How to Buy a Home for Sale by Owner

Closing a FSBO Without Representation

for sale by owner and open house signs on street
Tim Boyle/Staff/Getty Images News/Getty Images

You probably did not start out to buy a home for sale by owner. Nobody really does. But I can tell you how it's likely to happen. Let's say you are in the home buying market and have decided to buy a home. So you're driving around the neighborhood and, voila, spot a For Sale by Owner sign in a yard. It's probably a small red-and-white sign, with a hand-scrawled phone number. I did recently spot a For Sale by Owner sign that was made out of wood and engraved with the seller's name and phone number, like an architect's sign, but many For Sale by Owner signs are handmade.

You may wonder if it's worth contacting For Sales by Owners (FSBOs). Yes, write down the For Sale By Owner's phone number and call.

Myths About for Sale by Owners

  • For Sale By Owners aren't serious sellers. A small minority might be testing the waters, but the majority of For Sale by Owners absolutely do want to sell their homes.
  • For Sale By Owners are not flexible on price. Sometimes buyers think FSBOs can't afford to hire a real estate agent; they need every dime out of the deal and won't bend on price. But according to studies by the National Association of Realtors, most For Sale By Owners get less for their homes than those who list with a real estate agent. For Sale By Owners are willing to negotiate. Since they don't do it for a living, FSBOs are unlikely to be very good at it.
  • For Sale by Owners are hiding material facts by not hiring a real estate agent. FSBOs are bound to the same laws that govern those who are represented by a real estate agent. These sellers need to give buyers federal- and state-mandated (if any) disclosures, including disclosing any pertinent material facts.

    Writing the Purchase Contract

    If you are uncomfortable writing a purchase contract, call a real estate lawyer to handle that aspect of the transaction for you. Many lawyers will draw up a purchase offer for $500, give or take, and it's money well spent.

    You can also find real estate purchase contracts online to buy.

    Consider asking a real estate agent to represent you. Although a seller might not want to hire a listing agent, many FSBOs will absolutely pay a buyer's agent. Buyer's agents aren't always excited to work without a listing agent because they don't want the liability or to do what would be the listing agent's job, if the seller had a listing agent.

    Below are tips for writing the purchase contract with a For Sale by Owner:

    • Offer less than list price. The only way to go in negotiations is up; if you start out too high, you can't come back down.
    • Write contingencies. Make sure you have a way out of the transaction if you find physical defects the seller will not fix, the CC&Rs are unsatisfactory to you or your loan is not approved. Some contingencies are:
    1. Appraisal
    2. Loan approval
    3. Home inspection
    4. Clear title from seller
    5. Approval of seller's disclosures
    6. Pest inspection
    7. Insurability.
    • Earnest money deposit. Do not give your earnest money deposit to the seller. Give it to a third party such as a title or escrow company.
    • Determine who pays for what. There are no set rules. There is​ a local custom, but who pays which fees is negotiable. Figure out who will pay for transfer taxes, escrow, title fees, and so forth. You can ask a local real estate agent or title officer how to do this.
    • Prorations. You can use prorations to your advantage if you know how to figure whether a proration will be in your favor. For example, if property taxes are paid in advance, the unused portion will be a credit back to the seller. In that instance, you might ask for no prorations. However, if taxes are paid in arrears, you will want prorations because the seller will credit you.
    • Possession. Specify when you will retain possession of the property and be handed the keys. In some parts of the country, it is acceptable to expect possession on the day of closing. In other areas, possession is given the day after closing to give the seller time to move.

    Home Inspection

    Always get a home inspection by a reputable home inspector. Too many deals go south by hiring a bad home inspector. Ask for credentials and whether the inspector belongs to an association.

    If major problems are found, you can ask the seller to:

    • Fix the problem. Bear in mind the seller is not required to hire the best contractor or do a quality job. Further, many contracts specify an AS IS sale. Sellers are not required to fix anything.
    • Credit you the money to hire your own contractor after closing, which will apply toward your closing costs. Whatever you do, don't state the credit is for repairs in an addendum.
    • Lower the sales price.

    Get a Title Policy

    Some buyers think it's not worth the extra money to buy title insurance, but smart buyers will always order title insurance. The cost to fix clouds on title, or disputed easements, among other factors, can be enormous when compared to the pennies it costs to buy title insurance.

    Remember, if you have questions, seek legal and tax advice. It's typically a little bit risky to buy from a For Sale by Owner because they don't have experience selling homes. They also believe they are "saving" money by not hiring an agent when, in fact, according to NAR, they typically lose money. You know what they say about that type of thinking.

    At the time of writing, Elizabeth Weintraub, Cal BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.