I hear you in the background shouting, “They don’t!" A few years ago, I would have agreed with you about 99% of the time. Naturally risk-averse, I saw too many pitfalls inherent with “As Is” offers. While my stomach still lurches a bit when clients suggest one, I recognize that there are times–-especially in a strong seller’s market like we’re experiencing–-when “As Is” offers make sense.
Caveats about “As Is” Offers
Without question, “As Is” offers increase a buyer’s risk. Even the most knowledgeable buyer can’t see hidden defects. If you’re pondering an “As Is” offer, you need to understand:
What an “As Is” offer means. According to NAR (National Association of Realtors®), in an “As Is” sale “the homeowner is selling the home in its current condition, and will make no repairs or improvements before the sale (or negotiate with the buyer for any credits to fund these fix-its). The term ‘as is’ is rarely tacked on a property sales listing that’s perfect and move-in ready.” NAR points out, too, that “people often sell as-is homes that are in disrepair, because the homeowners or other sellers can’t afford to fix these flaws before selling,” even though they know that making the repairs would make the home more valuable to prospective buyers.
It’s sometimes difficult–or impossible–to secure a mortgage on an “As Is” home. One reason for the difficulty is that lenders won’t finance homes that aren’t habitable. Lenders reject mortgage applications for homes with foundation problems, a leaky roof, inoperable heating or plumbing systems, or anything else that would make it impossible to live in “As Is.”
Another difficulty rises from the fact that “As Is” homes are challenging to appraise accurately. The appraised value is critical since lenders won't approve a mortgage for more than a home's value. Frequently, homes offered “As Is” are in some state of disrepair. While still in livable condition, they have not been adequately maintained or updated. For instance, the roof doesn’t leak, but it’s 20 years old. The AC unit functions but is at the end of its expected life. The windows haven’t been updated, so they are drafty and energy-inefficient. These things all lower the home’s appraised value and increase the likelihood that the appraised value will not equal the home’s selling price.
You’ll be competing with cash buyers. Because mortgages are more difficult to acquire on an “As Is” basis, cash buyers–especially investors looking to flip a home–hone in on houses like this. A skilled investor who understands home construction can assess a home’s general value fairly quickly and submit a cash offer early compared to other buyers. This competitive advantage, coupled with a cold-hard-cash offer, is tough to surmount, especially if the sellers want to quickly divest themselves of a home that has become a burden.
Your state’s laws concerning “As Is” offers. Some states permit a prospective homebuyer to withdraw an offer without penalty if the home inspection reveals a major defect the seller did not disclose. My state of South Carolina specifically disallows that option. The current contract–Form 310–contains this wording: “Buyer retains the right to inspect the Property . . . for informational purposes only. The seller is under no obligation to remedy any issues the Buyer discovers during their inspections, and the Buyer may not terminate the contract based on the results of any inspections conducted.” South Carolina does not permit an inspection contingency for the home’s general condition. The contract does, however, contain a “Wood Infestation” section in which the buyer can make the purchase contingent upon the results of a termite inspection.
While not being able to terminate based on the results of inspections significantly increases the buyer’s risk, the wood infestation contingency does mitigate things a bit. States’ real estate laws vary considerably. Any buyer considering an “As Is” offer must know what his state dictates.
Why Do “As Is” Offers Sometimes Make Sense?
As I mentioned earlier, “As Is'' offers aren’t always feasible for buyers who need to finance the purchase. However, assuming that the home is in good enough condition to meet the lender’s requirements, “As Is” offers are at times sensible. Here’s why:
In a strong seller’s market “As Is” offers give buyers a competitive advantage over offers that stipulate repairs.
In case you’re wondering, the spring 2022 U.S. housing market strongly favors sellers. Two factors contribute significantly to this:
Inventory levels that continue to plummet. A recent Fortune article noted that January 2022 housing inventory has risen 30% or more above January 2020 levels in only 2 market areas in the entire United States. In many areas, inventory levels are more than 30% lower than they were 2 years ago.
Strong demand for housing. Many people are looking to purchase a home, and spring is typically the busiest home-buying season. My husband and I recently wrote a contract for one of our clients. In 4 days, this older, solid-but-dated home had over 30 offers–several of which were cash offers. Numbers like that are no longer uncommon in the Greater-Greenville, South Carolina market. (They may be even crazier in your market.)
Combined, these factors place the burden on prospective buyers to sweeten their offer any way they can. Being willing to bear the risk of possible hidden repair costs is one way to do so.
Savvy buyers can purchase their dream home at a bargain price.
Knowledgeable buyers who understand the concept of “sweat equity” and are willing to move into a less-than-perfect home find that “As Is” purchases allow them to:
Live in a neighborhood that would normally be beyond their budget.
Purchase a larger home.
Build equity quickly. (See below.)
Buyers with sufficient cash to cover any surprises an “As Is” purchase may hold can leverage short-term expense against long-term benefit.
Buyers with a cash nest egg and knowledge about housing construction (or a knowledgeable, trusted family member or friend), may be able to identify a home that needs a facelift, but has excellent bones. Although “As Is” buyers typically incur higher-than-normal repair and maintenance expenses early on, they usually see significant increases in home value in a short time. Therefore, purchases of “As Is” homes present buyers with the opportunity to build substantial home equity quickly.
Sometimes “As Is” offers are necessary.
Increasing numbers of sellers in our Greater-Greenville, SC market are selling their home “As Is,” not because their home is in disrepair, but simply because market conditions allow them to do so, and still receive several attractive offers. Sellers listing starter homes, homes in desirable neighborhoods, or homes with attractive amenities just don’t need to deal with the hassle of repairs, so they aren’t. An “As Is” offer simplifies the transaction for them. And, as more and more sellers opt for this approach, the stigma of an “As Is” listing is waning.
Buyers who are scouring Zillow, Realtor.com, and other sites to find a home that fits their criteria realize that being unwilling to consider an “As Is” purchase drastically reduces their options. As a result, many are setting aside their misgivings and pursuing an “As Is’ purchase.
Home buyers need to realize that “As Is” offers are:
Subject to laws that vary from state to state.
The darlings of “fix and flip” investors.
Despite these factors, “As Is” offers are sensible if:
Buyers need a competitive advantage in a seller’s market marked by high competition and low inventory.
Buyers are savvy enough to recognize an undervalued home.
Buyers are financially sound enough to bear the burden of repairs that are initially higher-than-normal.
Substantial numbers of homes are offered for sale “As Is.”
Prospective home buyers–if you’re confused about how to navigate a housing market that favors sellers, we’re ready to assist you. If you’re listing your home and need professional guidance about whether an “As Is” listing would be best for you, we’d be glad to help. Please contact us at email@example.com or firstname.lastname@example.org.
Whether you’re a buyer or a seller, “We do the HOMEwork for you.”