"As Is" Is All The Rage
When I look for property in the Multiple Listing Service and other internet sites, I find that many -- perhaps most -- of the properties are listed for sale in their "as is" condition. This is a selling position that was adopted in recent years during the strong seller's market by people who wanted to maximize their profit by eliminating the costs associated with making repairs to real estate. Buyers were willing to accept this sales ploy because there was so much competition for realtively few available properties. It was a matter of supply and demand.
Today, that strong seller's market is gone, yet some sellers still feel that they can pass off inferior property at high prices. In fact, "as is" seems to be all the rage. What is even more amazing is that apparently many real estate agents actually encourage listing homes in their "as is" condition. These listing agents, most of whom are relatively new to the business and have experience only in the recent seller's market, appear to believe that "as is" is the preferred way to list and sell property. They've even coined a clever little term for the approach: "as is for the seller's convenience".
News Flashes!
Here are two quick news flashes for sellers and agents regarding "as is" listings. "As is" may have been the way to go in a seller's market, but now we're in a buyer's market and people are not so keen on paying top dollar for property that is in need of repair and/or remodeling.
The second little news flash is that there is no such thing as "as is for the seller's convenience". There's "as is" and "as is with right to inspect". But there is no listing category that concerns the seller's convenience, although it sounds nice in a listing presentation because it makes the seller think he's going to increase his net profit by avoiding the costs of repairs. Actually, every professional buyer's agent I know will totally ignore the "seller's convenience" part of the description. Their job is to represent the buyer and they won't give two-cents for the convenience of the seller. If something is substandard, the buyer's agent is going to advise the buyer to demand that the problem be corrected by the seller prior to closing or the buyer will legally cancel the contract.
"As Is" Is Rare
When you really analyze the way property is bought today, a true "as is" sale is a very rare thing. About the only time you can really sell property in "as is" condition is when the purchase is all cash and the buyer is not going to insure the property.
You see, property insurance is required by mortgage companies. Buyers who own their property free and clear, or those who take title without a mortgage, are not obligated to purchase an insurance policy of any type. So, they can go ahead and buy a property with problems in its "as is" condition since they are assuming all the risk.
Most properties, however, are purchased with the aid of a mortgage. If a mortgage is involved, insurance will be required by the mortgage company. Mortgage companies and most insurance companies require that property be appraised and inspected prior to issuing the mortgage and insurance policy. Frequently, mortgage and insurance companies send their own people to do these inspections. If the property needs work or does not measure up for some other reason, they often require that repairs be made prior to issuing the mortgage or insurance policy.
If the insurance company feels that there is something substandard with the property, they can refuse to issue the policy until the matter is corrected. With no insurance policy, the mortgage company will not issue the mortgage. With no mortgage, the buyer likely will not be able to close on the purchase. Unless other wording obligates the buyer to perform, if the buyer can't obtain the mortgage he can cancel the sales contract and have all his escrow refunded.
All sellers should be made aware of this dangerous problem associated with "as is" sales. And there's more danger ahead for sellers ... so keep reading.
A Triple-Edged Sword
"As is" is a kind of triple-edged sword. In addition to the problems involving insurance companies and mortgages, some real estate buyers use the "as is" clauses in standard Florida real estate contracts as a way to leverage lower prices for real estate. Here's how ...
Let's assume the seller and buyer have agreed on a purchase price and the "as is" contract for sale is all signed. The two most commonly used Florida real estate contracts -- the FAR and the FARBAR contracts -- both give the buyer the right to do a property inspection. Both also give the buyer an easy way out of these contracts following those inspections. The FAR contract's "as is" clauses state that if repairs are estimated to be in excess of a certain negotiated amount, the buyer can cancel the contract and have his escrow returned. The FARBAR contract is even easier for the buyer to cancel. It simply states that following the inspection and at the buyer's sole discretion, if the buyer sees anything in the report that he does not like he can cancel and have his escrow returned.
So, let's say the buyer does the inspection. The inspection report lists a bunch of things that are wrong with the property. The buyer uses the "as is" clauses in the contract to get the price lowered by telling the seller that repairs will cost him way more than he anticipated. The buyer will then initiate one of three scenarios:
1. The buyer will threaten to cancel the contract and demand his escrow be returned. In this case the seller generally panics and makes a unilateral offer to lower the price if the buyer will not cancel the purchase contract. (Just what the buyer had in mind all along.)
