In an era of ever-escalating home prices, the option of purchasing a For-Sale-by-Owner (FSBO) property seems attractive for cash-strapped home buyers. Most consumers make the assumption that the property will be offered at a lower price than it is might otherwise be listed for on the market. Without the involvement of real estate agents, there will be no commission to pay, either by the buyer or the seller of the property. And finally, buyers who consider themselves master negotiators see the absence of an agent as an opportunity to put their skills to the test and drive down the price even further.
While all of these assumptions may be true–to some degree–it’s also just as likely that the opposite might be true: That an owner will overestimate the value of a home, and try to charge more than the market price; that errors or omissions in the transaction which might have been prevented by an experienced real estate professional might far outweigh the cost of an agent’s commission; and that, absent a third-party to handle the negotiations, the buyer and seller might never manage to consummate a deal.
So, for the average consumer looking to navigate the purchase of a FSBO property, the operating phrase should probably be “Proceed with caution.”
Because of this, many people looking to buy a home choose not to consider FSBO properties. They’d prefer not to deal directly with a home seller, or are worried that they’ll make a mistake in the sometimes complicated process of researching and evaluating a home, securing financing and closing on the property.
“There’s a fair amount of squeamishness among buyers when it comes to purchasing a home directly from the seller,” explains James J. Saccacio, chief executive officer at RealtyTrac (www.realtytrac.com). “Since most real estate transactions have historically involved one or two real estate agents, it’s understandable that home buyers might feel more comfortable with the help of a professional. But that’s no reason for a buyer to limit the pool of available properties they can select from by eliminating FSBO homes from consideration.”
Saccacio notes that many real estate industry experts believe that a larger and larger percentage of home purchases in the near future are going to be completed in “non-traditional” ways. There are several reasons for this trend, according to Saccacio. “The internet enables sellers to expose more and more properties to more and more prospective buyers, which means that even the consumers who choose to work with an agent have probably already identified homes they’re interested in before they engage an agent. And as home prices continue to soar, more buyers and sellers are reluctant to pay the full, traditional 6% agent commission on the sale.” As a result of these trends, more sellers are looking at discount brokerages, online real estate marketing and even auctions when they decide to sell their homes. And, not surprisingly, more and more sellers are looking seriously at the option to handle the sale themselves–which is the catalyst behind the growing number of FSBO listings across the country.
Like others in the industry, Saccacio believes that this trend can benefit both the buyer and seller if both parties know how to negotiate effectively, have access to the tools and services they need to make informed decision, and are able to identify when professional help is required to facilitate the process.
RealtyTrac, which hosts the nation’s largest and most comprehensive database of FSBO properties, pre-foreclosure and foreclosure properties, has added new features and services to help both buyers and sellers navigate the process. The company appends estimated market values to all properties, offers comparable sales data and loan history wherever available, provides access to a national network of real estate agents and lenders, and is developing an offer management system to enable sellers to entertain and counter offers from qualified buyers through the RealtyTrac.com website. Saccacio offers the following tips for home seekers interested in buying a FSBO home:
First, get your financing in order
Before you start your search, it’s a good idea to be pre-approved for a loan. Whether you’re looking at FSBO properties or those shown by an agent, being pre-approved will let you know what you can afford to spend on your new home. It will also give you a competitive advantage over other prospective buyers who still have to arrange their financing. Since many home buyers have traditionally worked with lenders recommended by their real estate agent (often at the end of the transaction), having your financing in order may make you appear easier to work with, which is especially attractive to FSBO sellers who can sometimes feel overwhelmed by all the various aspects of conducting the real estate transaction.
Search for the right property
One of the challenges of purchasing a FSBO property is knowing how to find them. Marketing is one of the common services provided by a real estate agent, so a first-time seller may not be as savvy about making the public aware that their home is for sale. And even if you’re working with an agent, FSBO homes are seldom listed on the Multiple Listing Service (MLS), where agents locate most of the properties they show to buyers. Most often, FSBO owners will post their properties in the classified section of the local newspaper. Sometimes, though, the only “advertising” a homeowner might do is posting a “For Sale” sign on the front lawn. So keep this in mind and spend some time driving through areas you’re interested in, and be on the lookout for flyers posted around town or For Sale signs.
A fast-growing way to find FSBO properties is online. RealtyTrac (www.realtytrac.com) offers a national database of over 40,000 detailed FSBO listings, which is updated daily. There are a number of other local, regional and national sites featuring FSBO homes, allowing you to save time, money and energy by previewing properties online, and visiting only those homes that meet your criteria.
Though FSBO owners will sometimes hold open-house events, it’s more common that these homes are shown by appointment or drop-in visit. Calling for an appointment is the preferred method, though a more motivated seller will honor drop-in requests as well. In the case of a drop-in visit, it’s considered a common courtesy to call first to give the owner a bit of a warning before you show up. That way they can straighten up things as needed and aren’t caught off guard by a knock on the door.
Make sure you know what you’re buying
Once you’ve had a chance to quickly look around the property and determine if it meets your general needs, carefully review its condition, taking into account any work needed to make it move-in ready. This is important, since it will ultimately affect the value of the home and the price you are willing to pay for it. However, don’t substitute your informal review for a professional inspection! A thorough evaluation by a trained inspector can uncover things that most buyers wouldn’t even know to look for, and is a necessity before closing on any property.
