7 Key Things to Consider When Buying a For Sale By Owner Home (FSBO)
You have started the search for your new home and have fallen in love with a home that is for sale by owner (affectionately known as FSBOs in the real estate world). Since FSBO properties only accounted for 11% of home sales in 2018 and FSBO sales are currently at an all-time low, it suggests that most homeowners and sellers aren’t nearly as familiar with the ins and outs of the FSBO process as a traditional sale.
On top of not understanding the FSBO process, many people also have misconceptions about what it means to buy or sell a home for sale by owner. For example, many FSBO sellers think if they sell their homes themselves that they’ll save money on the commission fee by doing just a bit of work on their side. Not only do they tend to not make more money on their home sale than an agent would, but they often wind up spending significantly more time selling the home than they planned.
If your dream home is listed as FSBO, then it is wise to consider all the pros and cons of buying a FSBO property, as well as understand the steps you will need to take before you can call the property home. On the flip side, if you plan to sell your home for sale by owner, then you need to know what to expect.
Here is 7 Key things to know when buying a For Sale By Owner Home (HSBO):
Table of Contents:
- 1. The Pros of Buying a House for Sale by Owner
- 2. The Cons of Buying a House For Sale By Owner
- 3. Things to Consider When Buying a FSBO Home
- 4. The Buyer’s Process for Purchasing a FSBO Property
- 5. Purchasing a FSBO Without an Agent Versus with an Agent
- 6. What to Know About Purchasing a FSBO Home from Someone You Know
- 7. Where to Look for Homes FSBO
1. The Pros of Buying a House for Sale by Owner
For the buyer, there are a few pros to buying a house for sale by owner. The most commonly reported pro is potentially saving money because you don’t have to pay for agent’s fees. Typically, the buyer’s agent and the seller’s agent each often get a 3% commission for the sale. Since the FSBO seller does not have to pay a 3% commission fee to a seller’s agent, the FSBO seller can sell the home for less money and may be more willing to negotiate. However, if the FSBO buyer does work with an agent, then the FSBO seller often pays a 3% commission to the buyers’ agent.
Another pro is getting to work directly with the current homeowner. Many people appreciate being able to communicate directly with the current homeowner rather than having to go through an intermediary. A pro for speaking directly to the homeowner means getting to know information you wouldn’t previously have access to, such as what the neighborhood is like or where to shop for groceries.
2. The Cons of Buying a House For Sale By Owner
We’d be remiss not to discuss the cons of buying a house for sale by owner. Most real estate agents believe there are more cons than pros when it comes to FSBOs. Case in point – real estate agents have taken classes and earned a license, which demonstrates they are knowledgeable about all the ins and outs of selling and purchasing homes. In contrast, the current homeowner likely does not have the same amount of knowledge or experience as a licensed agent.
Along these same lines, many FSBO properties are not listed at the right price. The owners do not have the resources available to real estate agents or know how to create a comparative market analysis (CMA). Since they are attached to the home, they may have a hard time seeing the home for its actual worth and be unwilling to negotiate on the cost.
Selling and buying a home involves a ton of paperwork that uses unfamiliar real estate and legal terminology. If neither party has a real estate agent, it means this massive amount of paperwork will have to be completed by them. This includes everything from negotiations to contracts. It’s daunting, to say the least. When working with real estate agents, they handle all the paperwork for you.
Additionally, homeowners do not always have the same ethics as real estate agents. For instance, the homeowner may not disclose information that s/he should, such as roof damage, because s/he wants to sell the house quickly and doesn’t want to lower the selling price. Or, s/he may hide information that would make the value of the home depreciate.
Unfortunately, sellers are required by law to disclose this sort of information, but an unscrupulous FSBO seller may not believe s/he is held to the same standards as agents. This is especially true if the seller knows there are issues, such as mold, that will have to be addressed during the real estate purchase and sale negotiations.
