3 reasons to think twice about looking at a for sale by owner home

Rick Sheppard
Published on July 28, 2020

3 reasons to think twice about looking at a for sale by owner home

It’s the summer of 2020 and despite the coronavirus pandemic we are facing, the housing market is moving at warp speed.  Inventory is low, mortgage interest rates are, too and buyers are buying.  Many homes added to the market are under contract with a buyer in just a few days and often the seller had multiple offers to consider.  When it will end, nobody knows.

One thing that is certain is that the percentage of for sale by owner homes on the market sits at around ten percent, nationwide. So, after being mortally wounded in the bidding wars, many buyers are tempted to pursue FSBOs – pronounced “fizzbo,” and short for for-sale-by-owner.

Sure, buying directly from the owner may seem attractive, at first glance. But, there are very real problems that commonly occur when the seller (and the buyer) isn’t represented by a real estate agent. Let’s take a look at three of them.

1. The paperwork

The 2018 National Association of Realtors’ Profile of Home Buyers and Sellers showed that “paperwork” is one of the most challenging aspects of selling a home without an agent. The FSBO’s first challenge is in knowing which forms are required. A Google search of “What forms do I need to sell my house” returns, in fact, 5,960,000,000 results.

The online discount brokers aren’t all that helpful when it comes to the proper forms, either. In fact, one of the largest offers only a purchase agreement. So, what happens when a FSBO buyer wants to amend that agreement with a demand for repairs? What form will the seller and buyer use and where will they get it?

The next challenge FSBOs say they have with the paperwork is understanding it. Unless the seller is a lawyer or a real estate agent, or has a deep understanding of state and federal law, this is perfectly understandable. These may look like “forms,” but each one is a legal document and, naturally, filled with legalese.

This lack of understanding leads many FSBOs to make assumptions about the documents’ meaning and about his or her responsibilities. Buying a home is a huge financial investment – that said, be overly cautious about assumptions made by someone who does not have legal and/or real estate expertise.

2. The money

During the for sale by owner home purchase process, the buyer will require the services of an attorney and a title company. It’s just far too dangerous to proceed without professional consultation. So, from the outset, buying a FSBO is going to cost you far more than were you working with a real estate agent – whose services don’t cost the buyer a dime – to buy a home.

Then, there are three additional seldom-considered financial pitfalls when dealing with a homeowner directly. The first is price. While coming up with a list price is easy, determining what buyers will actually pay for a home is a bit trickier and most homeowners haven’t a clue as to the true market value of their homes.

Even if the homeowner has decided to employ the services of an online discount broker or a for-sale-by-owner company, there’s no guarantee that he or she will have accurately priced the home for the market. In fact, since many of these companies aren’t headed by real estate professionals, there’s a very real possibility that the homeowner received bad advice and that home you’re contemplating making an offer on is overpriced.

“There are a lot of variables that come into play when determining the list price of a home including local inventory, interest rates, average market price for comparable homes, appraisal value and the sellers’ personal and financial objectives,” Steve Udelson, President of Online Real Estate at Altisource (which oversees Owners.com and Hubzu) claims in an article he contributed to forbes.com.

Now, in all fairness, Udelson admits that he is not a real estate professional. Yet, if his customers follow his advice, they may end up overpricing the home. And a homebuyer who lacks representation may just end up overpaying for it.

The truth is, the list price of a home should ideally match, or come close to, it’s current market value. This value has little to do with the asking price of currently listed homes, local inventory and interest rates, and nothing to do with the “ . . . sellers’ personal and financial objectives.”

It has everything to do with what a ready, willing and able buyer will pay for the home. The proof of that amount of money is reflected only in recent sold prices of comparable homes.

That information, by the way, isn’t easy to come by without a real estate professional’s access to the Multiple Listing Service statistics. And, no, what you see on the big aggregator websites is not typically taken from the MLS and is rarely accurate.

So, how will you know that you aren’t overpaying for the home?

Then, there is the common assumption among homebuyers that, since the seller is saving money by not having to pay a real estate commission, he or she will pass some of that savings on to the buyer.

According to studies by the National Association of Realtors, the number one reason a homeowner decides to go it alone is to “save money.” Sharing the savings with the buyer rather defeats that purpose, don’t you agree? So, no, don’t count on getting a discount.

Which brings us to the third financial pitfall: closing costs. Do you know how to negotiate with the sellers to have them pay for all or part of your closing costs? Do you know the maximum amount your lender allows the seller to pay on your behalf? How will you word the purchase agreement to make the request?

3. The integrity

Nationwide, sellers have a duty to disclose the presence of lead-based paint in homes built before 1978. But there are other, state and locally mandated disclosures required of sellers as well. The most significant of these is the disclosure outlining any material defects concerning the property. The proviso to this disclosure is that the seller is only required to disclose items that are within his or her knowledge.

In the hands of an unscrupulous or ignorant seller, this may be seen as an opportunity to “fudge” on the details. Sellers represented by professional real estate agents, on the other hand, are warned that anything less than complete honesty is not in their best interest.

If it’s too late, and you’ve fallen in love with a for sale by owner home, take the following precautions:

  • Get everything in writing.
  • Do not sign anything until you’ve run it by your attorney.
  • Deposit your earnest money deposit with a neutral third party (ask your attorney how to set this up) – never give it to the seller.
  • Don’t waive the home inspection and be willing to pay for additional inspections if conditions warrant.
  • Ensure that the seller actually owns the home and that no-one else has a claim to it by ordering a title report.

Protect yourself before looking at a for sale by owner home by communicating with a trusted real estate agent. He or she can approach the homeowners to determine if they are amenable to paying the agent’s commission. This way, you are represented and protected, and at no cost to you.

The author, Rick Sheppard, is a licensed real estate broker with RE/MAX Achievers, Inc in Pennsylvania and a 32+ year veteran of the real estate trenches.  He knows a lot because he’s seen a lot.  If you have any questions about this or any real estate related topic, feel free to contact Rick a[email protected] and he’ll do his best to answer your questions.

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