On average, only 10 to 12 percent of homeowners sell their home without using a listing agent. As a buyer, there are a number of reasons for looking into for sale by owner (FSBO) homes, potentially including a lower price and the ability to speak directly with the seller about the home and the neighborhood.
There are also, however, numerous and often-overlooked aspects of buying a FSBO home that can more than offset these benefits—especially if you are also acting on your own.
Be on the lookout for these potential pitfalls:
1. Full disclosure may not occur
A sale between two individuals may not include all the seller’s disclosures required by law when using a licensed real estate agent. For example, you may not know if the home had been used as a meth lab, if a murder took place inside the dwelling, if the house suffered fire or water damage, or if the property doesn’t conform to current zoning laws.
In fact, the owner may have decided to sell on his/her own specifically to avoid certain disclosure requirements mandated by your state’s real estate license laws.
2. You may pay too much
Even though many buyers think they’ll have more room to negotiate on the price of a FSBO home (because the seller isn’t paying a commission to a listing agent), it may be more accurate to say that the owner is pricing their home without full knowledge of comparable properties and current market dynamics (because only licensed real estate agents have full access to the local Multiple Listing Service).
In the case of a FSBO home, this may work to your advantage—or to your disadvantage. The only way to know, with certainty, is to engage a professional buyer’s agent to represent and assist you with pricing and negotiating details.
3. You could get “stuck” with the house
If an attorney or a buyer’s representative isn’t assisting you with important contract details, including contingencies that would release you from the sales contract (such as a home inspection clause), you could find yourself forced to complete the purchase. To help prevent such problems, some states actually require attorneys to be involved in all real estate transactions.
4. You could lose your security deposit
If the seller requires “up front” or earnest money, make sure this is placed into an escrow account through your financial institution or lender, so your deposit can be refunded if the transaction does not proceed. (Who will pay the fees associated with setting up this account will be one of many negotiating details.) Do NOT give earnest money directly to the seller.
5. Closing costs can catch you unaware
Without a buyer’s agent to help identify and negotiate the “who pays for what” at closing, you could end up shouldering most or even all of the closing fees and expenses, including (but not limited to):
- Appraisal costs
- Transfer taxes
- Document preparation fees
- Notary fees
- Delinquent taxes
- HOA dues (current and past)
- Pest inspection fees
- Title search fees
- Owner’s title insurance policy
Purchasing a FSBO home is a personal decision. If you DO decide to buy one without representation by a buyer’s agent, be sure you take these additional steps, at a minimum, to protect yourself:
- Get a home inspection
- Get all agreements in writing
- Determine who will pay each fee related to closing
- Hire an attorney to review the sales contract and assist with the closing
- Specify the date you will take possession in the contract
- Order a Comprehensive Loss Underwriting Exchange (CLUE) report, which will disclose any claims filed on a home in the previous five years.
Also, if you are emotionally attached to the house, be sure to keep your sentiments to yourself. If the seller picks up on this, it will seriously limit your bargaining power on price, repairs and other contingencies.
A Better FSBO Option?
Does buying a FSBO home on your own sound a little less appealing? Indeed, the best way to protect yourself, get a fair price, and ensure the transaction proceeds in a professional manner is to work with an Accredited Buyer’s Representative.
Your buyer’s rep may also be able to convince the seller to pay their commission. After all, by bringing an eligible buyer to the table and handling some of the transaction paperwork, the seller also benefits from a buyer’s rep’s involvement.