When Does As-Is Really Mean “As-Is?”

By Ronald R. Rossi and Laurel M. Champion

Smith sold Richards a gold mine Virginia. Richards was told by Smith that the mine contained rich veins of ore.

However, the contract of sale warned, “I, however, sell it for what it is, gold, or snowballs, and I leave it to you to decide, whether you will take it at my price or not.”

It turned out there was no gold. There weren’t any snowballs either. And this, is a fact pattern that history is met with time and again.

Richards sued. Did the seller’s exculpatory clause work? Do such clauses protect sellers in the sale of real property in the real world?

Sale set aside

The Smith vs. Richards case, 38 U.S. 26, was decided by the Supreme Court more than 175 years ago in 1839. Even with the “gold and snowballs” clause, the Supreme Court set aside the sale in favor of Richards, because the seller knew there was no gold.

When we fast forward to the present, similar paragraphs, known as “as is clauses,” are frequently found and used in real property purchase contracts, including the form used by the California Association of Realtors.

Does this mean that sellers can tell buyers their house is a “gold mine” when it really isn’t? In the real world, “as is” often signals to the buyer that there is a problem, but it is also a way many sellers think they can get around telling a buyer about known problems with the property.

Buying a home (or other property offered for sale) “as is” means the seller makes no warranties or representations about the property’s condition. In addition, it means the seller will not repair any property defects.

But what if you buy a house as is and then discover that the seller failed to tell you about problems with the foundation, which will cost hundreds of thousands of dollars to repair? Does the “as is” provision mean you have no recourse against the seller and have to pay for the repairs yourself?

The answer is that it depends. It depends on whether the seller knew about the problem, whether (and what) the seller told the buyer about the problem, and whether the buyer saw or could see the problem.

Case law defines “as is” to mean that the buyer takes the property in the condition visible to or observable to him. So, if the buyer with the foundation problem saw cracks in the foundation when he looked at the property, but decided to purchase it anyway, he is going to have a hard time getting the seller to pay for the necessary repairs.

In other words, even if the seller did not tell the buyer about the foundation cracks, if the buyer saw them, or could have seen them, then the “as is” provision most likely protects the seller.

But what if the foundation is missing steel reinforcements or “J” bolts holding the house to the foundation? Will the “as is” clause be effective in this situation?

Again, it depends. The absence of steel reinforcements is not something the buyer is able to personally observe. If the seller knows the steel reinforcements are missing, he has an absolute duty to tell the buyer. Whenever a seller knows of a problem that affects the value or desirability of the property, he has a duty to tell the buyer and will not be protected by an as is clause if he fails to disclose the problem.

A seller is required by law to tell a buyer of all known defects. If he fails to do so, known as “concealment,” or if he misrepresents the problems, he will be liable to the buyer.

In some circumstances, the buyer may be able to rescind the purchase contract (which means that the court may relieve the buyer of his obligation to purchase the property and give him back his purchase costs). Or the buyer may decide to keep the property and the seller will probably be ordered to pay for the repairs.

But if the seller truly didn’t know of any problem with the foundation, the “as is” clause will protect him from liability for failure to disclose. You can’t disclose what you don’t know.

Many sellers have valid reasons for selling “as is.” For example, the seller may have recently inherited the house, never lived in it and is unaware of any problems or the home’s repair history. Another frequent “as is” situation occurs when the seller knows the property has defects but is unable to pay for the necessary repairs. As long as the seller tells the buyer about the problems, he should be protected from any future claims by the buyer for repairs of those defects.

Inspect, inspect, inspect

In the real world, when a property is sold “as is,” buyers should protect themselves by having multiple professional inspections of the property. The printed real estate forms in use give the buyer the right to inspect the property’s condition. The buyer’s agent should go over the inspection paragraphs with the buyer in all of the purchase and sale documents to make sure the client understands those inspection rights and knows what to do after inspections have been performed and reports received.

“As is” houses can be terrific bargains. Buyers, make sure that professional inspections show you are buying a potential gold mine – not fools’ gold.