Most people don't start with the intention of buying a house that's for sale by owner (FSBO), but these properties pop up regularly in the real estate market. Should you follow up on these properties or steer clear? Here's what to keep in mind if you're considering buying a house for sale by owner.
- Having an agent can be extremely helpful throughout the process, and the seller typically pays the agent's commission.
- Many lawyers will draw up a purchase offer and other documents for a reasonable fee.
- Offer less than list price, check what comparable properties in the area are selling for, and be prepared to negotiate.
- Give your earnest money deposit to a third party, such as a title or escrow company.
Do You Need an Agent?
The seller obviously doesn't want to hire a listing agent, but many homeowners are willing to pay a buyer's agent. If you already have an agent, they 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 and it may mean 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 work with someone. Why go it alone if you don't have to?
Writing the Purchase Contract
A purchase contract establishes the terms of the sale between you and the seller. If you're uncomfortable writing one yourself and you don't want to enlist the aid of an agent, 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 to make sure the 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 online, but you might be better off hiring a professional if you don't have the expertise to complete the forms correctly.
If you decide to take care of documents yourself, keep the following advice in mind.
Offer Less Than List Price
That way, negotiations can only go up. If you start too high, you can't come back down. It can also help to nail down in advance whether the list price is reasonable or a pipe dream. Check what comparable properties in the area are selling for and be prepared to negotiate.
Write in Contingencies
Have a way out of the transaction if you find physical defects in the property that the seller won't fix 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.
Don't Give Your Earnest Money Deposit to the Seller
Give your earnest money deposit (the money you submit with your purchase offer) to a third party to hold for you, such as a title or escrow company. Normally, the listing agent would place it in their escrow account for safekeeping. You don't want it going into the seller's checking account. What if the seller spends it and the deal falls through due to one of those contingency clauses? Or what if they refuse to return it to you? You'd be out the money, at least until you take them to court.
Determine Who Pays for What
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. You can probably take care of this on your own. Similarly, you can 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 so you can 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. It's not unheard of, either, for the seller to have relocation issues, particularly if the deal came together quickly. Consider whether you're willing to let the seller rent from you for a period of time after closing.
About the 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 they belong 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 they're not required to hire the best contractor available or ensure that a quality job is done.
- 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.
Some buyers think it's not worth the extra money to buy title insurance, but a smart buyer always does. The cost to fix title issues or dispute easements can be enormous compared to the pennies it costs to buy insurance.
Some Myths About FSBO Deals
There are some misconceptions about buying a house for sale by an owner. Here are common myths and why they're wrong.
- FSBOs aren't serious sellers: This isn't true. A small minority might be testing the waters, but most absolutely want to sell their homes.
- FSBOs aren't flexible on price: Some buyers think FSBOs aren't hiring agents because they can't afford to and 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 represented by a real estate agent. These sellers must give buyers federal- and state-mandated disclosures, if any, including revealing any pertinent material facts.
- You don't have to get preapproved for a mortgage: This is helpful whether you're buying an FSBO or going a more traditional route. It might not be required, but it helps define your price range and all sellers will appreciate knowing that you're already approved to proceed.
Remember, seek legal and tax advice if you have any questions. It's a little risky to buy an FSBO when the sellers don't have experience selling homes, but if you work with an agent and/or an attorney to ensure everything's legally sound, you're in a good position to move forward. Also remember to calculate the monthly mortgage payment that best fits your budget before negotiation with an FSBO.