Today we are going to dive in and explain everything you need to know about “As Is” when buying or selling a home.

With the waning of the property-buying frenzy that characterized the COVID era, and a rise in interest rates, the equilibrium between buyers and sellers has been restored. This juncture presents an opportune moment to revisit the impact of a property’s condition on its sales price during various stages of a real estate transaction.

A logical point of departure involves delving into the significance of the Seller’s Disclosure Notice, the interpretation of “As Is,” the examination clauses outlined in Paragraph 7 of the One to Four Family Residential Contract (Resale), and the utilization of the option period for potential sales price renegotiations following property inspections.

Seller’s Disclosure Notice

While the Seller’s Disclosure Notice stands as a distinct document from the sales contract, it is no coincidence that it is an integral part of Paragraph 7 concerning Property Condition. Texas Property Code Section 5.008 mandates the Seller’s Disclosure Notice, which outlines the minimum property condition information a seller must reveal to a buyer in a residential sales transaction, including any past incidents of flooding.

Aligned with the statutory provisions, the Texas Real Estate Commission (TREC) has devised a Seller’s Disclosure Notice. Several real estate trade organizations and brokerages provide Seller Disclosure Notices that surpass the statutory requisites.

Paragraph 7B of the sales contract specifies whether the buyer has received the notice before contract signing, is yet to receive the notice, or if the seller is exempt from providing the notice as per specific property code exemptions.

In instances where the buyer has not received the notice, the seller is granted a negotiable timeframe for delivering it. The buyer is then afforded the liberty to terminate the contract within seven days of receiving the notice. 

This structure within Paragraph 7B arises from the contract being categorized as an “As Is” contract (this concept will be elaborated shortly), with the understanding that pre-contract knowledge of the property’s condition influences the buyer’s valuation of the property. The seven-day period allows the buyer to review seller disclosures, possibly prompting renegotiations of price or repairs based on newfound information. If consensus is reached during this period, an amendment to the sales contract is executed. In the absence of an agreement, the buyer retains the right to terminate the contract and receive their earnest money back.

The Seller’s Disclosure Notice serves not only as a negotiation tool for property sales prices but can also sway a buyer’s decision to purchase the property altogether. Sellers should be cautious, as incomplete property condition disclosures might lead to legal repercussions from buyers months or even years after the sale.

Best Practices for Sellers Disclosure

It’s crucial to acknowledge that Texas law obliges sellers and real estate agents to disclose any known significant defects on the property, irrespective of whether these are listed on the Seller’s Disclosure Notice. Real estate agents are keen to avoid legal entanglements, and as such, a few best practices regarding the Seller’s Disclosure Notice are as follows:

• Agents should refrain from assisting sellers in filling out the form; sellers in need of assistance should consult a real estate attorney or employ online programs.
• Agents should provide sellers with all available Seller’s Disclosure Notice forms in their market area, allowing the seller to choose the appropriate one.
• Agents should emphasize the importance of truthful and complete form completion to their clients.
• In cases where an agent is aware of a material defect that the seller hasn’t disclosed, the agent is legally obligated to inform the buyer.

Paragraph 7D: “As Is” Provision

The phrase “As Is” is encapsulated within Paragraph 7D, titled “Acceptance of Property Condition.”

The contractual language defines “As Is” as the current state of the property, encompassing all defects and without warranty, barring the warranties of title and those stipulated within the contract. For buyers, discerning the property’s condition by perusing the Seller’s Disclosure Notice, conducting property walkthroughs to evaluate its visible condition, and subsequently engaging in contract negotiations, are pivotal steps that dictate the price they are willing to pay for the property.

Paragraph 7D extends two alternatives to buyers: (1) acceptance of the property in its current condition; or (2) acceptance of the property under the stipulation that the seller, at their own expense, completes specific repairs and treatments as delineated.

Agents and their buyer clients must comprehend that the space designated in Paragraph 7D(2) isn’t an all-encompassing provision applicable to any future inspection findings (more on inspections shortly). Instead, it’s tailored for specific issues highlighted in the Seller’s Disclosure Notice as non-operational or for visible signs of disrepair observed during property viewings.

It’s also imperative for agents and buyers to grasp that this paragraph doesn’t preclude the execution of inspections in accordance with Paragraph 7A, nor does it obstruct negotiation based on inspection outcomes.

To illustrate appropriate utilization of 7D(2), consider the scenario where the Seller’s Disclosure Notice indicates non-functional HVAC equipment. A buyer could submit a contract outlining in Paragraph 7D that the seller must rectify or replace the HVAC system prior to closing. The seller, given their prior acknowledgment of the issue, might counteroffer with a higher price, factoring in the repair cost.

Paragraph 7A: Inspection Provision

According to Paragraph 7A of the sales contract, sellers are mandated to permit buyers and their chosen inspectors (licensed by TREC or legally sanctioned inspectors such as plumbers, electricians, or termite inspectors) access to the property during reasonable hours for inspections. The seller must also maintain utility services while the contract remains active to facilitate inspections. Written approval from the seller is only requisite for hydrostatic testing.

All inspection expenses are the responsibility of the buyer. The buyer’s entitlement to conduct inspections isn’t contingent on the option period. This right persists whether the buyer procured an option period or whether it has expired.

Option Period and Price Renegotiation Post Inspection

The option period empowers buyers with a bargaining chip for reevaluating the sales price post-inspection, warranting that buyers pay an option fee for an option period as defined in Paragraph 5 of the contract. During this period, it’s recommended that buyers conduct inspections with sufficient time remaining to renegotiate the price or request seller-funded repairs should the inspection report unveil latent property issues not discernible upon initial inspection or disclosed by the seller. This becomes especially relevant when a buyer aims to modify the sales price under an “As Is” contract.

In an “As Is” contract, the buyer’s offer is founded on the property’s present condition. Typically, the seller’s listed price reflects the property’s value in its existing state. Sellers reasonably presume that the buyer’s offer is based on the information they’ve divulged in the Seller’s Disclosure Notice, coupled with the buyer’s observations during the property walkthrough. 

Consequently, sellers might be hesitant when a buyer endeavors to renegotiate contract terms grounded in inspection report findings that were previously disclosed or readily observable, given that the initial offer was premised on the property’s current state.

Crucially, parties and their agents should recognize that under an “As Is” contract, renegotiation of the sales price or solicitation of seller-funded repairs should be confined to issues that weren’t previously disclosed or immediately noticeable. This is the added value that an inspection report imparts to the transaction.

During the option period, if new issues surface, the buyer has the leeway to renegotiate contract terms. While sellers aren’t obligated to acquiesce to price reductions or repairs, they risk jeopardizing the deal if the buyer decides to back out, prompting a refund of their earnest money. In a competitive market, this might not have been.