What You Need To Know Before Buying A Home ‘As-Is’
Homes sold as-is have the potential to provide a high return on your investment because their asking price is usually well below the market value of other properties in your local housing market.
In real estate, however, if someone sells you a lemon, squeezing out some lemonade could mean wringing out your wallet as well. Here’s what you need to look for before you buy a house as-is.
What Does It Mean To Buy A Home Being Sold As-Is?
Purchasing a house in “as-is” condition means that there are no guarantees from the seller on the home’s physical condition. The seller isn’t under any obligation to provide a Seller’s Disclosure, which means they don’t have to be forthcoming about any previously undisclosed, potentially unfavorable details that do not fall within your state’s required disclosures. By buying a house sold as-is, you’re accepting any faults that might exist.
However, “not all as-is properties are distressed,” says real estate agent Katie Messenger of Bello Dimora Real Estate Network. Financial concerns are a common reason that sellers choose to list a home as-is, removing themselves from the responsibility of repairs and the sometimes costly fixes from home inspections.
A homeowner may also choose to sell their house as-is for reasons of convenience. For example, the seller lives elsewhere and doesn’t want to deal with managing the repairs before selling.
“Other times the house is in good condition, and it’s an estate, so the executor may just want to sell the home and move on with as little hassle as possible,” Messenger says.
Foreclosure is another common reason for a home being sold as-is, especially if the previous homeowners left their home in a questionable state. If the bank now owns the foreclosed home, they don’t want to invest in improvements or repairs, so they’ll list the home as-is.
What To Look For When Buying A House As-Is
When buying a house as-is, how can you be sure you’re getting a deal and not a dud? Rocket Homes℠ broker Rosanna Rivera shares what you need to know and what you need to do before buying a home as-is.
Insist On A Home Inspection
A home inspection is an important part of any home purchase, especially when you’re buying a home as-is. “Every single home buyer in America should obtain a home inspection before buying a home,” says Rivera. “Not only is a home inspection a crucial element, but as any real estate agent will tell you, it offers disclosures that an agent can’t provide.”
What if the current homeowner refuses a home inspection? A seller might not allow a home inspection because they know – or they believe it’s likely – that the inspection would reveal serious problems that could significantly decrease the value of their property. Either way, if the seller signals this red flag, you may want to avoid the transaction altogether or press for more information.
Check out our home inspection checklist to make sure that you review all potential repairs before buying a house.
Know Your State’s Disclosure Regulations
While the seller isn’t required to provide a Seller’s Disclosure, they are responsible for disclosing any known – but perhaps hidden or previously undisclosed – defects that fall within state or federal regulations.
For example, let’s say water damage is included in your state’s disclosure regulations, and the seller – either intentionally or unintentionally – doesn’t acknowledge the extent of such damage in their home. If the need for expensive repair is revealed in the home inspection, you have the option to walk away. You could also use the issue to negotiate a lower asking price, since the seller will now have to disclose that information to any potential future home buyers should you walk away from the sale.
And if the damage isn’t revealed until after you’ve closed on the home, you may be able to file a lawsuit for damage or cost of repairs.
Disclosure laws vary from state to state. At present, lead paint is the only defect included in federal disclosure regulations.
Negotiate A Home Warranty
“A home warranty is a service contract that covers the repair or replacement of important home system components and appliances that break down over time,” says Rivera.
Getting a home warranty can be a no-brainer when purchasing a home in as-is condition. Not only can a home warranty help save you money, but it can also help you as a home buyer rest a little easier with one less expense or costly repair to factor into your budget.
Hire An Experienced Real Estate Agent
Hiring a real estate agent or REALTOR® should be one of your first steps when looking at real estate. A seasoned real estate agent can help you safely navigate the house-hunting process and avoid potential money pits.
“An experienced agent has the knowledge to explain the as-is purchase contract slowly and thoroughly so customers understand and have no fear of purchasing a property as-is,” says Rivera. “An experienced agent also can recommend service providers who can help obtain the right mortgage product, make home repairs and so on.”
A great real estate agent can also help determine the best offer for an as-is property, factoring in the cost of repairs for which the buyer is responsible. Real estate agent Nancy Brook of Billings, Montana, recommends designating 10 – 25% of your budget toward repairs when buying as-is. Discover how to find the right real estate agent to fit your needs.
Understand What’s Being Sold As-Is
It’s important to understand what part of the property is being sold as-is. It could be the entire house sale or just specific components of the property. Common areas of the property that may be listed as-is are garages, roofs, pools, fireplaces and outbuildings, such as sheds or barns.
Be sure to read and analyze what’s being sold in as-is condition. It could be something small and easily replaced, like a deck, or it could be the whole property.
Research Financing Options For As-Is Home Sales
You won’t have as many financing options buying a home as-is. Conventional mortgages – meaning mortgages not insured or guaranteed by the federal government – are available for some properties. The caveat here is that the homes can only have minor defects. Things like window cracks, cracked or damaged driveways and minor interior wall damage will usually be acceptable.
What lenders don’t want to do is finance a property in bad condition because it’s risky for them. If the condition worsens to the point where the property loses considerable value or is unlivable, the mortgagee may not want to pay back the loan.
So, to qualify for most mortgage loans, a home must meet what’s known as minimum property requirements (MPRs). MPRs are standards that determine whether a house is safe to live in at the time of purchase.
“As-is properties may not qualify for government-insured loans like FHA or VA,” cautions Brook. “To qualify for this type of loan, properties cannot have defects like roof issues, chipping paint or other major deficiencies.”
“FHA mortgages are very on-point about safety issues concerning plumbing, electric, lead paint, etc.,” says Denise Supplee, a Pennsylvania real estate agent. “Though you may believe you are getting the ‘deal of a lifetime,’ your mortgage company may not agree.”
Explore Other Ways To Afford A Home
If you’re a first-time home buyer, purchasing a home as-is might not be the best route for you. The U.S. Department of Housing and Urban Development (HUD) offers many other ways for first-time home buyers to get assistance, through classes or financial aid. You can also check out our First-Time Home Buyer Guide for popular loan options or to talk to a Home Loan Expert.
The Bottom Line: Is Buying A Home As-Is The Right Choice For You?
Buying a home as-is isn’t for everyone. If you’re a house flipper looking for a chance to profit, or if you’re handy and know how to spot and fix issues, buying as-is may work for you. For many home buyers, an as-is home is too risky.
If you decide to look at as-is properties, get a home inspection to try to avoid any unwanted surprises. Do your research on mortgage lenders to make sure you have one that will fund an as-is purchase. And hire an experienced real estate agent or REALTOR®, especially if this is your first as-is house. Learn more about how to find a real estate agent you can trust and who has experience with the as-is home buying process in our Home Buyer’s Guide today.