The concept of selling a home “as-is” has been around for a long time. Typically used by institutional sellers and real estate investors, the as-is home sale gained popularity during the last recession.
Banks that were already taking a financial hit for mortgages that were underwater sold these homes as is to avoid further losses and the hassle of dealing with repairs.
While the idea may sound appealing to many home sellers, there are a lot of things to consider before going this route.
Selling a House As Is Defined
In “as-is” real estate transactions, the homeowner is selling the home in its current condition with no intention of making repairs or home improvements before the sale.
These homes are usually in poor condition, and the seller can’t afford to make necessary repairs, or they simply don’t want to deal with needed repairs or major problems.
In most cases, the potential buyers have the right to have a home inspection in order to discover the condition of the property. By selling as-is, the seller is saying upfront that no matter what you discover on your inspection, they have no intention of making any repairs or financial concessions in lieu of repairs.
The as-is sale runs counter to a traditional sale because home sellers are usually looking to get the most money possible from the sale of their home by making improvements, repairs, and staging the home to show in the best possible light and get a higher price.
There may be some cases where selling a home in as-is condition is the best option, but most of the time, it is not.
Why Sell As Is – What’s The Right Real Estate Market?
All houses are actually sold “as-is,” which means that the seller is never legally required to repair or modify the property for a buyer.
Most as-is home sellers are attracted to this type of sale because they like the idea of a quick sale, and eliminating the expenses and hassles involved with preparing the home for sale as well as having to deal with any inspection repair items that might arise along the way.
A seller generally chooses to go this route because of either time or money. They know the home needs repairs, but they don’t have the time or money to make those repairs.
There are a lot of repair issues that can arise with a house, some come about as a result of deferred maintenance or bad luck. The types of repair issues that can lead a seller to choose the as-is route are often things like structural issues, which depending on the severity, can cost tens of thousands of dollars to repair.
Other major repairs can be items like replacing the roof, windows, furnace, water heater, or expensive electrical issues all of these can be very costly.
Another example of as-is sellers is institutions and heirs. In these situations, the owner has little to no emotional attachment to the property. This type of seller is usually just looking to liquidate the asset and get a fair price for the property without putting any money into it.
The issue for the home seller is that selling a home in as-is condition because of repair costs does not relieve them of their responsibility to disclose any pertinent information about the condition of their home.
Disclosure?
Some home sellers think that selling a property as-is eliminates their legal obligation to fill out a disclosure report or disclose any problems with the property to buyers. The truth is that if the seller knows about problems, they need to disclose that information, and failing to do so could cause serious problems for them later. If the buyer feels the seller was hiding material facts about the condition of the property, they could sue for damages. When selling a property, it’s best to be an open book about the home’s condition.
Caveat emptor is the Latin term for “let the buyer beware.” until the advent of “Buyer Agency,” this was the standard attitude towards home buyers during the sales process. Buyer Agency changes the way buyers are represented, as well as new disclosure laws enacted at both state and national levels have collectively set a higher standard for the way home buyers are represented.
Now sellers are required to disclose any known issues or negative conditions they are aware of regarding the property. This includes everything from previous water damage, and lead paint, to asbestos, foundation issues, and neighbor disputes or boundary issues.
If you’re going to list your home in the multiple listing service (MLS), you’ll be using a realtor. Most real estate companies require home sellers to complete a Sellers Property Disclosure. This document is the seller’s opportunity, and the best way to disclose and describe any issues they are aware of.
There are instances when a seller doesn’t have to complete the seller’s property disclosure. This is generally in a situation where the property is owned by an institution like a bank or is inherited by someone. In both cases, the owner has never lived in the home and therefore presumably has no knowledge of the property to disclose.
Buyers and As Is Properties
Beyond the disclosure issues, there is a negative connotation related to an as-is sale. Many home buyers won’t even look at an as-is listing. The fear is that there is something wrong with the property and that they are buying a problem they might not be able to afford to fix. This means that the as-is sale ends up with interest mostly from investors, and investors are looking for a great deal, not a home.
Investors, just like regular buyers, will do an inspection. If the home inspector returns with results that reveal serious defects, the buyer or investor will want some compensation for those repairs, even minor repairs. This can present a major barrier in the selling process unless the discount for the repairs is already built into the price, and you can show the value in spite of the problems.
Selling “as-is” doesn’t mean the buyer can’t re-negotiate the price, and as long as there is an inspection clause in the contract, the buyer can get out if the repairs are too costly. The buyer has three options after the inspection:
- Close at the agreed-upon price.
