“As Is” Clause in the Agreement of Purchase and Sale – Comprehensive Analysis

Real Estate Law
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“As Is” Clause in the Agreement of Purchase and Sale

The clause “as is” in a real estate transaction refers to a disclaimer to the purchaser that the seller is not providing any warranties or guarantees with respect to the condition of the property. Therefore, it is up to the buyer to inform themselves about the property and the risks associated buying such a property. Typically, though not necessarily, the property needs extensive repairs and/or sold for only land value. If you are considering buying a “as is” property understanding the risks and implications of the clause can be critical.  In this article we explore advantages and disadvantages for both the buyer and seller of an “as is” property and make suggestions how to protect yourself.

Advantages of purchasing an “as is” property

One of the biggest advantages of buying an “as is” property is the lower price tag that is often associated with it. The buyer may be able to purchase a property in a better neighbourhood or a larger square footage property that they would not be able to afford had it not been sold in “as is” condition.

In some cases, the vendor would have an inspection report ready for the buyers to let them know what deficiencies need to be addressed after closing. Having an inspection report ahead of time allows the buyer to make an informed decision as the buyer would be able to estimate the cost of repairs that the property.  Should an inspection report not be available at the time of purchase, the buyer could order an inspection report while waiting for closing, with vendors consent, or shortly after closing. Once the buyer finds out the extent of repairs, the buyer can budget accordingly.

Another advantage for the buyer is the Lower price point of the property being purchase. If the buyer is buying a property for lower price, it allows the buyer to build equity while making repairs in their own timeline.

Disadvantages of purchasing an “as is” property

If an inspection report is not available prior to putting together an offer, and/or the vendor does not agree to inspections prior to closing, the buyer may be buying a property with hidden defects or problems that may not be immediately known. The buyer should consider the cost associated with the visible repairs as well as budget towards defects that will only be known after the inspection.

Not visible defects could result in substantial costs to the purchaser. Most common unknown defects can include foundation, electrical and plumbing. Depending on the extent of repairs required, the property, after the cost of repairs, may end up costing more than had the buyer bought a house that did not have an “as is” clause in the APS.

Another drawback to an “as is” property is its financing. The bank often sends out an appraiser to confirm the value of the property. If the appraisal does not confirm the value of the property, the buyer would have to contribute more funds in order to the transaction. Furthermore, traditional financing options may be limited, as banks are more conservative when it comes to lending on “as is” properties. Should the buyer not qualify for a mortgage through the bank, they would have to seek financing through alternative lending.

Should the buyer require to finance their new property through alternative lending, the buyer should be aware of higher interest rates and potential fees charged by the lender.

Insurance is another reason why buying an ”as is” property could  be challenging. Home insurance brokers will ask questions about the condition of the property when issuing a policy and some insurance companies may not be willing to insure an “as is” property without an inspection.

Advantages of selling “as is” property

For a vendor, selling a property “as is” can reduce the amount of time prior to listing the property. The seller does not have to prepare the property for sale by decluttering, undertaking substantial repairs, staging, photographing, all tasks that would take up time and as such delay listing of the property.  The same tasks would also require an upfront substantial financial investment on behalf of the seller. However, some sellers do not have financial resources at the time of listing the property to address all the repairs and therefore listing a property “as is” could be beneficial for them.

Another benefit for the vendor to sell property “as is” is transfer of liability to the purchaser and it would be the purchaser who must deal with defects related to the property.  Disclosing to the buyer that the property is being sold in “as is” advises the buyers to tread cautiously. While “as is” clause does reduce the number of parties who may be interested in the property, the parties who are interested are specifically looking for an “as is” property.

Disadvantages about selling “As is” property

Depending on the market conditions, the sellers may face some difficulties selling “as is” property. When the market is down, lower priced properties are usually most attractive to the buyers. However, pricing “as is” property in a down market would require a more enticing price tag to encourage offers. Meaning the vendor would have to lower the price substantially to compete with “lower priced” properties.

The other drawback is the smaller pool of potential buyers. Not every buyer will be willing to take on liability and financial burden that comes with repairing an “as is” property. As such, the pool of people interested and who can invest time and money will be smaller. However, “as is” properties also tend to attract builders who do not intend to renovate but rather wish to demolish the property. The draw back with selling an ”as is” property to a builder buyer, is the location of the property . If your property is situated in a neighbourhood that does not see a lot of builder redevelopment either due to smaller lot sizes or stringent city building permit approvals, finding a builder buyer could be challenging.

The importance of an inspection report when purchasing an “ as is” property

When buying a property is it highly advisable to have an agreement of purchase and sale conditional on inspection to ensure that the property purchased does not contain any major defects. When buying an “as is” property is it crucial to have that inspection done. The vendor may not accommodate an inspection prior to closing and as such the buyer is purchasing a property with unknown number of defects or the extent of each defect.

Should the seller allow the buyer to conduct an inspection prior to closing, it is important to remember that the seller is under no obligation to make any repairs or abate the purchase price should the inspection reveal defects.  The purpose of the inspection is to advise the buyer of potential issues or defect and to budget for them accordingly.

Should the seller provide an inspection report, it is buyers choice if they wish to rely on the report as it could be dated or incomplete. Additionally, there is often a disclaimer that the report is for informational purposes only and should not be relied upon.

It is also recommended that the buyer engage the services of specialist when it comes to electrical and plumbing inspections. The traditional inspection rarely examines electrical and plumbing issues. Should defects be found with plumbing or electrical, the price associated with

Does buying as “as is” property mean that title to the property will also be “as is”?

To alleviate some of the stress associated with buying an “as is” property, the buyer should consider conducting extensive title and off title searches. While the vendor does not make any representation or give warranties as to the condition of the property, the vendor is required to provide clean title to the property.  The buyers’ lawyer should conduct the necessary searches to ensure that the title is clear as required by section 10 of the agreement of purchase and sale.

When purchasing a property, the buyer in most cases will purchase title insurance to protect themselves as well as the bank against defect on title. On the property that is being sold “as is”, title insurance may not cover some defects it would on a non “as is” property. Therefore, title and off title searching becomes even more important.

Understanding “as is” clause in the agreement of purchase and sale is fundamental for both buyers and sellers. There are both advantages and disadvantages for buying and selling an” as is” property and knowing them will allow the buyer as well as the seller to make an informed decision. It is essential to seek professional advice from a real estate lawyer as well as hire the necessary inspectors when considering “as is” property. Having all the facts about the property will allow you to make informed decision and ensure that the process will run smoothly.

Are you thinking about buying or selling an “as is” property? Understand the risks and how to protect yourself! Consult with a professional real estate lawyer at MBLAW today. Our experienced team will guide you through the complexities of “as is” transactions, ensuring your interests are safeguarded. Do not navigate this journey alone. Reach out to MBLAW for expert legal advice and peace of mind.

Disclaimer

The Content is current as of its original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose. Content is provided solely for informational purposes. It is not intended to be legal or other professional advice or an opinion of any kind. You are advised to seek specific legal advice by contacting members of MBLAW (or your own legal counsel) in relation to your specific legal issues.

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