Buying a "for sale by owner" home, or FSBO, can save you 6 percent of the cost of the house if neither side uses a real estate agent.
Six percent is the average sale commission that most real estate agents get. Saving thousands of dollars — $18,000 is 6 percent of a $300,000 home, for example — can make home loan payments from a mortgage lender more affordable for some people and can be the difference between buying a house and watching someone else buy the home you want.
Getting to that savings, however, comes with a few caveats and things buyer should understand before buying a home for sale by owner. Here are five issues to consider:
1 - Understand how much you’re saving on commission
A commission isn’t the only way to save on a FSBO, but it’s one of the main ways.
The typical commission on a home sale is 6 percent. It’s paid by the seller and is split by the agent for the buyer and the agent for the seller — each gets 3 percent.
As a home buyer, you wouldn’t be paying the commission anyway, so why does it matter to you? Because it’s likely factored into the price of the home.
If you’re going on the basis that a real estate agent isn’t worth hiring, that can make more sense from the home seller’s point of view. Not only do sellers pay the entire 6 percent commission, but some economists have found that agents don’t lead to higher average selling prices and that they don’t sell homes for much more than the initial asking price.
One reason to list your home with an agent is that it can then be listed on the Multiple Listing Service, or MLS, that only agents can use to find homes for sale. The MLS, along with other factors, can help agents sell homes faster than homeowners can on their own.
Without the MLS, using a real estate agent reduces the selling price of a typical home by 5.9 to 7.7 percent, according to a research paper by Stanford University economists. Without that MLS assistance, using an agent doesn’t lead to a higher selling price of a home, the researchers found. For a FSBO buyer, that could be more reason to not use an agent.
2 - You’re losing an advocate
A home inspection, appraisal, seller’s title to the home, searching for the best mortgage rates and other headaches that pop up during a home sale can make an agent’s fee worthwhile.
“There is no right answer as to what a Realtor’s value is,” says Kristopher Shenton, Sr., a sales manager at Equity Prime Mortgage in Crofton, Maryland. “After settlement some folks feel their representation was priceless and others feel it was worthless. But, the only time a FSBO goes off without additional headaches is when there are no issues.”
A seller may try to convince you to not have an inspection or appraisal. But if you need a home loan to finance a home purchase, the bank will require them. Without an agent to help you, you could be negotiating those areas and others on your own. That’s fine if you’re a good negotiator.
“The seller almost always thinks their home is perfect and doesn’t want to amend the price or do work,” Shenton says, “and buyers almost always feel that they deserve to get a home without any defect in it. There is where the problems arise.”
“Realtors have a stronger knowledge of the fair market cost of home deficiencies” and can help resolve them, he says. When sellers and buyers are negotiating only with each other, that’s where more contracts get voided because they can’t reach an agreement, Shenton says.
Dealing directly with the owner of a FSBO home in 1983 was the only real option for Hyapatia Lee to be able to afford a home in 1983, Lee says. But not having a home or property inspection as part of the process led to a major surprise — that an oil tanker had spilled its contents on the land, poisoning the ground water.
It was a rural area and it was a few years before city water was brought in, so she and her husband had to fill a water cistern every 10 days for $35.
3 - Ready to build a relationship?
If you are a good negotiator and you can make a connection with the seller, then FSBO can be beneficial for you as a home buyer.
“If the buyer is an experienced or good negotiator, there is a high probability that the purchase price negotiated will be lower than for a standard agent represented seller,” says Jeff Swaney, a real estate investor in Atlanta who has bought and sold homes through FSBO.
“When you meet with the seller, a connection can be formed that will make both parties more willing to be flexible and can get a deal done, even when the starting points are far apart,” Swaney says.
“When you go through an agent, you are betting your success on the negotiating skills of the agent, and the process is dehumanized,” he says. “With only the agents talking, the human element of emotions is taken off the table. Emotion is the primary driver behind a sale, and removing that element, or communicating that element through third party agents is very difficult.”
The better the relationship — or trust — that the buyer and seller develop in a FSBO, the better chance they have of overcoming the inevitable hurdles that will come up until the sale closes, Swaney says.
“Everybody assumes the other guy is cheating them or gaming the system,” he says. “When the buyer and seller are working directly with each other, the idea of taking advantage of the other party is less desirable. Nobody wants to be seen as a cheater.”
FSBO buyer John Liston says he saved as much as $14,000 on a home in Boston by eliminating a 3 percent real estate agent fee for the seller.
Liston, manager of strategy and operations at All Set, a website that helps people hire house cleaners and others, says that working directly with the homeowner helped him during the offer negotiation and inspection process. Liston’s offer was accepted the night of the first open house in what he found to be a streamlined process.
“When the inspector had little questions about various aspects of the home, the owner was right there to provide detailed answers,” Liston says. “This allowed us to avoid much of the Realtor speak that can bog down negotiations or leave you feeling like questions have gone unanswered during the inspection.”
“I have lived in the home for a couple of years now and have zero regrets about having purchased directly from the prior owner,” he says.
4 - You may still need expert help
Even without an agent, the seller should go over the transaction with a real estate attorney and have the attorney provide the contract documents needed to be signed, Swaney says.
Buyers may also want to hire a buyers agent, who is a licensed agent and can help negotiate the best price and assist in other areas such as interpreting inspection results and finding contractors, says Bruce Ailion, a real estate agent at RE/MAX Town and Country in Atlanta.
The seller can be asked to pay for the buyer’s agent, and if they refuse, the buyer should agree to pay a real estate agent to represent them, Ailion recommends.
“Some transactions may be clean cut and easy, others can be very complex, difficult and stressful,” he says. “Going it alone will be difficult and may be impossible,” he says, which is why 88 percent of home buyers purchased their home through a real estate agent or broker, according to the National Association of Realtors 2016 Profile of Home Buyers and Sellers.
5 - FSBO homes may be overpriced
Any savings from not paying a real estate agent may still not get a buyer the best price for a home. The seller who is acting on their own may be overpricing their home, causing it to stay on the market longer than it might otherwise.
“A for sale by owner is typically wanting to save the commission by choosing not to be represented,” Ailion says. “Focused on money, they are often overpriced.”
“A buyer’s agent will confirm the property value and assist the buyer to negotiate the best price,” he says.
To be absolutely certain, you would need to make some serious calculations into the savings you'll be making, while also taking into the consideration the expertise of the realtor and the knowledge they bring.