflected in the price offered by the Buyer. The Buyer may be willing to tolerate issues with the property if the price is reduced by the cost of correcting these issues.
An "As Is" Residential Contract does not mean that the Seller should not disclose known defects in the property; however , failure to disclose certain defects does not constitute a default by the Seller. An example of a defect that may not require disclosure would be an issue with the roof that was repaired years ago that is known by the Seller but unknown by the Buyer. In that transaction, the Buyer may not be entitled to a deposit refund for a roof that was revealed to be defective. On the other hand, if the Seller did not know about the issue and it existed at the time of contract, a Buyer might be entitled to a refund of a deposit in such a transaction.
The Seller of property may also be a bank involved in the sale of a property through a foreclosure. These transactions are often referred to as Bank Owned or REO. They are often advertised as a good deal, with no inspection or due diligence period for the Buyer. In an effort to increase the number of sales they can make, the banks will sell the real property in any condition and pass the complete risk of that property on to the Buyer. These transactions are represented by attorneys either employed by the bank or sub-contracted by a sale/foreclosure agent. More than likely, these banks will not pay close attention to scheduling a walkthrough, deposits, or other requirements of a typical sale.
Essential Features of ‘As Is’ Contracts
Central to the "as is" residential Contract for Sale and Purchase are a number of essential features, including the purchase price, inspection periods, and buyer obligations. These contracts have gained popularity where sellers of used residential or commercial real estate expect the property to have defects and are not in a position to repair the property. Regarding these essential features, section 6 of the standard "as is" residential contract provides:
(a) Purchase Price: The Purchase Price payable by Buyer is the sum of $________.
(b) Inspection Period: This Contract is contingent for _______ days after the effective date, as defined in the Contract, upon the Buyer’s inspections of the Property. During the period of this contingency, the Buyer or the Buyer’s representatives shall be permitted to enter the Property at reasonable times and with reasonable notice upon the Seller or Seller’s Agent, for purposes of inspecting the Property. The inspection shall be completed by the end of the inspection period.
(c) Buyer’s Obligations: If the Buyer is not willing to accept the Property in "as is" condition, Buyer shall, on or before the end of the Inspection Period, elect to terminate the Contract by delivering written notice of termination to the Seller or Seller’s Counsel and the Escrow Agent. The Seller’s failure to comply with the Buyer’s request is not a basis for Buyer to terminate this Purchase and Sale Agreement. Notwithstanding anything to the contrary in the Contract, other than time of the essence, the Buyer may elect to postsign for an extension of the Inspection Period if it is reasonably necessary to complete Buyer’s inspections. If the contract is terminated, the purchase deposit shall be refunded within five business days, subject to disbursement fee noted above.
Pros and Cons
The "as Is" residential contract for sale and purchase has its advantages and disadvantages for both buyers and sellers. One of the biggest pitfalls in using this type of contract is the buyer’s failure to have the property inspected. Because the buyer is promising to purchase the property without requiring the seller to repair or upgrade the property, the failure to hire an inspector gives the buyer a false impression about the condition of the property. The property may turn out to be in a horrible state of disrepair.
The advantage for the seller is that there are likely to be fewer contingencies in the contract. Without the need for repairs, the seller may not need to wait for inspections, contractors or appraisers to determine the value of the property. This avoids delays in closing. The seller may be able to sell the property quickly, which reduces the risk of the property losing value.
The disadvantage for the seller is that the seller frequently has more leverage over the price and repairs requested by the buyer, because the buyer is assuming the risk associated with the property and will be likely to be less aggressive in negotiating the purchase price. The buyer can walk away if the property is in worse shape than he anticipated, but the seller usually has already purchased another home in the expectation of the sale of his home, and is now exposed to two mortgages.
The advantages for the buyer are that the buyer may be getting the property at a reduced price, and the buyer will be buying the property with the expectation that it is in better shape and is free from potential problems. The buyer can finance the property without the need for any contingencies relating to repairs. The buyer can get a lower interest rate, because the mortgage company may be willing to lend money on the property without requiring the owner to complete repairs.
The disadvantages for the buyer are many, including that the buyer has no recourse against the seller unless the seller committed fraud. The seller could have misrepresented the nature and extent of the repairs needed, and once the buyer has signed the contract, the buyer has no recourse. The "as Is" contract also does not provide for the renegotiation of the price or for credits to the buyer if there are problems with the property.
The "as Is" sales contract makes sense for cash purchases and for buyers who are experienced at dealing with real estate transactions who know what residual issues are likely to loom after the property purchases, or who are willing to accept those risks.
Legal Considerations for Purchasers and Vendors
Buyers typically think that "as-is" means like the used car they just bought – it has a blown head gasket, but so long as it is $1500 or less and not blowing dark exhaust smoke we will buy it. But a car is a movable piece of property, and as-is would be sufficient for that kind of purchase. In an "As Is" Residential Contract for Sale and Purchase the seller must warrant that there is clear legal title in fee simple to the real property being purchased; and the title must be marketable, free and clear of all encumbrances or restrictions; with only restrictions of record that do not materially interfere with a purchaser’s intended use of the property. The seller has no obligation to make any repairs to the property. Therefore, in the contract it is important that the buyer review the term "knowledge" to make sure that is does not leave a loophole allowing the buyer to back out. The "as is" provision is enforced by Florida courts which have held that the seller does not have a duty to disclose defects in the property or make any repairs.
