Source: Dana Bull.
If you’re just stepping into the real estate scene, you’re bound to come across a listing that is FSBO (for sale by owner). Homeowners bypassing real estate agents are certainly not the norm, but comprise an estimated 8 percent of sales. Why would an owner choose to sell his or her home this way? Likely it’s because the owner wants to save on real estate agent commission fees, or because he or she wants more control over the transaction.
What should you do if you encounter a FSBO listing? Is it a red flag? Should you go running for the hills? If the home meets your criteria, there’s no reason you shouldn’t pursue the opportunity. That being said, there are some nuances to working with an owner who’s selling a home agent-free. Here are my dos and don’ts to help you navigate the deal.
Negotiating directly with the homeowner can go either way. On one hand, having “less cooks in the kitchen” removes some of the layers that make negotiating a convoluted process. On the other hand, it can be a little awkward when you don’t have a buffer.
Do: Find a Real Estate Agent
Just because the seller has chosen not to hire an agent doesn’t mean you need to follow suit. Unless you feel confident in the market and managing the real estate transaction on your own, I highly recommend bringing on representation. Among many things, the right agent can connect you with contacts, like lenders and property inspectors, and specialists, like an attorney. An agent can help craft your offer and ensure that all local disclosures are being filed appropriately. In addition, your agent can negotiate on your behalf and keep tabs on meeting deadlines.
The big question is how does your agent get compensated? In a traditional home sale (where agents represent clients on both sides of the table), the seller typically foots the commission bill. In a FSBO scenario, you can negotiate the commission with the homeowner and see if they will cover it. Or, you can work out an arrangement with your real estate agent and his or her agency to pay direct.
You may also want to consider bringing on a real estate attorney for assistance. In some states, real estate attorneys play a mandatory role throughout the transaction, but are not required in all areas. Either way, an attorney can provide buyer’s side counsel to ensure your interests are being met.
Do: Review a Comparative Market Analysis
When preparing to sell or buy a home, a real estate agent can help advise on market values. Agents receive training and software for analyzing comparable homes to educate clients on pricing strategy. How do homeowners determine a list price for their own home? Your guess is as good as mine! In fact, according to research conducted by the National Association of REALTORS®, getting the right price is the most difficult task for FSBO sellers.
Keep in mind, homes are not commodities; establishing fair market value is not as easy as plugging a property into an algorithm and having it spit out a dollar amount. It’s important to look at data and run a comparative market analysis to determine what the house is worth to you. You may find that your aligned with the list price set forth by the homeowner, or you may discover the house is either overpriced/under priced.
Do: Negotiate House Price
Negotiating directly with the homeowner can go either way. On one hand, having “less cooks in the kitchen” removes some of the layers that make negotiating a convoluted process. On the other hand, it can be a little awkward when you don’t have a buffer. Either way, it’s always important to establish a price and terms that you feel are fair. After all, this is a business deal! I have found that in most situations, homeowners are motivated and willing to negotiate if you professionally present your case and position yourself as a financially strong and serious buyer.
It’s always important to establish a price and terms that you feel are fair. After all, this is a business deal!
Don’t: Forget to Get Pre-Approved for a Home Loan
Financing an arm’s length transaction (meaning you’re buying a house from a complete stranger) is the same regardless of whether or not the purchase is FSBO. Prior to submitting an offer, you’ll want to shop for lenders and get your mortgage pre-approval ready. There’s no sense in putting together a bid unless you are confident in your ability to receive a loan. Receiving a preliminary stamp of approval from the bank will help you put your best foot forward. Besides, savvy homeowners will be expecting a pre-approval, so it’s better to come prepared.
Don’t: Waive Your Home Inspection
Inspections are always important, but may even prove to be more useful with a For Sale By Owner. No matter the situation, sellers are obligated to disclose any known material defects with a property. However, sometimes a seller is unaware of a problem. Even worse, you never know what a seller could be trying to cover up.
Once you have the inspection report in hand, you can use it as negotiating leverage. You may find the homeowner to be extra motivated to resolve issues that are found. If you can’t come to a resolution, the homeowner risks having to relist and disclose defects to future buyers. Depending on the problem, it could be an immediate turnoff to buyers who are already skeptical of exploring a FSBO listing.
Don’t: Hand Your Earnest Money Deposit to the Home Seller
In many areas, it’s commonplace for the listing agency to escrow your deposit money. With this piece of the puzzle missing, who should be holding your funds? Well, anyone except for the homeowner! You’ll want to choose a third party camp to protect your earnest money deposit in the unfortunate event that your deal goes sideways. A real estate attorney or your buyer agent’s firm can likely accommodate. If not, bring on an escrow agent.
In a market where inventory is at an all-time low, you shouldn’t rule out anything! FSBO can be a manageable situation, if you know how to navigate it.