The Hazard of Buying As-Is

It’s being reported on every media outlet, the internet is flooded with the good news; real estate is on the move and prices are rising. Real estate professionals are touting; “it has never been a better time to buy or sell real estate”, (they said the same thing in 2009-2010).  New agents are venturing into real estate careers and finding out they can actually make a good living working in real estate.  Late night television is flooded with “Get Rich in Real Estate”, “Buy Real Estate for Wholesale” and “Buying Tax Deeds as Real Estate Investments” info-commercials that let you buy real estate without using your money or the promise of the ability to expand your real estate portfolio at someone else’s loss and all you have to do is attend their free seminar, so they can teach you how to live the lifestyle you deserve.  It is true, you can make a good living as a real estate professional, you can actually buy property without using your money and buying tax deeds are is a great way to expand a real estate portfolio.  What isn’t told on those info-commercials, (and the follow-up training and expensive coaching), or what many real estate agents forget to warn buyers is, the underlying hazards of buying property As-Is.  It is true that real estate is a very popular investment, what we are not reminded of as much as were a couple years ago, of the impending foreclosure market yet to come from those families still living in properties that have mortgages higher than the real value of the home. There are still many families out there losing their homes to foreclosure and there are still homes sitting idle that does not have a clear exchange of title due to the poor financial exchanges that will be hitting the market. Short sales are still the norm for many sellers and buyers, and the offers being written are typically “As-Is” contracts. I must also mention the desperate “For Sale by Owner” who won’t pay commissions to a real estate company for marketing or assisting in the sale of their property who will only sell their homes As-Is.  In this economic recovery, buyers are still strapped for cash or want to save every penny they can when buying real estate.  All too often, cash strapped or penny pinching buyers are bypassing inspectors, contractors and surveyors because of the cost of their services.  Instead, they select family members or friends who have worked or are working in the construction to do inspections, evaluate repairs and I often hear the lame excuse of; “surveys don’t mean anything because land doesn’t move”.  Here are a few examples of underlying hazards that many buyers find out after they own the property and it’s now their problem because they bought the property, “As-Is.

Survey:  I once bought a house without a survey and because of my vast experience of buying and flipping houses, I thought I knew it all and my arrogance could have cost me a bundle if I were buying in our current real estate market. I had found the house and counted the lots and determined the location from the tax parcel map, made the offer and went to closing to only find out that I was a lot short and I bought the house next door to the house I really wanted to buy. The fantastic deal I thought I was getting turned out to be a dud. I had the house torn down and sold the lot to another builder and put a few dollars in my pocket and was thankful for what I did make.  I had previously made a multiple parcel purchase that I did the platting from public records on all the parcels.  After I remodeled them and got them cash-flowing, I sold them and come to find out that one of neighboring houses next to my property was actually built two feet on my side of the property line.  I had to make adjustments to the title and survey before I could close.  Surveys also mark setback lines and for the in-experienced investor who buy tax deeds for building lots, find out quickly, many parcels platted years ago do not meet current building codes.  All too often the property will sit idle until the investor can buy an adjoining parcel to meet the current building code for new construction.  Encroachments are also marked on the survey and really come into effect when neighbors begin to feud. A storage building built to close to the property boundary may have not been a problem with the old neighbor but when the new owner doesn’t like the encroachment of the shed, the owner can be forced to remove the shed.  Easements can remove a lot of land that an owner believes is their property. Utility and Right-of-Way easements can eat away a large chunks of parcels and create heartache when utility crews clear-cut shrubs planted in these areas. So the comment; “Land doesn’t move”, is exactly right but zoning, setbacks and easement measurements do.

Home Inspectors: When a buyer uses a friend or family member to do a “Free” courtesy home inspection, it will probably be worth every penny they paid for it.  A quality home inspector, in most cases, has the experience to detect underlying problems within a structure, the average construction layperson doesn’t even think about.  They typically have tools to check water volume versus pressure, electrical current flow and resistance, gas leaks and any code violations.  The inspections are not designed to discourage a buyer from buying a property, they are hired to inform the potential buyer.  Most REO’s, (bank owned property), have no disclosures concerning the property and the one disclosure they will make is the property is being sold “As-Is”.  It is not the responsibility of the listing or selling agent to disclose any assumed information about the property, so it is left with the buyer to assume all risk.  Many home inspectors are qualified to test for; lead paint, radon gas, asbestos and wind mitigation and it is the responsibility of the buyer to know what to ask for and most professional real estate agents will encourage the buyer to have the inspections made, based upon the age of the property.  The investment made to a quality home inspection can be the determining factor of whether someone is buying the home of their dreams or stepping away from a nightmare of the future.