2. The buyer will demand that the price be re-negotiated due to the higher than expected repair costs, or he'll cancel the contract. In this case the seller will generally agree to a lower price rather than start looking for a new buyer again. (Again, the buyer wins this negotiating tactic.)
3. The buyer will demand that the seller make all the repairs indicated in the report at the sellers expense, or he will cancel the contract. Usually the seller makes the repairs. This, in effect, reduces the buyer's financial exposure on the property since the buyer will not have to lay-out additional funds for repairs after closing. In effect, this lowers the price to the buyer. (This tactic is especially common in sales to buyers who intend to quickly put the house back on the market and sell it, all fixed up, for a profit.)
So much for your "as is" sale. If the mortgage or insurance companies don't make you do the repairs, the buyer probably will. It's that simple. In fact, some really savvy buyers will only use an "as is" contract in purchasing property just so they can tie up the real estate during the inspection period and then use contract law to leverage a lower price from an unsuspecting and inexperienced seller. (There are ways to avoid having the property tied-up during the inspection period, but that's the subject for another article.) This kind of thing happens every day -- and will likely happen even more now that we are in a buyer's market with so many "as is" properties still for sale in which the listing agent and seller do not know the real problems and pitfalls associated with an "as is" contract.
Listing agents and sellers need to keep something in mind. Except in cases where there may be multiple offers on the property, it is the buyer who drives the deal -- even in a seller's market. Why? Because buyers have the MONEY, and the only thing a seller has is a property he no longer wants. Money talks. When the guy with the money says he wants some repairs done, the seller often has little choice but to make them or loose the sale. Sometimes the guy with the money is the buyer, but other times it is an insurance or mortgage company.
As you can see, even though "as is for the seller's convenience" may be all the rage, it's not really a very strong negotiating position and is easy for a good buyer's agent to overcome. If you've listed your home "as is" but your agent did not explain these things to you, you may quickly discover that "as is" is not necessarily "for the seller's convenience".
Oh, by the way ... don't forget to visit my website, www.thestpeterealestatesite.com.
Today, that strong seller's market is gone, yet some sellers still feel that they can pass off inferior property at high prices. In fact, "as is" seems to be all the rage. What is even more amazing is that apparently many real estate agents actually encourage listing homes in their "as is" condition. These listing agents, most of whom are relatively new to the business and have experience only in the recent seller's market, appear to believe that "as is" is the preferred way to list and sell property. They've even coined a clever little term for the approach: "as is for the seller's convenience".
News Flashes!
Here are two quick news flashes for sellers and agents regarding "as is" listings. "As is" may have been the way to go in a seller's market, but now we're in a buyer's market and people are not so keen on paying top dollar for property that is in need of repair and/or remodeling.
The second little news flash is that there is no such thing as "as is for the seller's convenience". There's "as is" and "as is with right to inspect". But there is no listing category that concerns the seller's convenience, although it sounds nice in a listing presentation because it makes the seller think he's going to increase his net profit by avoiding the costs of repairs. Actually, every professional buyer's agent I know will totally ignore the "seller's convenience" part of the description. Their job is to represent the buyer and they won't give two-cents for the convenience of the seller. If something is substandard, the buyer's agent is going to advise the buyer to demand that the problem be corrected by the seller prior to closing or the buyer will legally cancel the contract.
"As Is" Is Rare
When you really analyze the way property is bought today, a true "as is" sale is a very rare thing. About the only time you can really sell property in "as is" condition is when the purchase is all cash and the buyer is not going to insure the property.
You see, property insurance is required by mortgage companies. Buyers who own their property free and clear, or those who take title without a mortgage, are not obligated to purchase an insurance policy of any type. So, they can go ahead and buy a property with problems in its "as is" condition since they are assuming all the risk.