Not only is the seller limited in his or her obligations to the buyer by the "as is" purchase, but the buyer’s legal obligations are affected by the "as is" nature of the contract. The buyer may not be able to hold the seller strictly liable for any latent defects. Latent defects are those defects that are hidden, such as a defective roof underneath the visible tiles. Since closing is essentially an arms length transaction where the parties do not expect each other to care about one another’s needs, a buyer is expected to watch out for his or her own interests and not rely on the seller’s representation of the state of the property. In addition, a buyer cannot be indemnified for damages arising from his or her own negligence. On the flip side, these limitations do not apply if the seller intentionally conceals a defect known to him or her from the buyer. It really comes down to who takes on the risk of discovered and undiscovered defects once the transaction is closed.
Common Concerns
One common misconception is that a buyer will lose their deposit money if the inspection comes back bad. In fact, what will typically happen is that the buyer will ask for some or all of the repairs that are needed to be made by the seller before closing. Sometimes the seller will agree to do some of the repairs, sometimes not. It’s really in the hands of the seller to respond to the request and then all parties will renegotiate the contract and you move forward as normal. A buyer is not prohibited from walking away from a contract on a bad inspection, but it is risky , as the seller could argue fraud if there was no good reason given and the buyer had inspected ahead of time. Just know that a buyer is not necessarily out his money when he signs an as-is contract. EAFAH: not guaranteed just because it’s in the contract. Another common misconception is that a buyer is prohibited from ever looking at the home again after signing an as-is contract. An inspection does not legally become a part of the contract. That means the seller is encouraged to let the buyer reenter the property after signing to get contractors and inspectors in, in order to demonstrate the condition of the property. This can also help to demonstrate if the condition of the property has changed since signing the contract-something that is material and will allow a buyer to receive their earnest money back. Another misconception is that all homes being sold "as-is" are the same. Not true. Sellers can modify the language of an "as-is" contract any way they like, and it’s often modified to leave the door open to foreclose even if only minor repairs are required.
Buying ‘As Is’ – What to Look Out For
Upon signing the "As Is Residential Contract for Sale and Purchase" or, colloquially, an "as is" contract, the Buyer should fully expect to begin his or her due diligence immediately in connection with the real estate transaction. There are two primary factors to consider. First, make any necessary changes to the Inspection Contingency section of the contract. The standard Inspection Contingency found in the contract allows the Buyer to conduct various inspections and obtain reports thereon within 15 (fifteen) days after the Effective Date of the contract, if the Buyer desires repair credits in connection with any inspections. Because the Buyer is not requesting a repair credit under the contract, the Window Period for inspections is shortened to ten (10) days after the Effective Date of the contract. Keep in mind, if you are trying to negotiate a reduction in the sale price of the property based upon your findings during your inspections, you may want to give yourself as much time as possible to conduct them. The Buyer does not have to provide the Seller with copies of the inspection results, unless the Buyer seeks to terminate the contract or seeks a repair credit on the property.
Secondly, hire an expert to assist you in reviewing the Inspection Reports that you receive. Each report may provide specific recommendations and it is common for Buyers to simply accept each recommendation without consideration of their need or any potential value they provide. It may be worth your time and resources to review the same with an appropriately qualified contractor to determine the necessity and/or value of such recommendations.
Dispute Resolution
Buyers and sellers can encounter a range of challenges when it comes to an "As Is" Residential Contract for Sale and Purchase. Some of the most common type of disputes that arise are:
– Parties disagreeing on whether a disclosed defect is a material fact.
– Parties disagreeing over whether to extend the inspection period.
These types of disputes can be handled in the following ways:
If a seller has not disclosed a defect, that defect may be actionable fraud. The reason disclosure by the seller is important in "As Is" contracts is because it is meant to negate a misrepresentation claim against the seller. If the seller is not disclosing defects that the buyer would have known about upon reasonable inspection, the seller may be liable for fraud.
An extension to an existing inspection period must be by mutual agreement – this means that both the seller and the buyer have to agree to the extension. If you are a buyer and you intend to extend the inspection period, do so prior to the contract date. In the event that you are considering extending an inspection period with disputes around repairs or an entity such as a condominium association that you’re trying to deal with, you can extend the inspection period. However, if you do not have an extension and you’re trying to negotiate repairs, the seller is not required to negotiate repairs after the inspection period has expired. If you don’t have an extension and you’re trying to negotiate, the seller could simply say the inspection is over and ask you to go through with the sale anyway.
Top Tips for Vendors
When contemplating the sale of a property "As Is", a seller should keep several things in mind in order to both appropriately inform a buyer of the state of the property, and to protect themselves from potential liability resulting from the sale of the property "As Is".
The first step to take is to establish the value of the property that you wish to sell. This will include looking at all recent sales of properties in the area to determine a fair price. Next, the seller should obtain an inspection report for the property so that they may disclose all material information to a potential buyer. Full disclosure is the key to any real estate transaction, and by providing the buyer with the opportunity to conduct their own due diligence on the property, a seller can not only justify the asking price but more easily substantiate an "As Is" sale if a buyer should later bring a claim against the seller.
Once the seller has priced the property accordingly , and both parties have agreed on a price, there are a few final steps to take to ensure everything is in order. First, the seller should have more than one rough date for the due diligence period provided to a buyer to conduct their inspections. This will help ensure that if they do decide to conduct a physical inspection, they can conduct it once and receive all the necessary information the first time. Second, the seller should review all other property disclosures to ensure all required disclosures have been provided to the buyer. Additionally, if a seller has a claim against any person or household, they should immediately disclose that fact to a potential buyer. Finally, the seller should keep in mind that it is very important to retain a knowledgeable attorney to help guide you through the process.