What’s As-Is Got To Do With It?
In this seller’s real estate market, you may be seeing more real estate listings that include the phrase “as-is”. Typically, when a property is listed “as-is,” it implies that the seller does not want to invest time or money into addressing any problems with the property.
What is an As-Is Property?
When a property is listed “as-is,” the seller expects the buyer to purchase the property without the seller having to make any repairs or renovations to the property before the sale.
There is such high demand for residential real estate in Connecticut right now. So sellers have the upper hand and can use this to their advantage to find a buyer who will be less demanding.
Can You Still Ask the Seller for Changes with an As-Is Property?
Does this mean that a buyer who submits an offer for an as-is property is accepting the property in its existing condition? Not necessarily. Even in an “as-is” sale, buyers may still have the opportunity to conduct inspections to identify any issues or concerns.
The buyer’s offer may include a timeframe within which the buyer can conduct specific inspections, like a general property inspection, septic inspection, radon inspection, or water inspection.
What is an Inspection Contingency?
If the seller accepts the offer with these terms, then the buyer has what is known as an “inspection contingency”. This means that the buyer is allowed to perform the specified inspections within the time frame allotted in the agreement.
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Most standard real estate contracts that include inspection contingencies also include language that allows the buyer to terminate the contract if they find the inspection results unsatisfactory and get their earnest money deposit back.
This is true even if the property was listed “as-is”! Without an inspection contingency, the buyer is not allowed to perform an inspection. Further, without the inspection contingency, if the buyer terminates the contract for reasons related to the condition of the property, they will not receive their earnest money deposit back.
The earnest money deposit is the amount that the seller is usually allowed to keep if a buyer backs out of a real estate contract with no contingencies remaining. This is often referred to as the “liquidated damages” in the contract.
SIDEBAR: Buyers Often Submit Offers With Contingencies.
These are the circumstances that must happen in order for the buyer to be obligated to close.
The real estate agreement will include timeframes during which the buyer must satisfy these contingencies. The most common contingencies include inspection of the property, securing a mortgage (“financing”), and selling their current home (often referred to as a “Hubbard clause”).
If the buyer terminates the contract before the timeframes expire because of the reasons included in the contingency, then the seller must allow the buyer to cancel the contract and receive 100% of their earnest money deposit that they put down when they made the offer.
If all of the time frames for the contingencies included in the contract have passed, the buyer may still want or need to terminate the contract. But it is effectively a breach. Even if the contract states that the damages that the seller is allowed are equal to the earnest money deposit.
However, if the seller is able to sell the property within a reasonable amount of time for as much or more than the original buyer was going to pay, then the seller may have to return the original buyer’s earnest money deposit. Because the seller is not allowed to be over-compensated for the property that they sold.
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Submitting an Offer With No Contingencies
In this market, we are seeing some buyers submit offers with no inspection contingency. This could make their offer more attractive to the seller.
In this case, the buyer can back out of the deal. But they can’t get their earnest money deposit back if that reason is related to the condition of the property. It is also possible that a seller can reject the inspection contingency specified in the contract.
They could refuse to sign the offer unless and until it is removed. If the parties agree to remove it before it is signed, the buyer will not be allowed to perform an inspection or request repairs.
SIDEBAR: If the Buyer’s Offer is Contingent Upon Obtaining a Mortgage to Finance the Deal
If the lender requires certain inspections and those inspections fail, then the buyer may be able to technically terminate the contract for inspection reasons because of their financing contingency. This is true even if the offer did not include an inspection contingency.
FHA and VA loans often require that the property meet certain conditions. Repairs may be required before the lender will provide the financing for the buyer to be able to close. Paying attention to the type of financing that the buyer plans to obtain is important for sellers. Especially ones who want to ensure no inspections and an as-is closing.
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The buyer is allowed to perform the specified inspections and CAN request that the seller make repairs for unsatisfactory results. Even if the listing said that the property was being sold as-is. Some sellers may take this as the buyer acting in bad faith and refuse to do any repairs on principle. Especially when they have a backup offer.
Even more so, when the buyer specifically states in their offer that they are doing inspections “for information only.” Still, sellers are sometimes (even more likely in times of buyer’s markets) willing to consider the buyer’s requests.
Here are a few possible scenarios that unfold:
- Renegotiate: The buyer can request a price reduction or credits to compensate for the issues found in the inspection report. The seller may agree to negotiate and make adjustments to the terms of the sale based on the new information. Once the seller has knowledge of the condition, they should review the Property Condition Report. They should make sure it reflects their newfound knowledge, even if they don’t renegotiate.
- Request repairs: The buyer can request specific repairs or improvements to be made by the seller before proceeding with the purchase. This approach requires the seller’s willingness to address the issues. And can lead to a resolution if both parties can agree on the necessary repairs. This option sometimes results in an escrow agreement at the closing, which is necessary when the seller is unable to complete the agreed-upon repairs prior to the closing date.
- Terminate: If the inspection reveals significant problems or the seller is unwilling to negotiate or make repairs, the buyer may have the option to terminate the contract. This typically depends on the contingencies outlined in the purchase agreement, such as a satisfactory inspection clause or a financing contingency.
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When a Buyer and Seller Enter Into a Purchase Agreement That Includes an Inspection Contingency
The dynamics of an “as-is” listing can change. An inspection contingency allows the buyer to conduct inspections within a specified timeframe. It also provides the option to negotiate repairs or back out of the contract if significant issues are discovered.
In this case, even though the property is listed “as-is,” the inspection contingency gives the buyer the opportunity to request repairs or concessions based on the inspection findings. However, it’s important to note that the seller is never obligated to agree to these requests.
Remember, it is crucial for both buyers and sellers to review the real estate contract. And consult with their real estate agent and attorney to understand their rights and options. Local laws and contract terms can significantly impact the parties’ ability to renegotiate or cancel the transaction based on inspection findings.
If you are planning on buying or selling a residential real estate property, we can help. Our closing department has three attorneys and a dedicated full-time real estate paralegal with more than 35 years of experience. For more information, check out www.reedwilsoncase.com/real-estate
*Rest in Peace, Tina Turner.
Joan Reed Wilson Esq. – Managing Partner
Practices in the areas of estate planning, elder law, Medicaid planning, conservatorships, probate and trust administration, and real estate. Admitted to practice in the States of Connecticut and California, she is the President-elect of the CT Chapter of the National Academy of Elder Law Attorneys (NAELA), an active member of the Elder Law Section of the Connecticut Bar Association, accredited with the PLAN of CT for Pooled Trusts, with the Veteran’s Administration to assist clients with obtaining Aid & Attendance benefits for long-term care needs and with the Agency on Aging’s CareLink Network.