An “AS IS” addendum in a purchase contract used to be a rare event; now many sellers are an investor entity that purchased from a foreclosing bank, an investor that purchased at foreclosure, or just a risk- averse individual. Since the selling bank or investor did not live in the house, and foreclosed or bought with no or limited inspection, they are understandably unwilling to incur legal responsibility for disclosure of defects and property condition, or to agree to make repairs. Accordingly, the properties are sold with an AS IS addendum.
An AS IS purchase means that the buyer is responsible for identifying any and all defects or adverse conditions inherent in the home in making his decision to purchase. This clause also requires the buyer to waive any seller warranties. Of course, a buyer should exercise diligence prior finalizing any purchase, but an AS IS purchase creates a “buyer beware” paradigm.
The buyer should make sure the standard contract 10 day inspection period is extended. The seller will likely not object. We recommend at least 15 days to allow time for a full inspection. Once the initial inspector issues his report, it should be reviewed carefully. Any major item cautioned in the report should be further investigated, employing licensed electricians, plumbers, a/c servicers or roofers, or other professionals, as appropriate.
However, the seller is not protected by the AS IS clause if it knows of a latent material defect, as compared to an obvious, or patent, condition. Arizona law is clear on a seller’s obligation or duty to disclose known, latent material defects known by the seller and unknown to the purchaser. “[W]here the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.” (emphasis added) Hill v. Jones, 151 Ariz. 81, 85, 725 P.2d 1115, 1119 (Ct. App. 1986) Failure to disclose a known latent defect can expose the seller to liability for fraudulent concealment or false representation, even with an AS IS provision in the contract.
Hill v. Jones provides an example of a latent condition that must be disclosed if known to the seller. The buyers questioned a “ripple” in a portion of the parquet wood flooring. The sellers said it was from previous water damage, knowing that, in fact, it was caused by termites. Jones held that the prior infestation was material and should have been disclosed. “A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.
Arizona has recognized that a duty to disclose may arise where the buyer makes an inquiry of the seller, regardless of whether or not the fact is material. Universal Inv. Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 215, 619 P.2d 485, 487 (1980).
The inquiry by buyers about the cause of the ripple imposed a duty upon sellers to disclose what information they knew concerning the existence of termite infestation in the residence. The question itself elevates the condition to “material”, regardless of what the seller considered important. Lesson: ask questions, no matter how trivial.