Summer 2011 Mortgage Trends
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Bargain or bust? Buying a house as-is

Mortgage Trends » Bargain or bust? Buying a house as-is

Many homes are sold "as-is" in this housing crisis. The as-is strategy benefits sellers, but whether it means a good deal or a headache for buyers is a more complicated question.

Legally speaking, as-is encompasses more than the seller's reluctance to make repairs. It also releases the seller from responsibility or liability for the home's condition. The buyer gets the property with no guarantee that it's free from minor or major problems, says Joanne Fanizza, a real estate attorney in Farmingdale, N.Y.

"What you see is what you get," she says. "The question then is: What do you see?"

Inspections reveal defects

Houses are sold as-is for a reason. Consequently, there's all the more need for the buyer to obtain a professional property inspection, says David Tamny, owner of Professional Property Inspection in Columbus, Ohio.

The inspector, Tamny says, should be chosen through a referral from someone other than the real estate agents who have a stake in the sale. Choose someone who is a "straight shooter" and sensitive to which issues are important and which issues are immaterial.

An inspection can turn up useful intelligence, but no one can discover all the problems that might plague a property. Even the best inspectors, Fanizza says, aren't magicians or soothsayers.

Repairs? Maybe

Jan Baron, a Realtor at HomeSmart Real Estate in Temecula, Calif., draws a distinction between two types of home sales that often involve as-is conditions. Real estate-owned, or REO, refers to the sale of a house owned by a bank after a foreclosure, while a short sale refers to the sale of a house by an individual owner whose mortgage balance exceeds the property value.

An REO might open up some room to negotiate repairs, especially if safety hazards or government mandates are involved, Baron says.

"If it's a bank-owned home, even if they say it's as-is and they won't do any repairs, I always ask," she says. "It's worth a try. Maybe they'll do half a loaf."

A short sale usually means no repairs whatsoever, in Baron's experience.

Sellers who aren't underwater might offer a property as-is because they don't want to pay for repairs that benefit the buyer, not themselves, says Patti Ketcham, owner of Ketcham Realty Group in Tallahassee, Fla.

"They're reluctant to fix up a house and not get any of the pleasure from that," she says.

As-is can be costly

Buyers who don't have the cash or skills to make major repairs should beware of as-is sales, Tamny says.

"Once you buy that house," he says, "it's yours and you're pretty much stuck with whatever decision you made, so you really need to be very educated and thorough about what you're doing. It's a minefield for the unsophisticated buyer."

Some buyers walk away from an as-is sale after they receive the inspection report because they're dismayed by the condition of the house or can't afford the repairs, Ketcham says. But research into the actual repair costs, combined with prioritizing which repairs should be done first and which can wait, might make the deal doable, especially if the house's price is right. Oftentimes, Ketcham says, buyers and sellers can "elephant bite" the list, nibbling away at the repairs so the project isn't overwhelming. Top priority should be anything that's "electrical in nature" because such hazards can be deadly.

Disclosures might be worthless

Many states -- New York being one exception -- require most sellers to disclose what they know about a property's condition, Fanizza says. Often, these disclosures involve a standardized form the seller fills out and gives to the buyer. In the case of an REO, the information might not be useful since the bank obviously hasn't occupied the home.

"All of the foreclosures or bank sales are strictly as-is because the banks aren't in a position to know what happened to these properties over time before they were taken back," Fanizza says.

Buyers must accept risks

The bottom line isn't necessarily that buyers should avoid any house being sold as-is, Fanizza says. Rather, "as-is" means buyers should take extra care that they understand the risks and are willing to deal with repairs immediately.

"Some of these houses can be a really good deal, so I wouldn't say anyone should run," Fanizza says. "It depends on the buyers' tolerance for the unknown, combined with their own talents and (access to) experts who can assist them."

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