Buying from a 'for sale by owner'
Pros and Cons of buying a home without an agent
Buying a for-sale-by-owner (FSBO) property carries with it some additional buyer concerns. A FSBO property is one where the seller is not represented by a Realtor. This article is written to protect you from the things that can go wrong on the buying end if you don't have good information and competent guidance, including problems with disclosures, property defects, easements, zoning, financing, insurability, neighborhood restrictions, covenants, and closing delays.
Let’s say you’ve found your dream home on your own and you’re serious about buying it. Next, consider …
Price: Who wouldn’t want to get their dream house for less than the going rate? But often buyers are just as likely to be offering too much as too little. Your job is to get an idea of what the place is really worth before you start talking money.
Some buyers believe that unrepresented sellers will pass along their savings from an agent's commission -- usually about 6% of the price. The Truth: The seller may be a little more flexible on price when selling by owner, but they're not likely to give you all the commission savings or they'd be no better off than if they had let a real estate agent take care of everything.
Some sellers choose to be unrepresented after an agent tells them they won't be able to get as much as they wanted for their house. Many price their home based on what another homeowner is asking down the street. A neighbor can ask millions of dollars, but it doesn’t mean they’ll get it.
Get "comps" or sale prices of comparable homes that have sold in the past six months in the neighborhood from a Realtor. Your offer should be based on those comparable prices, not the asking prices. You can look at Web sites, like zillow.com, but keep in mind that they are not completely accurate. Typical newpaper published sales reflect the mortgage amount. Work on facts, not fiction.
Also, put yourself in the best buyer position by getting a mortgage pre-approval before you make your offer. It can help legitimize your offer and you're more likely to get a better price if you are willing to close quickly and easily.
Negotiation: Buying from an inexperienced seller who is handling everything by himself can be frustrating but can also be profitable if you are prepared.
People usually try to sell a house on their own to net more money. In reality, most unrepresented sellers net less than those sold by a Realtor. Often they underestimate the time, cost and complexity of going it alone. They end up tired and frustrated of the process, ready to be done with it. Help them solve their problems, and you may be rewarded.
Identify what is most important for the seller and try and give it to them in trade for something else. For example, if you think allowing possession after closing is something the seller needs, maybe you can trade that for a lower price.
The selling price is not the only area of negotiation. You should know which costs are customary for a seller or buyer to pay in our area. Date of possession and financing options can have a huge affect on your bottom line. Never rely on oral agreements, such as "all appliances will remain with the house." Get it in writing.
Keep all conversations as neutral as possible. Because the seller doesn't have an agent, there's no liaison to buffer the bargaining process and present offers with an informed, realistic perspective.
An owner isn't an agent, so don't ask possibly offensive questions or make negative comments about the house or its condition. A casual statement about "ugly carpet" can be hurtful enough to keep the seller from negotiating with you. It's difficult to get a good deal if the seller doesn't like you.
On the other hand, don't become too friendly with the seller. Sentiment and personality conflicts often cloud judgments. It is not in your best interest to let emotions guide the financial process.
Most people find it difficult to negotiate on their own behalf and feel better when negotiating is done by someone else. An intermediary can help take the personalities out of it. An agent can present the reasons for your offer and might be able to say things that the listing agent or homeowner haven't thought of or considered.
If you do decide to buy a home without a realtor, hire a real estate attorney to help you draft the purchase contract. Factor into your costs how many extra hours of the lawyer's time you will require because you’re buying a house without an agent. If that's too expensive, a title company can do some of the legal legwork, but they're less prepared to work on complicated transactions.
Home’s Condition (and what you don't see): Buyers, at a minimum, should be aware of our disclosure laws. Some unrepresented sellers have been known to take advantage of the less formal process by concealing problems or flaws. You may well want to hire an attorney or agent just to brief you on the disclosure requirements.
Always get a disclosure before making an offer. You want to know about material facts and potential problems upfront before money changes hands. After closing, it is pretty difficult to get compensation from a seller who has just moved cross-country.
You can also request copies of recent electric, gas or water bills and bills for any repairs. Who did them and when? If you’re looking at a 15-year-old home and the roof hasn't been replaced, that's probably something you need to consider.
