John M. Lee: Buying Property 'As Is'

In today's real estate market, most sellers are still able to sell their properties "as is." What exactly does that mean and what are the ramifications for buyers and sellers? Is it a good idea? These are some of the questions we will explore this month.

Even with the slight slowdown in the summer real estate market, there are still multiple bids on many properties, causing some buyers to submit "as is" offers to sellers so they can have an advantage over other bidders.

When a property is sold "as is," it usually means that the seller will not warrant the condition of the property. The buyers buy the properties in its current condition, and take responsibility for correcting any and all defects.

Some properties are sold "as is" because the seller acquired the property through adverse conditions, such as a probate or foreclosure sale. In these cases, the seller might not have any knowledge about the condition of the property, and thus cannot disclose much, causing the property to be sold in "as is" condition.

In the past, buying an "as is" property meant purchasing it in its current condition, without the benefits of any inspections. Even as recently as 15 years ago, many houses were purchased without inspections. However, a contractor and a pest control inspection are commonplace in today's real estate transactions.

As a real estate professional, I would never recommend buying a property without inspections to anyone, except if the buyer is very sophisticated or intends to tear the building down.

Instead, if the buyer is willing to purchase the property in its present condition, I would recommend subjecting it to inspections. I have seen many hidden defects in homes that looked perfectly fine. Paying for an inspection is "cheap insurance" for such a large investment.

I would advise the buyer that if the seller rejects his offer because someone else is willing to buy it without the benefits of inspections, so be it, because there is always a bigger fool out there and it might not be in the buyer's best interest to purchase in this manner.

Alternatively, on a probate or foreclosure sale, where offers must be for the property in "as is" condition, with no inspection contingencies, I would recommend that buyers obtain their inspections up front before an offer is prepared. Even though it will cost them several hundred dollars, considering the investment the expense involved is miniscule.

From a seller's standpoint, I would advise allowing full inspections to potential buyers. If a seller does not allow inspections, and problems are discovered after the close of escrow, the buyer can always come back and sue the seller for non-disclosure and for not allowing the buyer to perform inspections.

Had the seller allowed the buyer to obtain inspections, the defects could have been discovered and they would not have materially affected the value of the property. Also, by allowing inspections, the seller has shifted some of that liability for the defects to the buyer and his inspectors.

In today's real estate environment, sellers many times will spend the money to hire a termite inspector and a contractor to inspect the property prior to putting it on the market. This is a prudent move as most, if not all, defects will be disclosed up front and buyers can then make an intelligent decision on what the property is worth and if they are willing to tackle the repair work after the close of escrow if they were to purchase it "as is."

Also, up front inspections will eliminate the second round of negotiations that inevitably occurs if the inspections are performed after offers are accepted and damages are found.

In this litigious society, both buyers and sellers cannot be too careful and should take every precaution possible to minimize any surprises that can occur after the close of escrow. Buying properties "as is" without the benefits of any professional inspections can increase the possibility of problems for both buyers and sellers.

John M. Lee graduated from UCLA with an MBA and specializes in selling property in the Richmond and Sunset Districts. If you have any questions regarding real estate, you can reach him at (415) 447-6231 or e-mail him at johnlee@isellsf.com.