The topic of an “as-is” or “as is” sale frequently comes up in California Real Estate, especially in Trust sales (such as where, for example, Grandma owned her Newport Beach house since the 1940s, passes away, and the children that inherit the house have no desire to perform any repairs, and want to sell the home “as-is” or “as is”).
But what is an “as-is” or “as is” sale, really?
“As is” means different things to different people. Fortunately, California law and California Real Estate contracts – including the ubiquitous (and gold standard) California Association of REALTORS® Residential Purchase Agreement – clearly define how this actually works.
Foremost, there is “as is”, and then there are “no contingencies”. Below is a brief explanation on the difference.
As-is…
Unknown to many buyers and sellers, ALL resale real estate in California (i.e. not new construction, but when buying a home from the non-builder homeowner) is sold “as is”. Let us repeat that, ALL resale real estate in California is sold “as-is”.
Per the standard contract (the California Association of REALTORS® Residential Purchase Agreement), paragraph 7(B)(1) and 25(D), it notes that the property is sold “‘As-Is‘ in its PRESENT physical condition as of the date of Acceptance.” (the bolding and capitalization are in the contract! That’s right, “as-is” is bolded already in the contract!)
However, California law very clearly still requires the seller to disclose all known issues. So, for example, you can have an active roof leak and sell the home “as-is”, but you must disclose the roof leak to the buyer. If you fail to disclose the roof leak (and you knew about it), no “as is” or “as-is” language in the world will protect you from a fraud and non-disclosure claim.
Thus it is simple – a seller must disclose all “known material facts and defects affecting the Property, including, but not limited to, known insurance claims within the past five years… and make any and all other disclosures required by Law [or contract].” Likewise, a seller’s agent must disclose “all facts known to the agent materially affecting the value or desirability of the property.”
These disclosures typically are made in the Transfer Disclosure Statement or “TDS” or Seller Property Questionnaire or “SPQ”. (Review our article here on key real estate documents including a brief overview on the disclosures.)
NOTE – you can NOT contract around the disclosure requirements. Indeed, the California Legistlature has made clear that, “the delivery of a real estate transfer disclosure statement may not be waived in an “as is” sale.” (See Cal Civ Code 1102.1; See Also Loughrin v. Superior Court (1993) 15 Cal. App. 4th 1188.)
The contract allows the buyer to perform inspections and due diligence, etc. (in addition to delivery of a title report and hazards report, which are generally done by third parties in California). Although these timelines can be shortened, see below re “no contingencies.”
Based on those inspections and documents, the buyer can then ask for repairs, credits, reductions, etc.; to which the seller can agree, counter propose a lesser offering, or reject all requests.
But the seller has NO obligation to perform any repairs.
In other words, the seller does not have to agree to any repairs, but the buyer still has the option to ask for them.
That is “as is”.
Many sellers write in “sold as-is” into their counter offers, but the same is duplicative of language already in the contract. What they are generally really trying to say is, “seller shall perform no repairs.” Again, this does not stop the buyer from asking, but helps to set an understanding at the outset of the seller’s positions on repairs.
No Contingencies….
There is a way in California Real Estate sales to make an offer “locked in”, no changing of minds, no additional timeframe for requests, or review, or inspections, etc. – that requires an upfront presentation of all the disclosure documents, title report, hazards report, etc., etc.
If a buyer agrees, upon receipt of all required disclosures prior to signing the contract, the buyer can waive all contingencies concurrent with making an offer. (i.e. the buyer is saying they have read all the disclosures, done or waived the right to inspections, and are ready to proceed – this is a separate document a buyer would sign called a “Contingency Removal” form).
If that is done correctly at the outset, then no changes or cancelation whatsoever are allowed, absent mutual agreement. If a buyer does not proceed with the purchase, they risk loosing their deposit. The buyer could still technically ask for repairs or credits, but the seller can say ‘no’, and the buyer risks loosing their deposit if they back out.
However, if additional documentation is provided to the buyer after the execution of the contract, such as a title report or disclosure, that would re-open the buyer’s right of rescission for at least three days (up to five days depending on the delivery method).
This is rare in our market in Newport Beach, Costa Mesa and Orange County, but not uncommon in other markets, such as San Jose and the bay area.
Generally “no contingencies” occurs on ‘tear down’ properties in which the buyer does not care about the condition or where the buyer is getting an absolute ‘steal’ that they simply don’t care what problems may come up.
We also see this, sometimes, in a highly competitive market where a buyer is trying to stand out and present the best possible offer for consideration above multiple other offers.
It is obviously risky for a buyer.
What About a “Non Refundable Deposit” or “Non-Refundable Deposit”…
Another common misunderstanding, there is NO such thing as a “non refundable” deposit in California real estate.
Even if you write in “non refundable” that will go nowhere in Court. Such a provision would be void against public policy, like a contract agreeing to commit a crime, you just can’t contract for something illegal or void against public policy.
There is a “Liquidated Damages” provision (whereby if the buyer breaches the contract, after contingency removal, then the seller is arguably entitled to the deposit, up to 3% of the purchase price), but that is not airtight, especially in California. (See, inter alia, Kuish v. Smith (2010) 181 Cal.App.4th 1419; Freedman v. The Rector (1951) 37 Cal.2d 16.). Liquidated damages is well beyond the scope of this article and would require discussion with legal counsel.
Sometimes a Buyer may agree to “release” their deposit to the Seller in the middle of the transaction, sometimes called having the deposit “go hard.” While this puts the money into the Seller’s pocket (vs. the escrow company’s bank account), it does not change the law on the liquidated damage provision and the Seller may well still have to give some or all of that money back.
What About an “Option Agreement” or “Option Payment”…
This may be the best ‘work around’ to seeking a non-refundable deposit.
There is a way to structure a sale as an “Option Agreement” which may allow for a non-refundable “Option Payment.” The Option Payment is the payment the Buyer made to secure a future right to purchase the home at a later date for an agreed upon price at the time of entering the option contract. If the Buyer does not proceed with the sale by the agreed upon date, then the “Option Payment” remains with the Seller. (Here is an article on option agreements in California real estate sales.)
Conclusion
There is a lot of legal paperwork involved in the purchase or sale of Real Estate. Any REALTOR® that guarantees an “as is” sale or a “non-refundable deposit” may not be familiar with real estate laws in California.
Competent representation in the purchase or sale of real estate in California is essential; while getting a good price and terms is of course a main concern, there are so many legal and tax complexities in California real estate that your real estate professional should be above and beyond a simple sales agent and be able to help you navigate the entire process.
– Devin Lucas
Author Devin R. Lucas is a Real Estate Attorney, Real Estate Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individuals, Trustees and investors in residential real estate, including leasing and select local property management.
Thinking of selling your home in Newport Beach, Costa Mesa or surrounding Orange County communities? We offer free consultations to discuss your potential home sale. (View our ‘selling your home’ section, here, including links, phone and email to set up a free consultation.)
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Sources:
Cal Civ Code 1102.1
Also Loughrin v. Superior Court (1993) 15 Cal. App. 4th 1188
Kuish v. Smith (2010) 181 Cal.App.4th 1419
Freedman v. The Rector (1951) 37 Cal.2d 16.
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REALTORS® and related Real Estate Law & Tax Considerations
Lucas Real Estate is a unique full-service residential real estate brokerage providing related residential real estate legal services and real estate tax considerations and planning, based in Newport Beach, California. | Devin Lucas is a licensed California Real Estate Attorney, Real Estate Broker and REALTOR® | Courtney Lucas is a California licensed CPA and REALTOR®
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