Wholesalers, Flippers and FSBO’s: Many of these folks are practicing real estate without a license and I often caution the public about these types of transactions.  The typical wholesaler attended many of those free seminars and got sucked into paying thousands of dollars to learn how to buy real estate with no money down.  The majority of the time, these folks maxed out their credit card  buying into the training and what was created is a desperate person looking for a desperate person willing to sell their property for less than it’s worth to someone willing to pay more than its worth; what could possibly go wrong?  Some of the common wholesale terms used are: Contract Vendee, Mortgage Transfer and Lease Options. Flippers are a breed of their own and there are a couple different types.  I have many years of flipping homes and the difference between me and the average flipper is; I pull permits and have the home inspected by the building department.  Many flippers are buying homes and doing renovations under the radar of Codes Enforcement or the local building department.  I’ve witnessed houses being completely rewired, re-piped, windows and exterior doors replaced, all before the power was turned on to the home.  These types of repairs are what many refer to as putting lipstick on a pig and more often the modifications are not compliant to the current building code and more often than not, these same properties become FSBO’s, (For Sale by Owner).  The only disclosure made is the one made informing the potential buyer; the property was completely remodeled and there would be no reason to pay for a home inspection, the home is practically new.  Not all FSBO’s are flippers and very often the owner of the property doesn’t have enough equity to sell the home conventionally or they believe their home is worth more than the rest of the homes in the neighborhood.  All too often,  these folks have done improvements to their homes and are expecting dollar for dollar return on the improvement and in many cases did home improvement projects that needed to be permitted but never were.  Very often, FSBO’s have their own generic contract and do not follow the rules by a mixing security deposit into a personal account instead of with an escrow agent. I keep mentioning permits and inspections for a reason. Because the majority of professional real estate contract offers require disclosure of open permits, work or modifications done to the property that required permits or other types of mechanical modifications.  The old excuse I hear from many flippers is: they have been doing this kind of work for many years and they know the Code.  What the general public doesn’t know is the building code has changed many times over the years and as a licensed contractor, I never profess to know code.  I have a knowledge of it and rely on the current Building Code manual and paid professional building inspectors to check my work so I don’t have to proclaim, I know the Code. 

Mixed Bag of Goods: I bring this subject to light as many experienced real estate professionals have been caught looking like rookies when having sold or represented properties with a mixed bag of goods.  The Grand Fathered clause comes to mind when a buyer buys a piece of property for a specific purpose, (a dog kennel for instance), and upon the sale closing, the zoning changed and the new owner would have to apply to the zoning board for an exception to bring the property into compliance.  Time, application fees and the possibly of local neighbors speaking out against the change and the property owner could be left holding the bag of goods, of a property they can’t use for its original purpose.  Living in the country is a dream many look forward to and having the opportunity to purchase a five acre parcel, maintain it for several years and dream of riding their horses comes to a halt when the buyers find out the parcel they bought was not divided properly and the current Unified Land Development Code requires a minimum of twenty acres per parcel.  Another trip to the zoning board for an exception to policy with neighbors asking for denial of the change and the dreams, plans and riding the horses may fall into ruin.  Environmental land policies create some of the biggest headaches and are often times undetectable in title searches.  Large parcels of land may have to remain untouched and only small house footprints are allowed and livestock are not allowed in the environmental area. Properly subdivided rural lots along waterways have strict setback rules and the placement of septic tanks have to be a minimum of one hundred feet from wells and if an odd lot between two developed lots have their septic and well in place, could leave a building lot the inability to build upon. Buying a home and pulling permits on a home improvement project can open up a can of worms if the inspector finds something that needed a permit can bring a halt to the current project. The owner will have to pay double the permitting fee and provide professional plans and engineering needed for approval.  Issues of having a non-permitted addition with an encroachment could require the addition to be demolished, (and you have to have a permit to demolish), in order to bring the home into compliance along with the additional cost before the original project can be completed and a final inspection occurs.

So if you truly believe you can save a ton of cash and create a great deal by buying “As-Is” and not doing the proper inspections, remember this; everything falls back upon the current owner.  These were just a few examples of the hazards of buying As-Is, just be careful and try not stepping into one.