If you are keeping track, there are more cons than pros when it comes to buying a FSBO property. However, if you have a clear idea of what you are getting into, the pros may outweigh the cons during your FSBO buying experience.
3. Things to Consider When Buying a FSBO Home
When you are thinking about buying a home for sale by owner, there are some things you should consider. For instance, the laws regarding real estate transactions vary from one state to the next. While you may be able to go through most of the process without a real estate agent, some states require both the seller and buyer to be represented by an attorney, and other states make this a requirement even if you do use an agent. Plus, with the amount of legal paperwork required in real estate transactions, many FSBO buyers seek help from real estate attorney during the process.
It is highly recommended that buyers get a professional home inspection. A thorough inspection should reveal any potential issues in the home. Upon receiving the inspection report, you need to review it thoroughly. At this time, you can approach the FSBO seller about necessary repairs or renegotiate your purchase offer.
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Buyers will also need to get a home appraisal. If the home is appraised for less than the purchase price, then the buyer will have to cover the remainder. For example, if the purchase price in the contract for the home is $250,000, but it is only appraised for $230,000, then the buyer will need to come up with the $20,000 difference to get the bank loan for $230,000. If you don’t have that extra $20,000, as the buyer you may need to renegotiate.
Buyers should also consider asking the seller to order and pay for a CLUE (Comprehensive Loss Underwriting Exchange) document. This document provides a 7-year history of losses on personal property that have been reported as insurance claims. If the seller refuses, this is a red flag.
Unlike traditional sales with real estate agents who handle the escrow account, you will also be responsible for finding a third party to hold the earnest money, such as a title or escrow company. In short, you don’t want to simply hand over your deposit to the seller to put into his bank account.
Given the number of considerations, it is easy to see why many FSBO buyers wind up working with real estate agents. In contrast, FSBO sellers typically do not want to work with agents (which is why they are selling their homes themselves). However, most sellers are willing to work with buyer’s agents and are even willing to pay the buyer’s agent’s commission.
4. The Buyer’s Process for Purchasing a FSBO Property
There are several steps you must take when it comes to purchasing a FSBO property without an agent. The main difference is that you will have to take the initiative and do the work yourself rather than having someone knowledgeable guide you through the process.
A. Get pre-approved for a mortgage. It is wise to get a pre-approval letter before you even begin searching for a home FSBO. This shows you how much you can afford, and it shows the seller you are ready to purchase.
B. Research the property. In addition to touring the home, you should research to compare market values to get an idea of whether or not the home is priced appropriately.
C. Ask the seller important questions. When you find a FSBO property that you are interested in, there are some questions you should ask the seller. Use the following questions as a guide.
o Why are you trying to sell the home?
o How long has the home been on the market?
o Has the home been listed with an agent at any point? If so, why do you think it didn’t sell?
o Are there any problems or issues with the home I should be aware of?
o How old are the roof, heating and cooling systems, appliances, etc.?
o Have you done any major repairs or renovations? If so, did you work with a contractor or do it yourself?
o What is your favorite part of this home? What will be the hardest thing to say goodbye to in the area?
o What is included in the sale of the home (such as window treatments or moveable kitchens islands)?
D. Determine your offer. If you feel confident that you want to purchase this FSBO home, then you need to determine how much you will offer. Based on the seller’s responses to the questions you’ve asked and comparable market values, make an offer.
E. Write a purchase contract. A purchase and sale agreement is a legal document, which is typically written up and handled by a real estate agent. If you are going through the process without an agent, it is wise to hire a real estate attorney to help you draw up the papers. The purchase and sale agreement include the offer price, contingencies (such as a satisfactory inspection), the amount of the earnest money deposit, specific terms of sale (such as who pays closing costs, which items remain, etc.), and the planned closing date.
F. Follow with the contingency plan. Once you are under contract, it is time to get the home inspected and have the appraisal done. If all goes well, you move on to the closing paperwork. If there are issues with the inspection and appraisal, it is time to renegotiate.
