The FAR-BAR AS-IS Residential Contract for Sale and Purchase sounds like a great idea in theory. In a sense, it was meant to help buyers and sellers cut to the chase. Many AS-IS offers, especially in a changing market like we are seeing today, come in below list price. The pitch made by the buyer’s agent upon the presentation of the lower offer is usually the fact that the offer is being made “AS-IS” and will correspondingly simplify the transaction barring some major issue being discovered during the inspection period. Even though the general premise sounds very reasonable and logical, is that what is actually happening? Or are AS-IS offers subtly being used as a bait-and-switch technique by some buyers?
When an AS-IS offer is made, here is how the conversation sometimes goes…
Seller’s Agent: “So I have an offer to present to you, but I wanted to call you to discuss it with you first. This is an AS-IS offer, which really simplifies things, but the dollar amount is a little lower than we were hoping for, so I wanted to make sure to let you know that this is an AS-IS offer before sending it over.”
Seller: “How much lower is the offer?”
Seller Agent’s: “Well, it is on the lower range of what we had initially discussed, but I just wanted to make sure that you understood it is an AS-IS offer, which makes things easier in terms of you not having to make minor repairs prior to closing. Unless something major comes up during the inspection period, the AS-IS terms and conditions should make things run smoothly and create less of a headache for you.”
After the inspection occurs, the follow-up conversation is often something like this…
Seller’s Agent: “I just received an addendum from the other side, and I wanted to discuss it with you before I send it over.”
Seller: “Oh. What does it say?”
Seller’s Agent: “Well, the Buyer has a list of things that the Buyer is requesting to be fixed prior to closing. The Buyer’s Agent also said that, if you would rather avoid having to make the repairs, the Buyer would also be open to discussing you giving the Buyer a credit at closing in the amount of $5,000.00, and that would be enough to cover the cost of the Buyer resolving the issues after closing.”
Seller: “I thought that this was an AS-IS contract and that we would only be required to fix something significant?”
Seller’s Agent: “That is normally how it works, but the Buyer still has the right to terminate the contract if the property is deemed unacceptable for any reason during the inspection period. This determination can be made in the Buyer’s sole discretion. Likewise, you can refuse to make the repairs, refuse to offer a credit at closing, and terminate the transaction. Unfortunately, if you don’t agree to this, the Buyer’s Agent indicated on the phone today that the Buyer will then terminate this contract prior to the expiration of the inspection period, which is the Buyer’s right.”
Seller: “How will that look to people that might be interested in the house once the listing goes from pending back to active again?”
Seller’s Agent: “You might want to consider fixing some of these minor items between now and the next offer being presented. That way, when the question is asked down the road regarding why the contract fell through, I have a good answer for the other side. At the end of the day, once you have knowledge of something related to the condition of the property, and it falls into any category on the Seller’s disclosure, you will need to update the disclosure to account for the new information.”
Seller: “But I never would have accepted an offer that low if I knew that the Buyer was going to come back later and try to get an even lower price for cosmetic/minor issues.”
And there you have the basic problem in a nutshell.
The AS-IS contract does not state that the buyer waives any inspection contingency rights. It also does not stand for the proposition that the buyer must ignore the inspection results and recklessly move forward with the purchase of the property. Notwithstanding, there are usually two assumptions made at the time of finalizing an AS-IS contract, which are as follows:
- The condition of the property, as far as what is visible with the naked eye, is already accounted for in the agreed upon purchase price; and
- The seller will not be required to remedy minor issues identified during the inspection process either by making repairs or by offering a credit to the buyer on the settlement statement at closing.
Obviously, if there is a huge issue that is discovered during the inspection process, that is a totally different situation which might necessitate renegotiation, or repairs being made prior to closing. This is because significant issues aren’t going anywhere, and no reasonable buyer is going to close on a house with major problems, especially if one of the items impacts the buyer’s ability to get homeowner’s insurance. If the buyer is merely being petty and seeking another reduction in price or a credit at closing for cosmetic items, sometimes it is better for the seller to just walk away.
In responding to the initial offer as the seller, the seller’s agent, or the seller’s attorney, consider adding the following language to the Additional Terms section after an “AS-IS” offer is presented:
Buyer and Seller hereby acknowledge that this is an “AS-IS” contract and that the point of the “AS-IS” contract is to simplify the transaction by having the current condition of the property reflected in the negotiated and agreed upon purchase price. Correspondingly, Seller will not entertain any requests by Buyer after the inspections are completed to repair, and/or to provide a credit to Buyer at closing, for cosmetic/minor items. For items identified during the four-point inspection process which would need to be corrected prior to closing in order for Buyer to obtain homeowner’s insurance, Seller hereby agrees to make the necessary repairs prior to closing at Seller’s expense, not to exceed the cost of $_________________, in order to assist Buyer in obtaining the insurance needed to proceed with the transaction. Buyer hereby agrees to provide a complete copy of the applicable four-point inspection report at the same time as making the request for Seller to repair the items needed to obtain homeowner’s insurance. Should the repairs amount needed for Buyer to get homeowner’s insurance exceed the amount listed above, Buyer and Seller hereby agree to negotiate in good faith towards the resolution of same and to memorialize the resolution in a separate addendum. If Buyer and Seller are unable to reach a resolution after _____ days, which is also the number of days that the inspection contingency period shall be hereby extended, then this contract shall be deemed terminated. All remaining provisions of this contract remain in full force and effect.
If the seller does decide to walk away from the deal with the language above included in the contract, the seller will have a complete copy of the inspection report and can determine if it is worth potentially addressing some of those items in anticipation of the next set of buyers making an offer. If the items are resolved prior to the next offer being made, and the seller’s agent or the seller’s attorney lets the other side know about that prior to the showing as a negotiation technique, it might result in a higher initial offer and potentially more money in the seller’s pocket at closing.
Not only does the language above reinforce that both parties understand the intention of an AS-IS offer, but it also puts some teeth into the contract to preemptively address any underhanded attempt to use the AS-IS contract as a vehicle to make a low initial offer with the goal of then asking for an even lower price after the inspections are completed. At a minimum, the proposed language in the Additional Terms section will result in another conversation between the buyer’s agent and the seller’s agent or the seller’s attorney, at which time the seller’s agent or the seller’s attorney can clarify that the property is priced to sell, and that the seller will not be entertaining an AS-IS offer coupled with a subsequent request to fix cosmetic/minor items prior to closing. The seller’s agent or the seller’s attorney can also clarify at that time that the seller will correspondingly not agree to providing the buyer with some obscurely calculated credit for cosmetic/minor items that isn’t based on anything verifiable.
Stated differently, including the additional language above hopefully helps to reduce the instances of a buyer making an AS-IS offer below list price and then demanding that the seller replace all of the tiling in the guest bathroom because a few of the tiles are chipped, or face termination of the contract. Although an extreme example, the buyer has more leverage and can walk away from the deal and start negotiating fresh on a different property. The buyer is not required, upon making an offer on the next house, to present a list of previous times that the buyer’s prior negotiations on different houses failed to close. Conversely, the seller has lost valuable time and must now explain to future parties why the previous deal didn’t close. Furthermore, the seller has a verifiable record of the number of times, along with the specific dates, that the listing went pending as well as an obligation to update the seller’s disclosure. That is not equal bargaining power.
At the end of the day, most of the real estate industry, the legal industry, and sellers can agree that the AS-IS contract, and the intended purpose of the document, is being abused by some, but it is certainly not being abused by all. These additional steps could potentially help to level the playing field.