For sale by owner homes: should you buy one?

By ,
Ask a Lender
January 9, 2018


Key Points

What is involved in buying a For Sale By Owner (FSBO) home?

  • Buying an FSBO home isn’t much different than buying an agent-listed home.
  • Find comparable home sales in the area to establish fair market value.
  • Negotiate a purchase contract that includes contingencies for walking away.
  • Get the seller’s permission for an insurance-claims history report on the home.

If you’re in the market to purchase a home, you might not think twice about whether a seller is represented by a licensed real estate agent. A small segment of home sales involve dealing directly with a seller, however. These are known as For Sale By Owner (FSBO) properties.

A 2017 report from the National Association of Realtors found that FSBO sales have declined from a peak of 21 percent of all home sales in 1981 to only 8 percent in 2017. Another study from 2016 conducted by real estate services company Redfin found that one in five home sales took place without the help of a full-service agent. About half of these sellers had no agent at all, while the rest used limited-service listings that require paying little to no commissions.

Prospective homebuyers should not discount the possibility of purchasing an FSBO property, but they should be aware of the steps to take, particularly if they also are not working with a real estate agent.

Find an FSBO home

The process for buying an FSBO home does not differ much from buying one that has a listing agent. Many websites specialize in advertising FSBO properties, and they are good places for locating homes in specific cities or areas.

Some of these websites also list properties in foreclosure, can connect buyers with mortgage lenders and moving companies, and even offer help with real estate contracts. You’ll obviously want to see a home for yourself prior to purchasing, however, so contact the seller and arrange for a tour once you’ve found something appealing.

It can be helpful to discard some myths about FSBO sellers before going this route. Namely, some people believe that FSBO sellers are not serious about the sales process, won’t budge on the purchase price or are hiding problems with the home. In fact, many sellers who forego using a real estate agent are trying to save money, so they may be willing to negotiate if they’re trying to move quickly and avoid making two mortgage payments for an extended period.

More importantly, buyers should know that whether or not the sellers are represented by an agent, they are still bound to the same federal and state disclosure laws. They must inform prospective buyers of issues like lead-based paint, for example. In some states like California, sellers also must disclose any deaths that have occurred on the property and the potential for natural disasters or pollution.

Honest sellers also may willingly disclose any home repairs completed during their ownership. By law, sellers must disclose any material facts about the property that could potentially affect a buyer’s decision to purchase the home.

Ask questions and negotiate

If you’re interested in a home, ask the sellers some pointed questions: How long has the home been for sale? Did the seller work with any agents prior to taking over the process? Why hasn’t the home sold yet? Be wary of sellers who pass along blame. It’s possible they set an unrealistic sales price and local agents refuse to accept the listing.

Regardless of whether the seller has an agent, buyers may use one. The agent will look to earn a commission — usually 2 percent or 3 percent of the sales price. If a seller refuses to sign an offer contract that includes paying your agent’s commission, however, it could be on you to come up with the cash, unless your agent can negotiate a lower sales price to cover the commission or obtain closing-cost concessions.

If you choose to buy an FSBO home on your own, you won’t need to pay a Realtor commission, but you’ll also lose the real estate agent’s expertise. Their job is to get you the best deal possible, which includes connecting you with other professionals needed to close the deal, such as attorneys, appraisers, inspectors, title agents and mortgage lenders.

Without an agent, you’ll also want to obtain a comparative market analysis report that lists recent sales prices for comparable homes in the area. This will help you establish a fair market value for the property you wish to purchase. Having a prequalified or preapproved loan amount from a lender also can help convince the seller of your intentions.

Close the deal

Buyers who work with a real estate agent may save time during the closing process, but if you’re handling the process alone, you’ll have to complete several steps.

You will need a purchase contract, which an attorney can draw up for anywhere from $500 to $1,500. Alternatively, you can find standard purchase contracts online for less. This contract should specify any earnest-money deposits, closing-cost responsibilities and a date for transferring control of the property.

The contract also should contain some contingency clauses that allow you to walk away from the deal if anything should go wrong. Common contingencies include a market appraisal, home inspection, establishment of clear title, and approval of any seller’s disclosures or homeowners association (HOA) covenants.

Your lender generally will require an appraisal as well because they won’t approve a loan amount that exceeds the home’s value. They also may order a home inspection. Even if it’s optional, however, inspections are important because they can identify potential problems. Appraisals typically cost $300 to $400 and inspections often run $200 to $400, sometimes more.

Another way to protect yourself is to obtain the seller’s permission for a Comprehensive Loss Underwriting Exchange (CLUE) report. This costs about $20. A CLUE report lists any insurance claims made on the home within the past five years, the amounts paid and whether damage was caused by a natural disaster. This report can bring to light issues such as water damage, mold or structural defects.

Finally, you will need to hire a title agent and consider whether you need title insurance. The title agent will ensure the home is free from any liens. Begin this process early in the sales process because it takes time to research the title history of the property. Your lender can help you find a title company.

Title insurance protects buyers from potential title claims on the property for as long as they own the home. Your lender will want proof of homeowners insurance as well, so purchase coverage or make sure your current policy can transfer to your new home.

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