Like everyone else, when I’m reading the various ads in the real estate section, I see quite a few ads for properties being sold “as is.” The suggestion behind this phrase seems to be that this little two-word phrase absolves the seller (and the listing broker) from any responsibility or liability for existing physical defects with the property, or for the need to tell the buyer that certain things that might go awry somewhere down the line. As though it’s a legally sanctioned form of the old “caveat emptor,” or “buyer beware,” which basically puts all of the due diligence job on the buyer. While there is a (very) small grain of truth to this, it is by no means a blanket absolution for a seller regarding known defects.

So then what does this “as is” designation really mean? Resisting, of course, the flippant philosophical observation that almost everything in this world is sold “as is,” as opposed to “as it is not” or “as it might be if all our dreams and fantasies came true.”

California law requires that a seller of real property disclose in writing all conditions and problems that the seller knows or should know to exist. The means by which this is customarily accomplished is through a document called a Real Estate Transfer Disclosure Statement. As far as a seller’s disclosure duties, this is where the rubber hits the road. For those readers who like to read the actual statutes, the language and scope of this disclosure requirement is set forth in California Civil Code section 1102.1. This is a written disclosure, the format of which is specified by law, which requires a seller to go through an exhaustive list of attributes and characteristics and state whether there are any known problems, past, present or reasonably likely to occur in the future.

An “as is” clause does NOT exonerate the seller from the obligation to provide the Civil Code 1102 written disclosures to the prospective buyer, nor from the obligation to disclose known conditions that would affect the purchasing decision of the reasonable purchaser. Also covered are problems that a seller “should” know to exist. What does this mean? It means that even though the seller may not have set foot on the property for 15 years and thus have no idea that the floor boards are rotting to the core, if he or she “should know” that such problems exist, they must be disclosed. Intentionally blind eyes are no excuse.

From the buyer’s side, legally, all an “as is” clause does is put the buyer on notice that the sale is made without warranty, and that the property is accepted in the condition as it appears to a reasonably diligent inspection. As a matter of sound business practice, however, an “as is” clause should alert a prospective purchaser to the possibility of problems and the realization that your inspections should be extra diligent.

So, an “as is” clause is not an “anything goes” pass that allows a seller to dodge disclosure requirements. It is, however, a flag for the buyer that she should look extra carefully because there may be problems of neglect or inattention that a “reasonable inspection” will discover.

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The following post was originally written in response to the LinkedIn in response to the question:  In an eminent domain case, what would limit the fair market value a property owner could receive under just compensation?

As lawyers and courts like to say, the existence of such an agreement would likely be “probative but not dispositive.” Meaning that the fact that a buyer and seller had agreed in the past to such a cap would be important information for an appraiser (or other trier of fact tasked with determining FMV) to consider, but would not, by itself, resolve the issue. The justification for it would have to be considered.

ISTM you would have to analyze the conditions under which the cap was negotiated and agreed upon in the first place in order to determine whether those conditions still exist and should continue to limit the value. If the logic no longer prevails, then the cap should not continue to impact value. (Of course, if the capping agreement is contained in a option that is still in effect, and which limits the seller’s ability to sell, then it would still be relevant.)

So, for example, if the cap was negotiated in order to accommodate conditions unique to a governmental buyer (e.g., legislative limits on the use of redevelopment funds, some sort of restriction on use of tax money, etc.) and the buyer had acceded to them for some other reason (like he wanted to be the one who provided this “public service,” or there was a possible tax benefit to agreeing to such a deal, or any of a thousand other motivations) then the conditions that gave rise to the cap may no longer exist. In that case the cap would no longer seem to have a bearing on FMV. If on the other hand, the cap was based on an externally imposed market factor that would impact any user (like the existence of a conservation easement that restricts the building envelope) then it would affect FMV.

Capiche?

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