Most properties, however, are purchased with the aid of a mortgage. If a mortgage is involved, insurance will be required by the mortgage company. Mortgage companies and most insurance companies require that property be appraised and inspected prior to issuing the mortgage and insurance policy. Frequently, mortgage and insurance companies send their own people to do these inspections. If the property needs work or does not measure up for some other reason, they often require that repairs be made prior to issuing the mortgage or insurance policy.
If the insurance company feels that there is something substandard with the property, they can refuse to issue the policy until the matter is corrected. With no insurance policy, the mortgage company will not issue the mortgage. With no mortgage, the buyer likely will not be able to close on the purchase. Unless other wording obligates the buyer to perform, if the buyer can't obtain the mortgage he can cancel the sales contract and have all his escrow refunded.
All sellers should be made aware of this dangerous problem associated with "as is" sales. And there's more danger ahead for sellers ... so keep reading.
A Triple-Edged Sword
"As is" is a kind of triple-edged sword. In addition to the problems involving insurance companies and mortgages, some real estate buyers use the "as is" clauses in standard Florida real estate contracts as a way to leverage lower prices for real estate. Here's how ...
Let's assume the seller and buyer have agreed on a purchase price and the "as is" contract for sale is all signed. The two most commonly used Florida real estate contracts -- the FAR and the FARBAR contracts -- both give the buyer the right to do a property inspection. Both also give the buyer an easy way out of these contracts following those inspections. The FAR contract's "as is" clauses state that if repairs are estimated to be in excess of a certain negotiated amount, the buyer can cancel the contract and have his escrow returned. The FARBAR contract is even easier for the buyer to cancel. It simply states that following the inspection and at the buyer's sole discretion, if the buyer sees anything in the report that he does not like he can cancel and have his escrow returned.
So, let's say the buyer does the inspection. The inspection report lists a bunch of things that are wrong with the property. The buyer uses the "as is" clauses in the contract to get the price lowered by telling the seller that repairs will cost him way more than he anticipated. The buyer will then initiate one of three scenarios:
1. The buyer will threaten to cancel the contract and demand his escrow be returned. In this case the seller generally panics and makes a unilateral offer to lower the price if the buyer will not cancel the purchase contract. (Just what the buyer had in mind all along.)
2. The buyer will demand that the price be re-negotiated due to the higher than expected repair costs, or he'll cancel the contract. In this case the seller will generally agree to a lower price rather than start looking for a new buyer again. (Again, the buyer wins this negotiating tactic.)
3. The buyer will demand that the seller make all the repairs indicated in the report at the sellers expense, or he will cancel the contract. Usually the seller makes the repairs. This, in effect, reduces the buyer's financial exposure on the property since the buyer will not have to lay-out additional funds for repairs after closing. In effect, this lowers the price to the buyer. (This tactic is especially common in sales to buyers who intend to quickly put the house back on the market and sell it, all fixed up, for a profit.)
So much for your "as is" sale. If the mortgage or insurance companies don't make you do the repairs, the buyer probably will. It's that simple. In fact, some really savvy buyers will only use an "as is" contract in purchasing property just so they can tie up the real estate during the inspection period and then use contract law to leverage a lower price from an unsuspecting and inexperienced seller. (There are ways to avoid having the property tied-up during the inspection period, but that's the subject for another article.) This kind of thing happens every day -- and will likely happen even more now that we are in a buyer's market with so many "as is" properties still for sale in which the listing agent and seller do not know the real problems and pitfalls associated with an "as is" contract.
Listing agents and sellers need to keep something in mind. Except in cases where there may be multiple offers on the property, it is the buyer who drives the deal -- even in a seller's market. Why? Because buyers have the MONEY, and the only thing a seller has is a property he no longer wants. Money talks. When the guy with the money says he wants some repairs done, the seller often has little choice but to make them or loose the sale. Sometimes the guy with the money is the buyer, but other times it is an insurance or mortgage company.
As you can see, even though "as is for the seller's convenience" may be all the rage, it's not really a very strong negotiating position and is easy for a good buyer's agent to overcome. If you've listed your home "as is" but your agent did not explain these things to you, you may quickly discover that "as is" is not necessarily "for the seller's convenience".
Oh, by the way ... don't forget to visit my website, www.thestpeterealestatesite.com.
-30-
posted by Terry Ward at 5:24 AM
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