Buyer Beware on For Sale by Owner

Dan rafter
Written by
Dan Rafter
Read Time: 6 minutes

If you're shopping around for a house, you may have come across some properties listed as For Sale By Owner (FSBO). While these can offer some good value for buyers, there are also some potential pitfalls you ought to be aware of.

By many accounts, for sale by owner properties are making a bit of a comeback. With housing prices still relatively weak, homesellers are seeking to get every dime they can out of their properties and eliminating the real estate agent's commission is an attractive proposition. Furthermore, the relatively tight inventory of homes for sale in many areas means the demand outstrips supply and homesellers are less dependent on real estate agents to bring them potential buyers.

The housing market itself has changed, with online listings making it easier for home shoppers to find properties without the aid of an agent promoting a home on the seller's behalf.

Savings may be less than expected

The main benefit for the buyer in a FSBO transaction is the chance to save some money. Since the seller isn't paying a commission to a real estate agent, typically 6 percent of the sales price, that means there should be some savings on both sides of the transaction, right?

Not necessarily. For one thing, as a buyer, it's a really good idea to have your own buyer's agent representing your interests in the transaction, even if the seller isn't using one to represent theirs. Buyer's agents usually get half of the real estate agent's commission, or 3 percent of the sales price, so that lowers the potential savings right there.

Furthermore, FSBO sellers may be tightfisted when it comes to the price and negotiations. They're going to the trouble to list and sell their home without an agent, so they're going to want to realize those savings for themselves.

Things to look out for with a FSBO

Beyond that, here are some of the other things you want to be alert to when considering a FSBO property:

The owner may not make all the necessary disclosures

Depending on where you're buying a home, the seller is required to disclose certain things about the property, such as mold issues, the presence of any easements on the property, ground pollution, certain repairs that have been done, etc.

A real estate agent knows what has to be disclosed and will ask the seller about them when preparing to list the home; an owner may not be aware what needs to be disclosed or may simply neglect to do so. In some cases, these issues may turn up at closing (for example, a lead paint statement is required on homes built before 1978 and the insurance company will want to know if the property is in a floodplain.). In a worst-case scenario, you may not discover a problem until after you've owned the house a while. You may be able to pursue a remedy through the courts, but it's always easiest to simply avoid such problems to begin with.

Your buyer's agent may not want to get involved

When shopping for a home, it' a good idea to have your own real estate agent to look out for your interests. Typically, the buyer's agent and seller's agent will split the 6 percent agent's commission in a regular transaction. However, many buyer's agents are reluctant to get involved in a FSBO transaction because it means they end up doing all the work the seller's agent would normally do and still only get the same 3 percent commission.

Having a buyer's agent is even more important in a FSBO purchase because it means you've got at least one professional on hand who knows all the t's that have to be crossed and i's that must be dotted. It also means you'll get all your paperwork in line before applying for a mortgage or closing, rather than having them come up at that time and having to go back and take care of them.

You may be dealing with someone more savvy than yourself

In some cases, the seller in a FSBO may themselves be an agent, broker, developer or someone else with extensive experience in real estate. In that case, they should be aware of all the disclosures and paperwork that needs to be done. On the other hand, you're going to be dealing with someone who knows a lot more about this business than you do.

Some studies have found that real estate agents who sell their own homes get a significantly higher price than the colleagues get for their clients on comparable homes. It seems that while agents know what price a home will sell for most of the time, they also know what the upper range of that price is and will push harder to get it when their own money is involved. So you could actually end up paying more than you would in a conventional transaction.

If you buy a FSBO

If you do choose to pursue a FSBO, there are several things you want to be sure to do. Getting a buyer's agent is one of them. You also want to:

Order a comparative market analysis

This is what real estate agents normally do to determine a price for a home before putting it on the market. They look at recent sales of comparable homes in the area and determine what would be an appropriate price for the property in question. Your buyer's agent can do this for you, or you may be able to pay someone to do it.

Check into insurance claims

When buying a home, you can purchase what's called a C.L.U.E. report -a Comprehensive Loss Underwriting Evaluation. This will detail any insurance claims that have been filed on the property over the past five years. You need the seller's permission to obtain one but they're fairly inexpensive - and your insurance company will want to pull it anyway after you've bought the home, to help determine your ongoing rates. Better to check it yourself and avoid surprises.

Get a home inspection

Any time you buy a home, you want to have an inspection done to identify any potential problems. The more aggressive the inspector, the better. You want someone who's experienced in home construction and repair who will look into every nook and cranny. Real estate agents will often have inspectors they work with on an ongoing basis but these are sometimes reluctant to be too aggressive for fear of spoiling the relationship. It's better to find your own inspector on your own - check with friends and associates for recommendations.

Set up an escrow

If you make an offer to buy the home and it's accepted, you'll want to set up an escrow account to hold the earnest money until the sale is closed. Do not simply give the money to the seller; if the sale falls through, you might have difficulty getting it back.

Get an attorney

Most important of all in a FSBO, you want to be sure you have good legal advice. An attorney can advise you of the legal steps that need to be taken and can review purchase documents and make sure the sales contract is in order.

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