This is especially true with a FSBO property since owners aren’t as versed in assessing the condition of a home as an agent or other real estate professional would be and therefore may be completely unaware of an existing problem. The bottom line is you need to do your research. Don’t assume that the seller has done it for you.
Beyond making sure the neighborhood seems conducive to your family’s way of life, you should also do some research on the surrounding area to check for anything that could negatively affect your property value. These are things the seller may not readily tell you. In fact, they could even be the reason they want to move away! It’s your job to find these things out. As with any major purchase, “buyer beware” is much more than just a suggestion.
Often, your lender will require you to provide a professional appraisal of a property’s value before finalizing your loan. This service protects both you and the lender, in that it provides an objective, third-party opinion on the actual market value of the home. Appraisers base their figures on comparable sales in the area, neighborhood trends and the condition of the property itself. RealtyTrac appends estimated market values and comparable sales to every FSBO property in its database where this information is available, so buyers can get a sense of the home’s value before beginning the assessment process.
Make a reasonable offer
FSBO sellers have a reputation of sometimes being more difficult to deal with than sellers working through an agent. These home owners sometimes overvalue their property, as they have a personal connection to it, and are trying to make as much money as possible on the sale. And, for better or worse, when the home seller and home buyer enter directly into the negotiations, things can sometimes get personal.
FSBO buyers, on the other hand, may have unrealistic views of the potential bargains available, since they assume the seller will accept a lower price because of the savings on commission fees. This may or may not be true, but in the end, your ability to successfully purchase a FSBO property comes down to how well you can negotiate.
Regardless of whether you negotiate for yourself or through a third-party, make sure to remain as professional as possible. For instance, submitting a lowball offer to a FSBO seller can be seen as an insult, compromising your ability to negotiate further. So while you want to get the best price possible, you also need to be fair to the seller.
Conversely, you should never allow the seller to talk you into paying more than the property is worth or more than you are able or willing to pay. No matter how much you think you love a property, you need to recognize when the deal doesn’t make sense, and walk away.
Don’t be afraid to ask for help
While your initial objective might be to strike a deal directly with a homeowner and save money, buying a FSBO home doesn’t necessarily mean you must do everything yourself. There are a number of professionals who can help you locate, assess, negotiate for and purchase a FSBO property:
The Buyer’s Agent
Just because the home seller doesn’t want to employ a real estate agent doesn’t mean you can’t work with one. Many agents will work directly for the buyer, for a flat rate, negotiated in advance, or for a reduced commission (generally about 3%) which can be built into the mortgage. In this role, the agent is motivated to get the best deal possible for the buyer, and will do the research and negotiations on a property to ensure your interests are protected.
The Inspector and The Appraiser
As mentioned previously, regardless of how diligent you are in previewing the property prior to making your offer, it pays to have a professional home inspection and professional appraisal done before closing escrow. Make sure the inspection includes checking the electrical wiring and moisture levels, as well as for asbestos, lead and carbon monoxide, especially in homes built prior to the 1990s. That way, you know what you are buying and its true condition. The costs of these inspections and appraisals can often be shared with the home seller as part of the conditions for the sale.
The Real Estate Attorney
You may also want to enlist the help of an attorney to review all disclosures and make sure you receive all the pertinent information from the seller. Keep in mind that the seller doesn’t do this for a living, so even the most honest seller can make a mistake. Have the attorney determine what specific disclosure requirements pertain to the sale, since laws vary from state to state. They can also help you determine the correct forms to use for any contracts or other paperwork. Figuring out the correct paperwork, deciphering real estate jargon and generally navigating through the process to make sure all correct measures are taken is typically the job of a real estate agent, though any attorney who is well-versed in real estate matters can do all this for you.
The Escrow Officer
In states with escrow policies, an escrow officer is instrumental in purchasing any home, FSBO or otherwise. The escrow company can be selected by either the buyer or seller, though it is customarily chosen by the seller. In either case, pay your earnest money — and all monies concerning the sale for that matter — to an escrow company you agree on, NOT directly to the seller. This will ensure that your money is kept safely during the course of escrow and will allow you to retrieve it based on your agreement with the seller should escrow fail to close.
In general, if you choose not to hire an attorney, consulting with your escrow agent is the next best thing. This person can also help you identify state laws and determine which contract forms you need and that they are completed properly. Remember that the escrow officer must be a neutral party, so is shouldn’t matter whether they were retained by you or by the seller. The important thing is for everyone to feel comfortable with the officer’s knowledge, neutrality and professionalism.
An additional consideration that may require the help of an escrow officer is determining what title policy you are buying. Make sure to buy the owner’s title policy and the lender’s title policy. Check the laws in your state concerning this, as some states require the buyer to pay for the title insurance policy, while others leave it up to the seller. An escrow agent can help with this and retain the policy for you. In states without escrow, these title services can be provided by an attorney, lender or buyers agent as well.
Welcome to your new home!
Though there are definitely potential pitfalls when buying a home directly from the seller, there are some unique positives as well. Besides the potential savings, the owner of a home knows about the neighborhood and property firsthand and can impart helpful information on good shopping, neighbors, schools, community activities, babysitters and more. If you can navigate successfully through the process, buying a FSBO property can be a very positive experience.