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Buying a House for Sale by Owner (FSBO)?

Written by:  

Dan Silva

Dan Silva

Dan Silva

Dan is the Vice President of Marketplace Lending at Own Up. Throughout his career, he has held executive leadership positions in the mortgage and banking industry.

a blue and white house with a red "For Sale by Owner" sign in the grass

Are you planning on buying a house for sale by owner? Here's everything you need to know!

A house is the most expensive purchase many people will make in their lives—by many factors of 10. It is thus no surprise that homebuyers are intimidated by the numbers. The national median selling price of a home during the second quarter of 2019 was $320,300. In the Boston area, the median price is over $500,000, and in San Francisco, it's over $1 million. With all that money on the line, both buyers and sellers are looking to get the best deal on their ends. This is why a majority of buyers work with a real estate agent. For some sellers, though, this sometimes means foregoing a real estate agent and selling their home "for sale by owner," or FSBO.

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The Skinny On FSBO Economics

The real estate selling agent and buyer's agent typically earn a 3 percent commission, usually paid by the seller. This cost is often considered when setting the home sale price. On a $320,000 house, that's $19,200. Cut that number in half; it's easy to see the motivation for a seller to forego working with an agent.

FSBO sellers and realtors have a relationship akin to Red Sox and Yankees fans: they hate each other. They also share a desire to throw statistics at each other to make their point. The National Association of Realtors reported in 2018 that the average FSBO home sold for $200,000, versus $265,000 with a real estate agent. A larger enough difference to quickly make up for the 3% commission.

National Bureau of Economic Research compares the Multiple Listing Service (MLS) by agents versus FSBO in Madison, Wisconsin. They found sales prices were not significantly higher for MLS listing, although they did sell quicker. Typical real estate transactions with an agent take around three months. One explanation for the price difference is the kind of home. Some experts say condos, mobile homes, and homes in rural areas (read less expensive) are more likely to be for sale by the owner.

How the Internet Has Changed Home Buying

Before the Internet, FSBO home sales were much harder to market. Sellers mainly depended on word of mouth and yard signs. These days, online resources make it easy to do the more common hybrid model between selling on your own and using a real estate agent. Websites like Isoldmyhouse.com and Forsalebyowner.com offer packages that include listing on MLS. Which drastically increases the number of prospective buyers who see a house. Despite this, FSBO home sales had decreased from a high of 15 percent of all homes sales in 1981 to 7 percent in 2018.

The commission structure is also changing as real estate agents do less work than they did in the pre-Internet age. Buyers do comprehensive Internet searches for homes; listing agents have lockboxes (so they don't need to open a house for buyers to view it). Automated systems let buyers set up home showing appointments. For all these reasons, commissions are often negotiated below 6 percent.

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Finding an FSBO Home

House hunting is sort of like a personality test. How willing is a buyer to compromise on their needs and wants? Are they ready to widen the pool of options to consider an FSBO home? While local buyers can spot the FSBO signs, out-of-state buyers can take advantage of online listings.

Eighty-six percent of homebuyers used a real estate agent to purchase their home. But 50 percent of those people used the Internet to find the home they eventually bought, not the agent. The MLS listing service lists all homes sold by agents and those sold in a hybrid for sale by owner arrangement. Sellers pay a fee to be on the listing site. MLS listings are also distributed to Zillow, Trulia, and Realtor.com. For sale by owner, homes are also listed on sites like forsalebyowner.com, fsbo.com, and Craigslist.com.

Buying an FSBO House with a Buyer's Agent

Buyers must be cautious when buying an FSBO house to make sure it is as advertised. Real estate agents can be either buyers' agents or sellers' agents. Below are some critical things seller's agents do that get more complicated with an FSBO home seller situation:

  • Research the local market and set the selling price of the house. A house priced high above the appraised value will make it hard to get a loan. On HomeAdvisor, you can compare quotes for home appraisers.
  • Provides a property disclosure statement. This form, required by law in most areas, lays out any flaws and gives your home inspector a road map of things to check.
  • Takes photos for online listings and coordinates with prospective buyers.
  • Negotiates offers with prospective buyers.

Without an agent, these tasks are left to the seller, or lawyers, and other experts. This means FSBO buyers must be extra vigilant regarding the home and its condition.

A buyer's agent has a different set of tasks focused on the home buyers' needs. They focus on finding you a house in your desired area and price range, negotiating a price, and managing the paperwork. Many buyers' agents will not help buyers purchase an FSBO house. They worry they will end up doing the work of the listing agent without being compensated. This is especially true since the seller typically pays the agent's commission. If you find an agent willing to work on an FSBO sale, you may need to pay the 3 percent commission to make the real estate transaction go through.

