Homes for sale by owner may offer great bargains, but understand there will be some challenges in the process.
It may have happened to you before: You are driving down a street, and you see a lovely home for sale. However, the sign out front indicates that the house is for sale by owner, not through a real estate agent. What do you do? You may have heard that homes for sale buy owner (referred to in the industry as FSBOs and pronounced fizz-bows) could pose a number of problems for you, but should you avoid these sales altogether?
Many real estate agents will tell you that participating in a FSBO transaction is irresponsible and a bad idea. Of course, agents have a vested interest in making sure you use their services in any real estate transaction. The negotiations in a FSBO can work out well if you are careful and thorough with your research. There are advantages and disadvantages of buying a FSBO home. Here are just a few of the potential issues:
The Pros of Buying Homes for Sale Buy Owner
1. You can avoid paying real estate agent fees and commissions by purchasing directly from a home’s owner. This can be as much as 6 percent of the proceeds of a house sale and by side-stepping these, you may save a very large chunk of change.
2. You have the opportunity to have more direct contact with the homeowner during the buying process, and that can lead to better rapport and smoother negotiations.
3. You may be able to learn much more insider information about the house and neighborhood from the current owners. Who knows the area better than a current resident? The seller may be able to indicate many little-known perks about your potential neighborhood that an unfamiliar real estate agent would not know. For instance, you may get to know which grocery store nearby has the best local produce and which restaurants to frequent or avoid.
Talking to a local real estate agent about the pros and cons of FSBO homes costs nothing. Get more insight from a real estate professional here
The Cons of Buying For Sale by Owner
1. Unless one or both of you are licensed real estate agents, you and the home’s current owner are likely to be inexperienced with some of the minutiae involved in a real estate transaction. The paperwork may be more difficult and time-consuming to navigate than you thought. This could lead to extra headaches and lost time as you slowly work through the process. One of you (if not both of you) will probably want to hire a real estate attorney. At the very least, you will want to be sure that any and all documents governing the transaction are legally valid. (You can actually purchase some of these forms at select office supply or stationery stores and there are a growing number of websites where you can purchase and download legally valid forms and contracts for real estate transactions.)
2. Misunderstandings between you and the homeowner(s)/seller(s) can easily lead to legal actions. Although real estate agents are not lawyers, they do know how to negotiate the necessary contingencies that will protect you from purchasing a home that you do not want or one with unforeseen problems. Agents are licensed and regulated by the state they do business in and part of that licensing requires ongoing education to stay current on real estate regulations. Agents also carry insurance in case they make mistakes that cost buyers or sellers financial hardship or loss.
3. Some homeowners may have a tilted or even totally unrealistic notion of what their home is worth. Emotional attachments to the place may also make it hard (or even impossible) for them to negotiate price in good faith. This is one area where realtor involvement could be critical as a realtor will (and should) compile a comparative market analysis (CMA) that supports and justifies the asking price set for the home. (Of course, you could get lucky and the homeowner could have a professional prepare an independent CMA – or two or three – to justify the asking price.
4. Not all homeowners are going to be honest, especially about things that may lower the value of their home. While some homeowners may tell you that the neighborhood elementary school is going to be closed in the next three years, other homeowners won’t. Some homeowners are likely to have already raised their kids in that home and won’t be current on maters like that. They may also have only anecdotal information when it comes to local property values and crime rates. Here again, an agent is more likely to be current on these matters. An agent will also schedule a formal property inspection to uncover any issues that need to be addressed or accommodated in any transaction.
If you are a first-time homebuyer, or it has been awhile since you bought your last home, you may benefit from our free guide, "Real Estate Listings: 5 Crucial Steps When Shopping for a New Home."
Tips for Buying a FSBO Home
1. Put everything involved with your FSBO transaction in writing. Some advisors will also tell you to record all of your deal-related conversations (if you and the sellers can agree to that.) Never rely on your memory or on any verbal agreements. (You know what they say about verbal agreements…they’re not worth the paper they’re written on!)
2. If you are considering FSBO, make sure that you have the home inspected and appraised by certified professionals. Your purchase agreement should have contingencies for the inspection, appraisal and the approval of your financing. While there may be inspection requirements imposed by your lender, it’s a good idea to have a more thorough and complete inspection to look for issues like termites, radon, a sewer and water line scope, a septic and well check (if applicable), lead paint sampling, asbestos sampling and a mold inspection.
3. If the owner/seller cannot provide you with independent CMAs, get them yourself. (You may be able to negotiate reimbursement for the cost as part of the transaction.) Additionally, ask the homeowner/seller to order (and pay for) a Comprehensive Loss Underwriting Exchange (CLUE). This is a seven-year history of losses on personal property reported to the property’s insurers over the years. Watch for any claims involving damage that could have a long-term impact such as flood damage that could indicate mold issues.
4. Always require that any earnest money you are required to put out at the beginning of the process be deposited into an escrow account through a bank or other accredited financial institution. This will protect both you and the homeowner/seller from fraud. The bank or financial institution providing your funding for this purchase can assist you with the escrow account. (If you’re paying cash for the property, it’s still a good idea to establish a separate account for any earnest money.)
5. Be sure that you specify the date you will take possession of the home. That date should also serve as a benchmark for the completion of any work or the resolution of any issues spelled out (by either party) during the course of negotiating the sale transaction.
6. Even if you haven’t engaged the services of an attorney throughout the entire negotiating and purchasing process, have a real estate attorney review the closing paperwork. Closing documents can be lengthy and confusing and you certainly don’t want to legally bind yourself to something you didn’t understand.
If you are interested in a FSBO, you can still use a real estate agent for the purchase. There’s nothing stopping you from engaging the services of a buyer’s agent to help you through the process. While you may be on the hook for a few fees, paying a realtor to help you successfully buy a FSBO may be far less expensive in the long run than engaging the services of a real estate attorney. You may look at real estate listings in your area and connect with buyer's agents here.