The real estate market is full of potential homebuyers and investors, hoping to grab the deal of a lifetime. While investors tend to mine foreclosure auctions for their next big deal, the average consumer looking for a bargain-priced home tends to labor under two misconceptions: Short sales and for-sale-by-owner (FSBO) homes offer the best bargains. In reality, however, neither of them necessarily does.
The National Association of Realtors® (NAR) claims that, in some cases, you’ll pay less for a home listed by an agent-assisted home seller than you will for a FSBO going it alone.
If you have your heart set, however, on only shopping among an area’s FSBOs, read on to learn how to protect yourself and ways to save some money.
Know Who You’re Dealing With
The typical FSBO, an unmarried person, has a lower median income and is less likely to offer incentives (such as home warranties or assistance with closing costs) to the buyer than traditional home sellers, according to NAR.
If you know the seller, plan on paying more for the home than you would if you did not know the seller. The median sales price of a FSBO when the seller and buyer know one another is $167,100. The median price when sold to a stranger is $140,300.
Don’t expect to get a rock-bottom bargain price from the FSBO right out of the gate. The main reason the seller isn’t using a listing agent is to save the money he or she would pay in commissions. That’s money she wants in her pocket and she most likely has no intention on sharing it with the buyer.
Tip: To gauge the seller’s willingness to drop the price, ask if he or she is willing to pay a buyer’s agent commission. If the answer is yes then it’s a safe bet that the seller is most likely open to discounting the price at least 3 percent. If you feel confident enough to proceed with the purchase without a real estate agent, this will save you a significant amount of money.
If you aren’t using an agent in the purchase of the FSBO, you need to know how to protect yourself during the process. The number one rule is to never rely on oral promises but get everything in writing. Here are some additional considerations:
Never allow the seller to hold your earnest money deposit but instead ask that it be deposited into an escrow account. The ideal time to open one is with the deposit of your earnest money. Your lender can give you more information on how to open an escrow account.
Tip: These accounts typically have small setup fees, so request that the seller pay all escrow-related fees. Place this request in the purchase agreement.
Get a Clue
A Comprehensive Loss Underwriting Exchange (C.L.U.E.) report will allow you to check insurance claims data on the house. Covering the past five years, the report is inexpensive and can be ordered online.
Tip: Since obtaining a C.L.U.E. report requires the homeowner’s permission, ask the seller to order it and pay for it. Even if you decide not to go through with the purchase of the home, the seller can use a clean report as a selling tool with the next potential buyer.
What’s it Worth?
A smart homeowner will obtain at least three comparative market analyses (CMA) from real estate agents prior to putting the FSBO home on the market. Real estate agents use the research included in the CMA to determine the current market value of homes. Without this information the seller is living in fantasyland and the asking price is merely a dream of what he hopes to receive.
Ask the seller how he came up with the price of the home and, if it was agent-generated, ask for copies of the CMAs. If the seller didn’t obtain CMAs but used another method to determine value, ensure that the method relied only on the sales prices of recently sold homes in the area.
An accurate selling price is crucial, not only to ensure that you don’t overpay for the house, but to ensure that the house will pass the lender’s appraisal.
Tip: If you are still not satisfied with how the seller determined the price, ask for an independent appraisal of the home, paid for by the seller.
Structuring the Purchase Agreement for Maximum Protection
Contingencies are your friend. These are items placed in the purchase agreement that must be attended to before you will close on the sale. Time-limited, typical contingencies include:
- Loan approval
- Home and other inspections, such as a pest, well, septic system, roof, plumbing or electrical inspection
- The sale of your current home
Real estate buyer’s agents are worth every penny they make just for dealing with this section of the contract. This is where you, as the buyer, derive the most protection during the purchase process. Contingencies say to the seller “I want to purchase this home, and I will, provided the following occurs.”
If any of the contingencies are unmet – perhaps the home fails to appraise for the amount of money the bank is willing to lend for it – you have the right to walk away from the deal with a full refund of your earnest money deposit. Which is in escrow, right?
Give yourself at least two weeks to complete the inspections. Once the contingency time limit expires, you are on the hook to proceed with the purchase if you haven’t submitted an amended purchase agreement outlining what is required for you to continue with the purchase.
Additional Ways to Save Money
Who pays for what during a real estate transaction varies by local custom and laws, but many items are negotiable. Request, in the contract, that the seller pay for the following:
- Owner’s title insurance policy
- Document preparation fee
- Transfer taxes
- Loan fees for FHA or VA loans
- Pest inspection fee
- Unpaid homeowners association dues
- Bonds or assessments
- Delinquent taxes
- Notary fees
Buying a home without representation is risky. Without an agent or attorney not only will you have to do all the work by yourself, you lack that extra set of highly experienced eyes that may catch red flags that you fail to notice.
FSBO sellers name pricing the home correctly and understanding the paperwork among the top three most difficult tasks they faced when selling the home, according to research performed for the National Association of Realtors®.
Keep this in mind when deciding whether to enter into an agreement with a FSBO seller without agent or attorney representation. If you are equally as confused about these two critical elements of the home purchase, your best bet is to either pay for your own representation or find another FSBO home with a seller who is willing to pay for these services for you.