Making Offers on "As Is" Properties with contingencies?

Question

Good Morning BP. Quick Question.

I've been purchasing properties for the past year and waiving all the contingencies on the agreement of sale. I hear people leave themselves different caveats in the contract that could allow them to back out of deals without losing earnest money and things like that. I'm just curious for those who do this, what kind of things are they specifying as a deal breaker? Since the properties are sold as is, what are you finding inspections that leads to you backing out?

I often hear people use this as a way to send out multiple offers, without having to run around property to property, getting the property under contract, and then doing their due diligence. Is that a viable/ethical approach?

James Wise · Answer

If it's an incredibly aggressively priced property with lots of competition you can attempt to write whatever you want in the contract, that doesn't mean the seller is going to accept it. I assume that is the type of the property you are going after as the properties that are sold "as-is" always need lots of work, which is where the opportunity lies, which of course leads to more competition.

If I see a well priced property I want to buy I make a clean offer. No questions asked, because I want to make sure I win the bid. Likewise when I am selling a property for a client that I know is going to have lots of action on it we either reject or counter anyone who puts any type of contingency in their offer as there will be no questions asked cash offers coming in. If the property is not as hot then of course you have to deal with what is going to come in....In short it is all relative to the particular deal.

Kristopher Hanks · Answer

@Dewain J. I always have a walk through clause and an inspection clause. All the properties that I have bought have been advertised sold as is. I could care less what the seller wants. If he wants to reject my offer based on inspections clauses so be it. I refuse to buy a property as is unless I have had a chance to find out what is wrong with it. As is means there is something wrong with it. If it is a bad foundation then kiss any profit or cash flow good bye. I have not had anyone tell me no when I put in walk through and inspection clauses when offering on an as is property. I walked from a property I had under contract when I found that the foundation was shifting and the seller lied on the disclosure form when it asked for any shifting in the structure specifically the foundation. I got my earnest money back because I had the inspection clause in the contract. I would rather not get myself trapped in a bad purchase by waiving my right to do due diligence.

Jessica Zolotorofe · Answer

Absolutely a viable/ethical approach. In commercial I always have a broad, any or no reason due diligence period before your deposit goes hard, like @Mark Gallagher mentioned. For residential, the standard form contracts usually provide for a 10 or 14 days inspection period, depending on your state, which you should take advantage of even if the property is sold "as is". Also, like Mark said, those standard contracts typically require you to find something that is not aesthetic or obvious prior to your making the offer in order to terminate. And that's only IF the seller isn't agreeable to fixing the issue. Some states, like Maryland, have a very specific rider that lists the inspections you are allowed to do and the reasons you can terminate in connection with the inspection contingency. Other states, like NY and NJ have a more open, leave it to interpretation kind of clause, but still really requires a good reason to terminate. Those states also have attorney review periods, though, so your attorney should know your end goal and make sure to add into a contract amendment during the review period the rights you need to protect your interests accordingly. I often put in the general "due diligence" contingency in all contract amendments for my clients...sometimes it flies, sometimes not so much, but we figure out a way to work around it.

Also, "as is" still provides you with the opportunity to learn what exactly that means. You don't know what the then condition is without inspections, so even as is contracts should have inspection contingencies, so you can assess whether it still makes sense for you to purchase. They also typically have certain reps and warranties built in that have to be true for you to be obligated to close, like the major systems are in good operable condition, the roof is not leaking, there is no mold or lead paint, no high levels of radon, etc. If your concern is really with the condition of the property and not just getting out because you couldn't find an end buyer to wholesale to, then as is or not, spend the extra few bucks to have some thorough inspections done. As an investor, as you know I'm sure, time is money. The longer it takes you to deal with the unexpected, or have to pull permits, etc. the more it eats into not only your actual reno budget, but longer you are carrying the property-paying taxes, insurance, utilities, etc. with no income. Hope that helps! Good luck!

Mark Gallagher · Answer

@Dewain J.

In my opinion, if you're an investor making as-is offers, something drastically wrong needs to be wrong with the property for you to be walking away. Examples would be that the property is actually on a septic system when you thought it was connected to public sewer, encroachment issues, sinkholes, etc. Anything else that's visible to the eye should not be grounds for terminating an as-is offer.

That all being said, if you simply put 10 days due diligence, you should be able to terminate for any reason under the sun. Contact an attorney for further clarification.

Jessica Zolotorofe · Answer

I just took a really quick look at PA contracts, so don't quote me on this and definitely consult with your lawyer, but there is a whole section on inspections you can opt to do, and if you find any issues with those, you can terminate. They include zoning, radon, environmental, wood, water, etc. The seller also represents that there are no title issues or municipal violations in the form, so those would be other grounds to terminate if you found that to be untrue and the seller wouldn't cure. This is all assuming you actually use the realtor's form of contract.

If your attorney drafts one, or if you are in another state that has attorney review, make sure you have your lawyer address structural, roof, etc. as contingencies. Obviously your contractor can't make it to every property, but if you are under contract and have a deposit up, you should have the inspections done asap and calendar alerts for the contingency expiration dates to make sure you do not miss anything.

The unfortunate part is that PA doesn't have the 3 day attorney review period that other states do, so what I would do is have a lawyer draft a form contract for you that you can use on all of your offers (that you intend to hold, it would be different for other types of transactions, of course), which provides you with the extra protections you are looking for.

Devonne Miller · Answer

Great Question @Dewain J. and all the answers were great and very insightful , I too had questions about contingencies in purchase and sale agreements. This forum was very helpful

Mark Gallagher · Answer

@Kristopher Hanks

Those are the homes I sell and buy.. so people can stay away from those I'm buying, but not those I'm selling ;)

Kristopher Hanks · Answer

@Mark Gallagher No argument there, because those are the types of homes I buy. I would never steer anyone away from them, unless they are trying to buy the same home I want, lol.

Mark Gallagher · Answer

@Kristopher Hanks

In my area, as-is as it relates to "regular" sales just simply means someone isn't fixing anything for FHA, etc. Maybe 1% of as-is sales really have something significantly wrong that someone isn't fixing. I just wanted to be sure people reading didn't think they should stay away from as-is sales.

Mark Gallagher · Answer

@Kristopher Hanks

As-is does not always mean there is something wrong with a property. Plenty of institutional sellers sell properties as-is all the time and there is absolutely nothing wrong.

Making Offers on "As Is" Properties with contingencies?

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