Make any deals contingent in getting satisfactory report from a home inspector that YOU select and pay. Get your own inspection (and separate termite/pest inspection) done, even if the seller has already done them. Never sign away your rights to inspection, even if you know the seller won't agree to make repairs.
Do a final walk-through after the house is vacant, on the day of closing if possible. You don’t want to walk into your new home and find defects that had been hidden by furniture or damage caused when the sellers moved out.
Finally, ask the owner to provide a home warranty, which can range from $250 to $850. The home warranty (basically a private insurance policy) covers the electrical, plumbing and heating systems for one year. If the home is 15 years or older, you definitely want it.
Paperwork: If you've agreed on a deal, don't give your earnest money directly to the seller. It should be put into an independent, third-party escrow account by your agent in agreement with the seller. You don’t want to become one of the horror stories where a buyer gives an earnest money check to a seller only to find out that the seller contracted with other parties and skipped town with everyone’s money just before the bank foreclosed on the property.
The sales contract spells out all the terms of the deal prior to the closing. Again, if you don’t have an agent representing you, hire a real estate attorney before you sign.
Some contract points to consider:
- Does it allow you to opt out if the home inspection isn't favorable?
- Does it allow for renegotiating the price or canceling the contract if the house has conditions the seller hasn't disclosed?
- What will happen if there are title problems? Is the closing schedule realistic?
- What if you can't obtain financing that's acceptable to you?
- What if the property the lender’s appraisal value doesn’t agree with the sale’s price?
- If the contract is canceled, what happens to the deposit and earnest money?
Earnest money is given when you sign an offer to purchase. Until the property closes, the deposit belongs to you, not to the seller, unless your offer says otherwise. Unfortunately, some unrepresented sellers think that the deposit money is theirs to spend before closing. If the seller spends the deposit money prior to closing and the transaction falls through for valid reasons -- such as financing or repair issues, the buyers may have to fight for a refund. Make sure your contract dictates what happens to the funds if the transaction doesn't close.
Getting to Closing: Without an agent, the odds of a contract failing go up. Real estate today requires an ample awareness of current law, contracts, agency and the intricacies of closing the transaction. To succeed, buyers need to stay on top of the details and look out for their own interests.
Always make the offer and all counter-offers in writing. Verbal contracts involving real estate are not enforceable. Include the names of all owners on the contract. If one owner approves the contract, it does not mean that the other owner is obligated to accept it.
Unrepresented sellers usually don't have a plan for where to close, where to buy a title policy, where to keep a good faith deposit, etc. Be ready with simple solutions to all these problems.
After you sign the sales agreement, hire a home inspector. Not only should they give you a good understanding of the home's condition, he also should be able to tell you how much time is left on various systems, and what you can expect to repair over the next few years.
A survey and title search will also be needed. Without an agent, you need to give them instructions to call you if there are any problems. Several days before the closing, get copies of all the documents you'll have to sign so that you and your real estate attorney can go over them.
Don't ignore lender requirements. Know what is expected of you and take care of it. Answer lender questions and provide required paperwork as quickly as possible.
Buyer Representation: Most buyers are best served by selecting a buyer's agent to represent them. A buyer's agent represents your interests. If you don't sign a buyer's agent contract with an agent, then you should presume that they represent the seller in the transaction.
Buyer's agents provide services that may otherwise fall to the buyer or seller, eliminating the need for the parties to draft a purchase agreement, order appraisals, property inspections, title insurance, closing, etc.
For these reasons, unrepresented sellers generally welcome a buyer represented by a buyer's agent, and agree to include my buyer agent fee. Traditionally, the 3% commission is paid from the sale by the Seller.
Some sellers recognize that agents are their best source for a qualified buyer and a smooth sales transaction and they fully expect to have a buyer be represented by an agent. Other unrepresented sellers can balk at paying a commission to a buyer’s agent. After all, the seller's objective all along was to save money. Often it is my job to help everyone not only save money, but get the deal done.
“Who really benefits from omitting an agent, the seller or the buyer?” Without an agent, the buyer must navigate the process of writing and negotiating the contract, securing financing, arranging inspections, performing due diligence, coordinating the closing, … on their own. Logically, the motivating factor would be to save money. If only the seller is benefiting, then it’s hard for a buyer to justify omitting an agent.
These are just some basics of an offer to purchase real estate, consult with an attorney or a real estate professional for additional details.
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