G. Complete the sale. Once your mortgage is approved, and inspections are finished, it is time for closing. At the closing, you will pay your down payment and any other agreed-upon fees. Ownership will transfer to you – including the keys to your brand new home.
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5. Purchasing a FSBO Without an Agent Versus with an Agent
Now we arrive at the big question – what is the difference between purchasing a FSBO property without a real estate agent versus with an agent? Own Up explains it well: “If you choose to buy a house without the help of a Realtor, you need to be prepared to do all the work they could do for you.” Real estate agents will not only help you find the home you want in the area where you are looking, but they also can help you negotiate for a fair price and manage the boatloads of paperwork.
With this in mind, some buyer’s agents aren’t too keen on helping their clients with homes listed FSBO. Unfortunately, the buyer’s agent may be taken advantage of by the FSBO seller and wind up doing his share of paperwork in addition to the buyer’s. In other words, the agent winds up doing work without being compensated fairly. Therefore, properties listed FSBO tend to be headaches for real estate agents.
Additionally, many FSBO sellers end up selling their homes with the help of real estate agents because they don’t have success themselves. Many FSBO sellers choose that route mistakenly believing they will save time and money selling their home without the help of an agent. It is just the opposite. FSBO homes tend to stay on the market longer and earned an average of 23% less than homes sold by agents. As a result, statistics show a third of FSBO sellers end up listing their homes with an agent.
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6. What to Know About Purchasing a FSBO Home from Someone You Know
According to the National Association of Realtors, “Thirty-eight percent of all FSBOs […] were homes sold to people where the buyer knew the seller selling to a friend, neighbor, or family member.” Buying a FSBO home from a friend or family member can be a great option if you consider what it entails.
In real estate, this type of transaction is called a non-arm’s length transaction. Since the seller and buyer know one another, there are additional restrictions put in place for protection. For example, your mortgage lender may stipulate a specific down payment amount.
Additionally, while you may save money by not having to work with real estate agents, you may wind up having to pay significantly more in taxes. For instance, if your friend or family member cuts you a deal on the home that surpasses the $15,000 single or $30,000 married IRS yearly equity law, then the costs you saved on the home may count as taxable income.
It is also important to consider the relationship. There’s a reason why many people don’t do business with people they know. It can get messy. Depending on the relationship, the real estate transaction could make it turn sour. Ask yourself if you would feel comfortable negotiating a lower cost based on an unsatisfactory inspection or if you would feel taken advantage of later on down the road.
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7. Where to Look for Homes FSBO
Once upon a time, the way to look for homes FSBO was to peruse the streets looking for “For Sale” signs or through the newspaper. Nowadays, you have many more options for finding homes for sale by owner, such as the following websites that include both MLS listings and FSBO listings:
What is important to understand about looking for a FSBO property is that they typically don’t appear in the MLS (Multiple Listing Service). The MLS is what buyer’s agents use to find homes for their clients, but only properties represented by agents are included in the listings. However, some FSBO sellers will use a for sale by owner site that charges a fee to include their home on their website with an option for an MLS. This is why FSBO homes do appear in the MLS occasionally.
Use What You Know
Often, FSBO sellers are hoping to save money by selling their homes themselves and not because they have something to hide. They have their reasons for wanting to move, but they all have the same idea – they want to transfer ownership of their home to someone else. Since their priority is selling their home, they are usually willing to work with or without a buyer’s agent.
Ultimately, the smoothest way to buy a home for sale by owner is to work with a buyer’s agent. A buyer’s agent understands the entire process and is skilled at negotiating and managing legal documents. Your buyer’s agent can work as the middleman and make sure you get a fair deal. Plus, many FSBO sellers are willing to pay the buyer’s agent’s commission, so you don’t “lose” any money by working with a professional real estate agent.
There is always a chance that the home you fall in love with is listed for sale by owner. Hopefully, after reading this article, you will feel more confident walking through the process independently.
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