- Cancel the contract.
- Re-negotiate with the seller for a lower price.
The as-is seller can hold their ground and refuse to renegotiate the price or terms of the sale, but this could tie up the home sale for weeks. Two or three of these types of transactions can translate to months of wasted time. Investors know this, and many use it to their advantage. As an “as-is, seller,” you are opening yourself up to this kind of manipulation.
Financing Issues
As is, properties often sell to cash buyers, this is because the Federal Housing Administration (FHA) and Veterans Affairs (VA) require that the property is in good condition. This means that the roof, windows, walls, and exterior surfaces are all in good condition prospective buyers won’t be able to use a VA or FHA loan if any of these areas are in disrepair, depending on the type of loan.
FHA and VA loans constitute about 24% of the loans used to purchase homes, while cash sales only account for about 4% of home sales. Refusing to make repairs means you could be eliminating a large portion of your potential market.
If you want to appeal to a larger portion of the real estate market, you should consider making repairs before putting the home on the market. You can talk with real estate professionals, or mortgage lenders to find out what the VA and FHA appraisers will be looking at when they appraise your home; these are the repair items you should focus on.
The mortgage lender is going to order an appraisal to establish value. At the same time, the appraiser will be looking at the overall condition of the property. If the home’s condition doesn’t meet the appropriate lending guidelines for the buyer’s particular loan type, the mortgage won’t be approved. This is why as-is sales are more likely to receive a cash offer than their open market counterparts.
A Better Approach to Selling As-Is
While the as-is sale might be the best option for institutional sellers, eliminating the “as-is” is a good option for private home sellers because it removes the negative stigma associated with the property.
If you are serious about the sale of your home and there are problems, transparency, and disclosure are the best approach.
By taking an open and transparent posture, you are leveling the playing field. The first thing this does is expands the potential pool of buyers that will be interested in your home, which will ultimately get you closer to receiving top dollar.
Getting the problems out in the open also fulfills the legal requirements associated with disclosure. This, in turn, reduces the likelihood of getting sued after the transaction.
Pre-Listing Inspection of Your House
This is a bold move, but it gives you a realistic sense of what the real issues are with the home. This helps with pricing and understanding what the potential inspection negotiations will look like. Additionally, many homebuyers will simply choose to use your inspection in lieu of doing an inspection of their own.
If the Pre-listing inspection reveals larger issues outside the scope of the property inspectors’ expertise, you may need to consult a specialist for further evaluation. We often see this with structural issues, if the inspector finds potential problems with the foundation of the home, they will most likely recommend an evaluation by a structural engineer. If there is a problem, the engineer would produce a report and recommend potential solutions. Having this information is better than not having it. Once again, the report offers a solution and a price for that solution.
You should take the information you discover during the pre-listing inspection and use it in order to get a sense of how much the repairs will cost. You would then use this information when you price the home.
Realistic Pricing
Once you are armed with a realistic sense of how much repairs will cost, you can start to focus on your asking price. A Realtor can give you a good idea of what the fair market value of your home is if it were in good shape by producing a comparative market analysis. By using this number in conjunction with the cost of repairs, you will be able to come up with the best possible price that is attractive to both regular home buyers as well as investors.
Being transparent about the condition of the home eliminates fear and suspicion about the home, as well as questions about the seller’s integrity.
The idea is to create a sense that the property is a diamond in the rough. Here are the problems, and we have discounted the listing price for those repairs. This sets the seller up for less friction during the negotiations as well as the subsequent inspection negotiations.
In many cases, we see sellers that take this approach get into a multiple offer or bidding situation. They have created a sense that yes, the property has problems, but they have disclosed them Secondly, they have done their homework on pricing and have priced the property correctly for its condition and the area it’s in.
This bottom-up approach generally nets the seller more money than the traditional top-down, as-is approach. Instead of assuming the worst and negotiating downward accordingly, the buyers have a complete picture of the situation and are less likely to make low ball offers, ask for price reductions or request extensive repairs.
In Conclusion
It can be difficult going when it’s time to sell a home that needs significant repairs. While the “as-is” sale is one option, it’s probably best used for institutional or estate sales. When it comes to selling a home you are familiar with, disclosure and transparency, at least in regards to condition, is always the best policy.
As always, if you are interested in talking to one of our Real Estate Professionals about selling your home, please contact us via e-mail or phone at 719-388-4000. We would love to help you.