The Practical Effect of Agreeing to Buy Real Estate "AS IS"

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Many boilerplate/form/template contracts providing for the sale of Texas real estate (including the TREC promulgated form 20-11) provide that the buyer will accept the property "in its present condition." See Section 7(D) of TREC Form 20-11.  Other real estate purchase and sale agreements expressly state that the Buyer is purchasing the property "AS IS."  

What does this mean, and what are the possible legal implications of buying Texas real estate on an AS-IS basis?

The Texas Supreme Court has held that when the terms of a Purchase and Sale Agreement (Earnest Money Contract) provide that the sale is one for the property in its "AS IS" condition, the buyer will be prevented from holding the seller liable if the thing sold turns out to be worth less than the price paid. Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 161 (Tex. 1995).  See also, e.g., Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 161 (Tex. 1995) (refusing to hold a seller responsible for alleged misrepresentations when the buyer was a sophisticated real estate purchaser who agreed to purchase the property "as is" and assumed the risk of properly determining the property's value); Isaacs v. Bishop, 249 S.W.3d 100, 110 (Tex. App.-Texarkana 2008, pet. denied) (suggesting the appellee was negligent for failing to read a promissory note, but still upholding rescission based on fraud by the appellant).   

That is, the risk of the property being different than the Buyer believed it was before the transaction is consummated is borne by the Buyer. By agreeing to purchase something "as is," a buyer agrees to make his own appraisal of the bargain and to accept the risk that he may be wrong. Mid Continent Aircraft Corp. v. Curry County Spraying Serv. Inc., 572 S.W.2d 308, 313 (Tex.1978). The seller gives no assurances, express or implied, concerning the value or condition of the thing sold.See Tex.Bus. & Com.Code § 2.316(c)(1) ("as is" agreement excludes implied warranties in contract covered by UCC).

Texas courts have also interpreted contract language stating "in its present condition" to be an agreement to purchase the property "as is." See Cherry v. McCall, 138 S.W.3d 35, 39 (Tex. App.-San Antonio 2004, pet. denied) (construing "in its present condition" as an "as is" agreement); Larsen v. Carlene Langford & Assocs., Inc., 41 S.W.3d 245, 251 (Tex. App.-Waco 2001, pet. denied) (construing to be "as is" certain contract language stating that "[b]uyer accepts the Property in its present condition. Buyer shall pay for any repairs designated by a lender"); Fletcher v. Edwards, 26 S.W.3d 66, 75 (Tex. App.-Waco 2000, pet. denied) (construing "in its present condition" in earnest money contract to be an agreement to purchase the property "as is"); Smith v. Levine, 911 S.W.2d 427, 431 (Tex. App.-San Antonio 1995, writ denied) (construing "in its present condition" to be an agreement to purchase the property "as is"); see also Sims v. Century 21 Capital Team, Inc., No. 03-05-00461-CV, 2006 WL 2589358, at *2 (Tex. App.-Austin Sept. 8, 2006, no pet.) (mem. op.) (construing "in its current condition" as the plain-English equivalent to "as is").

Thus, a valid "AS IS" clause will often work to the advantage of a Seller and the detriment of the Buyer.  

As with most legal topics, however, this is not universal -- especially where fraud is used to induce the Buyer to enter the "AS-IS" agreement:

A buyer is not bound by an agreement to purchase something  "AS IS" that he is induced to make because of a fraudulent representation or concealment of information by the seller. Weitzel v. Barnes, 691 S.W.2d 598, 601 (Tex.1985); Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 240 (Tex.1957); see Cockburn v. Mercantile Petroleum, Inc., 296 S.W.2d 316, 326 (Tex.Civ.App.—Dallas 1956, writ ref'd n.r.e.). A seller cannot have it both ways: he cannot assure the buyer of the condition of a thing to obtain the buyer's agreement to purchase "AS IS", and then disavow the assurance which procured the "AS IS" agreement. Also, a buyer is not bound by an "AS IS" agreement if he is entitled to inspect the condition of what is being sold but is impaired by the seller's conduct. A seller cannot obstruct an inspection for defects in his property and still insist that the buyer take it "AS IS". In circumstances such as these an "AS IS" agreement does not bar recovery against the seller.

 Prudential Ins. Co. of Am. v. Jefferson Assocs., 896 S.W.2d 156, 161 (Tex.1995).