Buyer Beware: Dangers of the "AS IS" Real Estate Contract

For most consumers, the purchase of their home will be the biggest and most important financial investment they will ever make. While most people are most concerned with the negotiations of the purchase price, it is imperative for the consumer to understand what the "As Is" clause in a Real Estate Contract really means. The impact these two small words can have on the business transaction is second to none! Because of the legal and financial ramifications of an "As Is" property, it is important that the Buyer investigate a property's liabilities before starting the price negotiation phase.

Does "As Is" satisfy contractual Disclosure or Notice of the Property's condition?

For many years, it has become standard for Sellers to include the term "As Is" in Real Estate Listing Agreements or Purchase Contracts, in hopes that this clause will alleviate them from their responsibilities. They intend for the "As Is" clause to be their "official notice" of the property's condition or lack of warranty, thereof. The ideology behind the phrase is two fold. First, the Seller is giving "official notice" and opportunity to the Buyer to discover any defects in the property; and second, the Seller is transferring the responsibility of finding and then accepting said defects to the Buyer.

The Discovery Phase of the Real Estate Transaction

The "Discovery Phase" of the transaction allows the Buyer the opportunity for discovery of any latent defects. In essence, allowing the Buyer to discover any problems should give them the knowledge they need to make an educated purchase decision.

Most Buyers are lured into accepting the "As Is" clause with the false sense of security they attain by hiring the services of a Home Inspector. Until recently, the Home Inspector was not required to have formal training or a license to practice his trade, therefore, anyone with little to no training could start up their own business. After years of reported fraudulent practices, Legislators stepped in and created laws that mandate the Inspector now be licensed and held to a higher accountability.

While this clause may give some protection to the Seller, regarding unknown defects, it will not protect them from the blatant misrepresentation and concealment of the property's known defective condition.

What the "As Is" Clause excludes...

Sellers can, more thoroughly, protect themselves from charges of misrepresentation and fraud when they specifically list known defects in writing. This disclosure usually remedies any future questions as to Seller's intentions. Termites and encroachment problems are two examples of what the "As Is" clause excludes, while other contractual language is strategically placed in the contract to address both of these requirements.

The following Scenario would be an example of misrepresentation and/or fraud. A Buyer has a property inspected, however, there are plumbing problems that are not obvious to the Buyer or Home Inspector. The Seller knew of this damage, and the subsequent repairs made, but he did not disclose the water damage history. In a court of law, it is probable that because the Seller did not disclose his prior knowledge, the "As Is" clause in the contract would be deemed insufficient to protect the Seller. Sometimes, even after the Seller discloses all known defects (due diligence), a Court will hold him responsible for things that go wrong after the closing.

The 1998 Albany, Schooley vs Mannion Appellate Court decision, is but one case that now provides Sellers and prospective Buyers with food for thought. The Appellate Decision, in this case, allowed that the final verdict depended on factors not included in the written contract.

Facts of Schooley vs Mannion Case

Plaintiff Schooley purchased an apartment building from Defendant Mannion through the means of an "As Is' Contract. When the tenants of the building started complaining about their high utility bills and freezing pipes, the new Landlord tried to remedy the matter by making repairs to the building. During his renovations, Schooley discovered the building was not insulated properly, even though, Mannion had allegedly represented that it was. Consequently, Schooley filed a law suit alleging Fraud and Breach of Warranty. He, also, sought punitive damages, stating the fraud was malicious and that Mannion had full knowledge that his disclosure was false. Decision: The State Supreme Court dismissed the Complaint with prejudice. Plaintiff Schooley then appealed and the Appellate Court reversed the prior decision, finding in favor of the Plaintiff.

This is just one of the many cases that prove Sellers and their Agents should be very careful in all written disclosures and verbal representations. Neither the "As Is" clause, nor the language of the "Merger" clause (found in all contracts) now offers the merits of protection they once did. The "Merger Clause" is legal terminology included in the contract to ensure that all parties understand the written contract is the entire agreement between parties. It is, also, an insurance policy that evidence, outside the contract, will not be admissible in a court of law to contradict the terms of the written agreement should there ever be a dispute.

Buyer Beware!

Any verbal representation you or your agent are counting on should be specified in the written contract. If you fail to include the correct legal language to protect your interest, the "As Is" and "Merger" clauses may nullify any future claims you may have.

Because real estate agents are not practicing attorneys, they are not able to modify the language in a contract or give you legal advice; therefore, it is imperative that you have an attorney preview the language of your Offer to Purchase before presentation to the Seller. The fee an attorney will charge for this service will not only buy you peace of mind, but may well save you future heart ache and thousands of dollars in legal fees.