Buying an FSBO House Without a Realtor

If you choose to buy a house without the help of a Realtor, you need to be prepared to do all the work they could do for you. This starts with getting a mortgage pre-approval letter, which determines the home price range you can afford. Own Up makes it easy to generate customized pre-approval letters in the exact amount you want up to the maximum you can afford. You will also need to set up visits to see homes for sale. Make sure you consider closing costs, in addition to the down payment, when evaluating the price of a house.

Without a real estate agent, you will need to do your due diligence to assess a property. This includes:

  • Calling the town or doing research online to find its assessed value.
  • Search the MLS listings for homes in the neighborhood for comparable recent home sales to assess their size, age, and cost. Then compare to the property you are considering. Forsalebyowner.com offers free reports to buyers for homes on its site. You can also do this research on realtor.com and Zillow.
  • Research how long homes are typically on the market in the town you are looking. In a hot market, they will sell quickly, and competition will drive up prices and often require an Earnest Money Deposit as a show of good faith. This amount will go toward closing costs. Be sure to pay it to a third party who will hold it in escrow and not directly to the seller. In a slow market, there will be more room for price negotiation.
  • Requesting a Comprehensive Loss Underwriting Exchange (CLUE) report for the prospective home. This is something the home seller will need to request and provide. It shows any claims against the property over seven years, including water damage, fire, and other structural damage claims.

When it's time to make an offer, be prepared to negotiate with the selling price and terms of the sale. FSBO homes are more likely to be priced out of line with the market as sellers are usually not real estate experts. Choose a realistic starting point for negotiations based on the validity of the asking price and the number of potential buyers. Building a relationship with the seller will make agreeing on a purchase price easier.

The agreement the buyer and seller sign is called The Purchase & Sale Agreement. A real estate agent usually handles it, but without one, you should hire a real estate attorney. Websites including Justia.com offer a database of attorneys by specialty and location. The Purchase & Sale Agreement is a binding legal document. It states the final price for the house and the terms of the purchase, as negotiated between a buyer and a seller. It includes:

  • Contingencies that must be met for sale to go through. These commonly include a title contingency to make sure the title is free and clear, a home appraisal to make sure the home is worth the purchase price, a finance contingency in cases where the buyer can't get financing, a home inspection contingency to make sure the house is as reported and in cases where the buyer is selling a house, sometimes a home sale contingency.
  • The amount of the Earnest Money Deposit
  • Riders that spell out specific terms of the sale, such as the seller paying some of the buyer's closing costs or personal items such as washing machines and window treatments being included in the purchase price.
  • The agreed-upon price and who will pay for fees, escrow, and transfer taxes, among others.
  • The planned closing date
  • The name of the title company

Sealing the Deal

Buying a home without a real estate agent is like being a general contractor. You need to bring together a team of people to get everything done and oversee the process. Once the Purchase & Sale Agreement has been signed, there is still a lot to do. First, you need to get a home inspection to ensure the property is as reported and does not have any issues. Issues can result in a need to reduce the purchase price. Find a home inspector here.

Buyers will also need to get an appraisal of the home to ensure it is valued at the purchase price. If you're getting a loan, the lender will select the appraiser to order the appraisal for you. If the appraised value is below the purchase price, it may preclude you from securing financing. The terms of the sale will need to be renegotiated. Buyers will also need to get title insurance.

A home inspection, appraisal, and title insurance make for a lot of research and phone calls, but the first task at this juncture is getting a mortgage. Make sure to shop around. Homebuyers often don't, and this is a huge mistake. Own Up makes comparing home financing options quick and painless. Our easy-to-use online tools help you evaluate lenders, understand how much home you can afford. You can compare loan offers and even update pre-approval letters on-demand. We streamline the process so lenders save money and offer better rates on mortgages, which we pass on to our customers.

Ensure that your mortgage company prepares closing documents for the actual home purchase. That includes adjustments for prorated property taxes, insurance, and other items. Your down payment will be transferred to the escrow company in time.

Home buying is a complicated process, and even more so with an FSBO sale, but a new home is a reward worth working toward. There is a reason most people use real estate agents for a home sale, but it can be done without one if you are willing to be diligent and hire experts as needed.

Own Up helps people through the entire homeownership journey. We focus on educating you, so you are empowered to make the best decision about all aspects of the process. If you are considering buying a house for sale by owner, we are here to assist you!


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