What To Know About Buying A Home That’s For Sale By Owner
In a hot real estate market, you might find more sellers going it themselves and doing what’s called a for sale by owner sale (commonly known as a FSBO). If you encounter one of these properties you might wonder if the etiquette for how to make an offer on a FSBO house is any different than a normal sale.
Here’s everything you need to know about how to buy a FSBO home.
Do You Need An Agent?
When considering the pros and cons of buying a FSBO house, you as the buyer probably wonder if you need an agent of your own. In any housing transaction, the answer is almost always yes. After all, you want someone in your corner for negotiation and dealing with the legalities involved, which is what a buyer’s agent does. Furthermore, your agent likely knows the ins and outs of the neighborhood and all the other important information you need to know before making such a large purchase.
Making an offer on a FSBO house with a buyer’s agent can be a little tricky since sellers are usually the ones who pay the commission. However, the seller is often happy to pay the commission (typically 3%) to have someone handle all the paperwork. After all, it’s still half of what they’d have paid if they had an agent too. Just make sure you include the details of the agent commission when you make an offer on a FSBO house.
What To Do If You Don’t Have An Agent
If neither of you has an agent, you’ll want to be extra vigilant as no one’s there to make sure proper process is being followed. And mistakes can be costly. Here are the main things you need to make sure you have covered.
Make A Smart Offer
Typically with a FSBO property you’ll want to offer less than the list price since the seller is essentially saving 6% by not paying any agent commission. Of course, they might have already mentally worked that into the price, but you still want to start your negotiations down a bit so you have room to adjust up if needed.
A National Association of REALTORS® survey found that the typical FSBO home sold for $200,000 compared to $265,500 for agent-assisted home sales. So when assessing pros and cons of buying a FSBO home, there could be more flexibility in the price.
Contingencies are vital when considering how to make an offer on a FSBO house, says Leneiva Head, Principal Broker and Owner of Welcome Home Realty in Nashville, Tenn.
“Buyers should be aware that contingencies are like contractual loopholes. They are your way out of a contract if certain expectations are not met,” she says.
For example, if your purchase is contingent on the home appraising for the agreed purchase price and it ends up appraising for less, you can elect to terminate the agreement, get your earnest money back and walk away. But if a contingency has a deadline and you miss it as the buyer, that contingency is considered met, she warns.
Have A Plan For Your Earnest Money
Earnest money is what buyers include with their offer as a show of good faith. Who will hold the earnest money is an important question to ask when buying a FSBO house. Often where it goes depends on the state regulations according to Eve Henry, REALTOR® with Ebby Halliday Realtors in Prosper, Texas. For example, he says, they close with title companies in Texas so they’re the ones who hold the earnest money; in Georgia, they close with attorneys who can hold the earnest money; and the broker or title company holds it in Florida.
“Bottom line, the buyers should insist on a third party holding the earnest money and also must make certain that they have it ‘receipted,’ which means they have a copy of the check or wire and a receipt date that is signed,” Henry says.
Finally, make sure it’s credited properly on the closing statement.
Determine Who Will Cover Fees
Closing costs can be paid by either the buyer or the seller, or otherwise split between both parties. It will be whatever’s negotiated in the offer, says Head.
“Some buyers offer less and pay their own closing costs while others may pay full list price or more and ask the seller to pay their closing costs,” she says.
In a seller’s market they have less incentive to pay closing costs for the buyer because they often have more than one offer to consider. As a FSBO buyer, Henry recommends getting a list of all the closing costs from the title company so you’re aware of what will need to be covered and then determine who will cover what.
Handle The Prorations
Property taxes, homeowners association dues, homeowners insurance and mortgage interest are all prorated according to how long each of you owns the property in a given year.
“It would be highly advisable for a FSBO buyer to insist that a title company handle the closing, and then the escrow officers can calculate the taxes and fees which prorate daily,” Henry says.
When applicable, the title company will issue a credit to the buyer at closing to cover the seller’s portion of an expense that may not be due yet, says Head.
“For example, if property taxes aren’t due until December and the buyer closes September 30, the title company will collect property taxes from the seller through September 29 and credit that money to the buyer,” she explains.
So when the tax bill comes in December, the buyer will pay the entire year knowing they already received the seller’s prorated portion.
Handling The Home Inspection
Home inspections are vital to protect you and your investment. After all, no matter how shiny the new kitchen is, you need to know what expensive issues might be lurking (e.g., a roof that needs to be replaced or an electrical system that’s outdated). That’s why an offer on a FSBO house should include an inspection.
As a buyer, you should make sure to go on the house tour with the inspector. Not only will they point out issues they see, but they can give you great insight on different systems and help you get to know the house a little bit better. Remember that almost every house will have some flaws, so don’t panic at the home inspection report. Their job is to point out everything, and you can assess if what’s a deal breaker and what’s not.
Seeking A C.L.U.E Report
If you don’t have a “clue” what these are, you’re not alone. One survey found that 82% of respondents had never heard of the C.L.U.E. Personal Property report. But now you have, and you’re going to be delighted at this new piece of intel.
The majority of home insurance companies contribute claims history information to this database which is primarily used by underwriters to determine rates for insurance policies. But as a buyer, you can use the report to get “clued” in to the history of the house and claims the owners have made. Seeking a C.L.U.E. report will turn up claims on the property related to weather incidents, fires, theft, vandalism and water damage going back 7 years. A free C.L.U.E. report can be obtained annually from LexisNexis either online or by calling (866) 312-8076.
Only the homeowner, however, can request a C.L.U.E. report. So what to ask when buying a FSBO house includes requesting one from the seller. Just remember it’s not an inspection or disclosure and doesn’t give recommendations; it’s just one more piece of data to help you make an informed decision.
Getting A Title Policy
The purpose of title insurance is to protect you (the home buyer) as well as your lender if there are liens on the property or your seller doesn’t actually have ownership and therefore shouldn’t be transferring ownership to you. While this rarely happens, the consequences are high so it’s not something to bet against. If you’re seeking a mortgage, your lender will likely insist on title insurance.
Before making an offer, you should always secure a mortgage preapproval which can help you in your hunt for title insurance. Ask your lender if they have a title company they routinely work with, or you can call around. Specifics vary by state so if you’re not working with a real estate agent take a cue from your lender as to how to find a reputable title insurance company.
Making An Offer And Writing The Purchase Contract
When it’s time to make an offer on a FSBO house, you need to make sure you’ve created an airtight contract. This is actually one of the core reasons buyers may want to engage a real estate agent, says Henry.
“The public doesn’t have access to our forms which specifically spell out contingencies and other factors you need to know when making an offer,” he explains.
The exact structure and inclusions vary by state, so search for a sample contract for your state. Among the information you’ll want to include is:
- Your offer
- The down payment
- Furnishings or personal items you want included
- Closing date
- Deadline for accepting the offer
- Your mortgage preapproval (Note that most sellers will need this to be sure you’re a serious candidate.)
If the negotiation process goes through more than one round, you don’t have to write a new contract. Just make sure you’ve clearly delineated what’s changed.
As you can see, buying a FSBO house has its pros and cons. But one thing is certain: An offer on a FSBO house should include a mortgage preapproval, as with any home.
Ready to get preapproved for a mortgage? Head on over to Rocket Mortgage® to get started.