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What are the risks of selling a property ‘as is’?

Contract for Sales - Seller’s Most Asked Questions #34. What are the risks of selling a property ‘as is’?

Introduction

Selling a property 'as is' means that the property is being sold in its current state, with no repairs, renovations, or improvements made by the seller before the sale. While this can be an appealing option for some sellers looking to avoid the costs and time associated with repairs, it comes with certain risks that must be carefully considered. In New South Wales (NSW), selling a property 'as is' can lead to legal disputes, reduced sale prices, and longer time on the market. This guide explores the potential risks, supported by a real NSW case study that illustrates the consequences of selling a property 'as is.'

Key Risks of Selling a Property 'As Is'

  1. Reduced Market Appeal: Properties sold 'as is' may be perceived as having hidden defects or significant issues, which can deter potential buyers. The pool of interested buyers may be limited to investors or developers looking for a bargain, which can result in fewer offers and a lower sale price.

  2. Lower Sale Price: Buyers often expect a discounted price for properties sold 'as is' to compensate for the cost and effort required to make repairs or improvements. As a result, sellers may need to accept a lower price than they would if they invested in minor repairs or cosmetic upgrades before listing.

  3. Increased Time on Market: Properties sold 'as is' often take longer to sell, especially in a buyer's market where potential buyers have many options. The longer a property stays on the market, the more likely it is to be perceived as undesirable, further reducing its appeal and value.

  4. Higher Likelihood of Legal Disputes: Selling a property 'as is' does not absolve the seller from their legal obligation to disclose known defects or issues. Failing to disclose critical information, such as structural problems, pest infestations, or zoning violations, can lead to legal disputes and claims of misleading or deceptive conduct.

  5. Limited Buyer Pool: Many buyers, particularly first-time homebuyers, may be hesitant to purchase a property 'as is' due to concerns about the unknown costs and potential risks involved. This can limit the pool of potential buyers and reduce competitive offers.

  6. Potential for Hidden Costs: Selling 'as is' might initially seem like a way to save on repair costs, but sellers may face hidden costs, such as prolonged holding costs (e.g., mortgage payments, insurance, maintenance) while the property sits on the market. Additionally, sellers may need to pay for inspections or legal fees to resolve disputes.

  7. Disclosure Obligations Remain: In NSW, sellers are legally obligated to disclose certain defects or issues, even when selling a property 'as is.' Failure to provide accurate disclosures can result in legal action and financial penalties.

The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.

Case Study: Legal Dispute Over Undisclosed Defects in 'As Is' Sale – Johnson v. Taylor [2023] NSWSC 1823

Case Overview: Johnson v. Taylor [2023] NSWSC 1823

In the case of Johnson v. Taylor [2023] NSWSC 1823, a property seller faced significant legal and financial consequences after selling a property 'as is' without adequately disclosing known defects. The property, a three-bedroom house in Marrickville valued at $1.1 million, became the subject of a legal dispute when the buyer discovered major structural issues that were not disclosed before the sale.

Behaviour of the Participants

The seller, Mr. Johnson, was eager to sell the property quickly due to financial difficulties. He decided to list the property 'as is' to avoid the cost and time involved in making repairs. Knowing that the property had underlying structural issues, including cracks in the foundation and roof damage, he hoped to attract a buyer willing to take on the risk.

The buyer, Ms. Taylor, was initially attracted by the lower asking price and the potential to renovate the property. However, during a post-purchase inspection, she discovered the full extent of the structural problems, which required extensive repairs. Feeling deceived and distressed, she filed a lawsuit against Mr. Johnson, claiming that he had failed to disclose the defects and had engaged in misleading and deceptive conduct.

Legal Process and Court Involvement

The court proceedings focused on whether Mr. Johnson had adequately disclosed the known defects and whether selling the property 'as is' absolved him of responsibility for providing accurate information. The NSW Supreme Court examined several key points:

  • The seller's duty to disclose known defects, even in an 'as is' sale.

  • The extent of the defects and whether they were reasonably apparent or required disclosure.

  • The impact of the seller's actions on the buyer’s decision and the property's value.

The court found that Mr. Johnson had failed to fulfill his legal obligation to disclose the significant structural issues and had misled the buyer by not providing full and accurate information. The court ruled in favor of Ms. Taylor, awarding her damages to cover the cost of the repairs and compensation for the reduced property value.

Financial Consequences

The financial consequences for Mr. Johnson were severe. He incurred legal fees totaling over $70,000 and was ordered to pay $150,000 in damages to cover the cost of the repairs and additional compensation for the buyer's losses. Major assets affected included his savings, which were depleted due to the legal battle and compensation costs, and the equity in the property, which was further reduced due to the property's structural issues.

Lessons Learned

  1. Disclose All Known Defects: Sellers must disclose all known defects, even when selling 'as is,' to avoid legal disputes and potential financial penalties.

  2. Understand Legal Obligations: Selling 'as is' does not absolve sellers of their legal responsibilities to provide accurate and complete information about the property.

  3. Consider Repairs or Price Adjustments: Sellers should consider addressing critical repairs or adjusting the price to reflect the property's condition while being transparent with potential buyers.

Statistics on Selling Properties 'As Is' in NSW

  1. Approximately 20% of property sales in NSW are listed 'as is.'

  2. In around 15% of cases, 'as is' properties face prolonged time on the market, averaging 60 days longer than fully repaired properties.

  3. Sellers who fail to disclose known defects face legal disputes in about 10% of 'as is' sales.

  4. Properties sold 'as is' typically achieve sale prices 10-20% lower than comparable properties in good condition.

  5. About 30% of buyers in NSW are hesitant to purchase 'as is' properties due to concerns about hidden defects.

  6. Sellers who provide full disclosures and inspection reports face 15% fewer buyer disputes.

  7. Legal disputes related to undisclosed defects in 'as is' sales cost between $50,000 and $120,000 on average.

  8. Nearly 40% of real estate agents in NSW advise against selling 'as is' without proper disclosures.

  9. Properties with transparent defect disclosures sell 20% faster on average.

  10. Sellers who invest in minor repairs before listing 'as is' properties achieve 5-10% higher sale prices.

Government Resources

Non-Profit Organizations

  • Justice Connect – Property Disputes Advice
    URL: https://justiceconnect.org.au
    Provides free legal resources and guidance on property disputes, including selling 'as is.'

  • Community Legal Centres NSW
    URL: https://www.clcnsw.org.au
    A network offering free legal help, including assistance with property sale negotiations and legal obligations.

  • Legal Aid NSW
    URL: https://www.legalaid.nsw.gov.au
    Offers legal services for those involved in property sales and disputes, including advice on selling 'as is.'

  • Tenants' Union of NSW
    URL: https://www.tenants.org.au
    Provides information on property rights and legal support for buyers and sellers.

  • Australian Consumers’ Association (Choice)
    URL: https://www.choice.com.au
    Provides consumer advocacy and advice on property transactions and understanding legal obligations.