Whether you buy a property that’s listed with an agent or is for sale by owner (FSBO), the same issues generally creep up. That said, there are a few specific issues to keep in mind when looking for a FSBO:
- It’s easy to overpay for a FSBO.
The biggest mistake home buyers make when buying a house that is sold by owner is overpaying for the property. It’s not just that you can’t compare one house to another in terms of size and amenities.
With a FSBO, you need to think about the possible financial impact of issues and neighborhood changes that aren’t readily apparent. For example, if the developers of a 6-story apartment building have received approval to build on the lot behind the FSBO property, the seller may not be legally obligated to share that tidbit of information with you — but it could dramatically (and most likely negatively) affect the value of the property. If you don’t know what’s going on in the immediate vicinity of the property, it could hurt you.
The seller won’t automatically reduce the sales price.
Another mistake home buyers make is thinking the seller will reduce the sales price by the amount of the commission he or she isn’t paying. If you believe the home is worth what you’re offering, versus what the seller is asking, you may need to back that up with some relevant sales data.
Some properties come with problems attached.
There are two reasons homeowners sell without a broker, and both have to do with money: (1) the seller doesn’t want to pay a commission, and (2) prospective agents have told the seller that the property won’t sell for as much money as the seller wants, so the seller decides to sell by owner in order to set a higher price (and hopefully catch a fool for a buyer). When the seller and prospective agents differ on the value of a property, it often has to do with the seller not realizing that any problems that may be attached to the property might lower the intrinsic value. In other words, if the property backs up to a cornfield, that fact might have a positive effect on the price. But if the cornfield is slated to turn into a subdivision of town houses, it could have a negative affect on the price. Do your investigation ahead of time and then, before you make an offer, think about how hard it might be to resell this property in the future.
- Don’t under-negotiate.
Often, first-time buyers don’t know whether it’s a buyer’s market or a seller’s market. Not knowing can undercut your negotiation power when it comes to dealing with a FSBO. Make sure you know what you want out of the deal, and how much you’re willing to pay, and then hold firm. Don’t allow a seller to talk you into paying more than you want (or can).
- Make sure the seller gives you the required disclosures.
Many state laws require sellers to make various disclosures. If you’re buying directly from the seller, without an agent, make sure you get all of the disclosure forms you’re entitled to receive. If you work with an attorney (which I think is an excellent idea anyway, but particularly if you’re not working with an agent), he or she should help guide you in this area. If not, talk to your escrow or title company about forms and contracts.
- Don’t give the seller your earnest money.
When you make an offer to purchase, you’ll typically include a good faith deposit check along with the signed contract. If there are no brokers involved, you have to figure out who will hold the earnest money. Never pay it directly to the seller. Instead, see if the escrow company, title company or other third party will act as an intermediary and keep the funds safe. Another option is to have one of the attorneys (either yours or the seller’s) hold it for you.
- Make sure you buy an owner’s title policy in addition to the lender’s title.
In some states, the buyer pays for the title insurance policy. In other states, it’s up to the seller. If the seller traditionally buys the title policy, make sure yours does. If the buyer pays for title in your state, you can work with your escrow agent or title officer to order the title.
- Get your documents in order.
In many parts of the country, real estate agents help buyers and sellers get their documents organized so that the property can close. If you’re doing this on your own, you’ll want to check with your attorney or escrow agent or title officer to be sure you haven’t forgotten anything. You don’t want to show up at the closing and find out there is a problem.
- Be careful which contract forms you use.
If you’re using an attorney, he or she should be able to provide you with a contract and contingencies that protect your rights. If you aren’t using an attorney, you can ask the escrow agent or title officer to help you gather the contracts and forms you need. While some, or maybe all (depending on the state) of these contracts and forms are on the web, you have to be careful about which form you use. Escrow state: escrow agents or title companies have forms. Or in other states, form contracts that are on the web. Take care in selecting the contract because these are the words, sentences and paragraphs that are supposed to protect you in this huge purchase.
- Don’t take the seller’s word — check it out yourself.
A common mistake home buyers make is taking the seller or the seller’s broker at his or her word. When you’re spending a few hundred thousand dollars, it’s important check everything out yourself. Insist on a professional home inspection and a final walk-through. If something doesn’t look right or doesn’t pass inspection, spend what you need to in order to be sure the house is okay. Once you close, it’s expensive and heartbreaking to have to sue the seller. The time to do it is now.