Tips for Buying a Home for Sale by Owner
Closing an FSBO Without the Help of an Agent
Most people don't start out with the intention of buying a house that's for sale by its owner, but these properties pop up now and again in the real estate market.
You might be driving around a neighborhood that you like and you spot a sign in the yard: "For Sale by Owner!" You might come across one in your local newspaper's real estate classified section. If you're working with an agent and she's particularly diligent, she might even have come across one while searching for something in your price range that meets your specifics.
In any case, there it is. At first glance, you love the property. Is it something you should follow up on or should you steer clear? You can follow up without reservation if you keep a few things in mind. Buying an FSBO is just like buying any other property ... sort of. But someone is going to have to assume the responsibilities of that missing listing agent.
Do You Need an Agent?
The seller obviously doesn't want to hire a listing agent because he's waded into this on his own. But many owners are willing to pay a buyer's agent. If you already have an agent, she can contact the buyer on your behalf. If you don't have one yet, consider finding one who's willing to take on the job.
Buyer's agents aren't always excited to work on FSBOs without a listing agent because they don't want the liability, or because it means more work for not necessarily more money. When only one agent is involved, that person often ends up doing the work of both sides.
As for your needs, having an agent can be extremely helpful throughout the entire process, and the seller typically pays the agent's commission, so there's no reason not to try to work something out with someone. Why should you go it alone if you don't have to?
Writing the Purchase Contract
A house sale begins with a purchase contract.
If you're uncomfortable writing one yourself and you don't want to enlist the aid of an agent, you can call a real estate lawyer to handle that aspect of the transaction for you. In fact, you should have an attorney waiting in the wings anyway to make sure the entire transaction is accomplished legally and all your rights are protected.
Many lawyers will draw up a purchase offer and other documents for a reasonable fee, and it's usually money well spent. You can also find real estate purchase contracts to buy online, but you might be better off hiring a professional if you don't have the expertise to complete the forms correctly. This probably isn't a time to be penny wise and pound foolish.
If you do decide to take care of documents yourself, keep a few things in mind:
- Offer less than list price. That way, negotiations can only go up. If you start out too high, you can't come back down.
- Write in contingencies. Make sure you have a way out of the transaction if you find physical defects in the property that the seller won't fix, if the CC&Rs are unsatisfactory, or if your loan is not approved, among other issues. Some common contingencies include a satisfactory appraisal on the home, loan approval, a satisfactory home inspection and pest inspection, clear title from the seller, approval of the seller's disclosures, and insurability. If any of these factors cannot be met, the contract becomes null and void ... if you included the proper contingency clauses.
- Do not give your earnest money deposit to the seller. Give it to a third party to hold for you, such as a title or escrow company. Normally, the listing agent would place it in her escrow account for safekeeping. You don't want it going into the seller's checking account instead. What if he spends it and the deal falls through due to one of those contingency clauses? Or what if he just refuses to return it to you? You'd be out the money, at least until such time as you could take him to court and force it out of him. But you're trying to buy a house, right? Do you really want to tie up your cash like that right now?
- Determine who pays for what. There are no set rules here. Who pays for which fees is negotiable. Figure out who will pay for transfer taxes, escrow, and title fees. If you're an excellent negotiator, all the better. This is probably something you can take care of on your own.
- Use prorations to your advantage. Figure out whether any given proration will be in your favor. For example, the unused portion of property taxes is typically a credit back to the seller if they're paid in advance of the sale. In this case, you might want to ask for no prorations. But if the taxes are paid in arrears, the seller will credit you so you'll want prorations.
- When will you take possession? Specify when the seller will hand you the keys and you'll take possession of the property. It's acceptable in some parts of the country 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.
About That Home Inspection
Always get a home inspection by a reputable home inspector. Too many deals go south when a bad home inspector is involved. Ask for credentials and ask the inspector whether he belongs to an association, then follow up on both to confirm.
You have a few options if major problems are found with the inspection. You can ask the seller to:
- Fix the problem, but bear in mind that he's not required to hire the best contractor available or ensure that a quality job is done. And many contracts specify that the property is being sold "as is," so check yours. In this case, the seller is not required to fix anything.
- Credit you the money to hire your own contractor after closing. This amount will apply toward your closing costs. But whatever you do, don't state in an addendum that the credit is for repairs.
- Reduce the sales price, typically by an amount commensurate with the anticipated cost of the repairs.
Get a Title Policy
Some buyers think it's not worth the extra money to buy title insurance, but a smart buyer will always do so. The cost to fix clouds on a title or to dispute easements can be enormous when compared to the pennies it costs to buy insurance.
Some Myths About FSBO Deals
- FSBOs aren't serious sellers. Not true. A small minority might be just testing the waters, but the majority absolutely do want to sell their homes.
- FSBOs are not flexible on price. Some buyers think FSBOs aren't hiring agents because they can't afford to, that they need to take every dime out of the deal so they won't bend on price. But according to studies by the National Association of Realtors, most For Sale By Owners actually get less for their homes than those who list with a real estate agent. FSBOs are typically willing to negotiate, but they might not be very good at it if they don't do it for a living.
- For Sale by Owners are hiding material facts. FSBOs are bound by the same laws that govern those who are represented by a real estate agent. These sellers must give buyers federal- and state-mandated disclosures, if any, including disclosing any pertinent material facts.
- You don't have to get pre-approved for a mortgage. This is always helpful whether you're buying an FSBO or going a more traditional route. It might not be required, but it helps to define your price range, and all sellers will appreciate knowing that you're already approved to proceed.
The Bottom Line
Remember, seek legal and tax advice if you have any questions. It's typically a little bit risky to buy an FSBO when these people don't have experience selling homes. They also believe that they're "saving" money by not hiring an agent when, in fact, they typically lose money according to the National Association of Realtors.
At the time of writing, Elizabeth Weintraub, Cal BRE # 00697006, was a Broker-Associate at Lyon Real Estate in Sacramento, California.