What You Need to Know If You’re Buying a Home from the Owner
You’re driving around a neighborhood you love, and then up there in the distance, you see a sign in a yard. Is it a yard sale? A political sign? A contractor’s information?
No…it’s a for sale sign!!!
But this sign looks different from the real estate agent signs you usually see and it lists the homeowner’s contact information. You’ve found yourself a FSBO home.
What is a FSBO home?
A “for sale by owner,” or FSBO (pronounced “fizz-bo”) home, is a home that is being sold by its owner who hasn’t hired a listing agent. In this case, the homeowner will be taking care of the home sale process and negotiations themself.
You can usually find these homes by driving around the neighborhoods in your area and scoping out “for sale” signs, but they can also be found on real estate websites and social media platforms like Facebook Marketplace. If you decide that you want to buy a FSBO home, the buying process tends to look a little different than a traditional sale.
In this guide, we’ll walk you through just about everything you need to know about buying a FSBO home. We even talked with top real estate agent Jesse Allen, who sells properties 51% faster than the average agent in Jeffersonville, Indiana, to get the inside scoop on what you need to know about FSBO homes and whether or not you should hire an agent, even if the seller doesn’t.
Why would a seller want to list their home FSBO?
When a seller hires a listing agent, that agent will collect a commission from the proceeds of the home sale, usually somewhere between 2.5% and 3% of the home’s sale price. When a seller decides to forgo hiring an agent, saving on the commission is a big consideration.
Another reason someone may consider selling their home themselves could be that they already know a buyer and want to cut out the middleman. In fact, 57% of FSBO sellers knew the buyer of their home.
Allen finds that “we see more [FSBO homes] in a neighborhood where you can pretty easily tell what the house is worth.” For sellers in neighborhoods with many recently sold homes, it can be easier to determine what their asking price should be based on estimated market value. In these cases, sellers may feel more comfortable handling the pricing and selling themselves.
The housing market can also play a role in the seller deciding to sell the home themselves. In a hot seller’s market, it might be easier for a seller to sell their home themselves rather than in a buyer’s market when they may have to give in to more buyer demands. If the market gets too hot, however, sellers might be more inclined to work with a listing agent.
Allen recalls, “when the housing market was at an all time high about a year and a half ago where things were selling extremely fast, we saw a lot of people doing for sale by owner.” But once sales started getting more complicated with multiple-offer situations, cash offers, and more creative offers, “they knew they could sell their home themselves, but it’s so much easier to let somebody handle the entire transaction, so they started reaching back out to us.”
According to the National Association of Realtors®, in 2021, only seven percent of home sales were FSBO, so there is a relatively small chance that you’ll be in a position to buy one. But in the event that you are, let’s look at some pros and cons.
Should I buy a FSBO home?
There are definitely pros and cons to buying a FSBO home. Ultimately, you know your situation best, but you can use this list as a starting point to help you make a decision that’s best for you.
Pros of buying a FSBO home
The home price might be lower
Knowing that they will save money by not paying the listing agent’s commission, a seller might list their home at a lower price than they would if they had hired an agent. The seller may also be trying to sell their home quickly and the price might reflect this.
The buyer pool could be smaller
One of the benefits of hiring a listing agent is their marketing expertise. FSBO sellers don’t have access to a marketing team and the resources that an agent does, so the home might stay on the market longer and have fewer interested buyers. This could reduce the likelihood that you’ll have a bidding war or need to offer more than their asking price.
Negotiate directly with the seller
When a seller works with a listing agent and a buyer works with a buyer’s agent, the agents do the negotiating. When you buy from a FSBO seller, either you or your buyer’s agent will negotiate with the seller directly. This can have some advantages because you’re not going through multiple people to get your requests to the seller.
It could be more efficient
In a best case scenario, negotiations go smoothly, the inspection doesn’t reveal any major issues, the appraisal comes in right where it should, and the whole process is very efficient (we’ll get into what could create some hiccups later on).
When both parties work with agents, you’ll likely go through them to schedule showings, inspections, appraisals, and offer submissions. These things can take time to coordinate. When you buy a FSBO home and choose not to use a buyer’s agent yourself, you’ll be doing all the scheduling directly with vendors which can potentially save time.
Cons of buying a FSBO home
Negotiations can be tricky
When both the buyer and seller work with an agent, the agents can act as an intermediary to help mitigate buyer and seller emotions. If a seller is unwilling to compromise on certain things like repairs or come down in price, a listing agent can advise them on whether or not they’re being unreasonable. Similarly, a buyer’s agent can advise you if it’s time to walk away.
The home might be overpriced
Sellers who do not understand the market may not know how to price their home appropriately. Emotions can also factor in if they feel a connection to their home and feel like it’s worth more than it actually is. While a seller’s memories in their home are priceless, the home itself is not.
The seller may not pay buyer’s agent commissions
Often, buyer’s agent commissions are a set percentage that the seller pays out of the total sale price of the home. If the seller doesn’t work with an agent but you do, they may not be willing to pay the buyer’s agent commission, meaning that it would have to come out of your pocket.
Seller’s disclosures may be incomplete
One thing that a seller’s agent helps a seller with is filling out their seller’s disclosure so that it is complete and complies with state requirements. If the seller isn’t working with an agent, or if the state you’re in doesn’t require a seller’s disclosure, you may not be informed of pertinent information or defects that could surface during the home inspection. While a FSBO seller might not be intentionally deceitful, they are not experts and might not know what to look for.
You might be more susceptible to frauds or scams
It would be terrible to find a home you love, meet with the seller, get excited about buying, and then find out that the seller can’t actually sell their home. Maybe there are liens or judgments against the title — or maybe they don’t actually own the home they’re trying to sell.
Either way, you don’t want to get yourself stuck in a situation where you waste your time attempting to purchase a home, only to be disappointed. If the seller is working with a listing agent, their agent will more than likely have already done their due diligence to make sure they are able to sell their home.
[Agents] provide the contract, we’ll make sure everything is signed and dated just like it needs to be, we’ll make sure their lender gets it, and it gets sent to the title company. We do everything on the back end for the transaction just as if we represented both sides. The only difference is that we have no part in negotiations.
How to purchase a FSBO home: 15 steps
Ok, you’ve found a home that’s for sale by owner, and you’ve weighed the pros and cons and decided this is the best route for you. Here are the steps you’ll need to walk through to get your FSBO home.
1. Get preapproved for a mortgage
Preapproval for a mortgage can take as little as one business day once you’ve submitted all of the required information and documentation. This is the first step to buying a FSBO home — or any home — because this will give you a good idea of what your budget is. This will also determine your chances of qualifying for a mortgage after your offer’s accepted.
At this stage, you’ll want to shop around and get preapproved by at least two different lenders to compare interest rates, closing costs, and terms.
2a. Find a buyer’s agent
Working with a buyer’s agent when buying a home, whether it’s listed by a listing agent or listed as for sale by owner, offers a long list of benefits to the buyer. From sending you off-market properties to recommending vendors such as inspectors and contractors, an agent acts as your advocate and aide throughout the process.
If you reach out to an agent and want to look at a FSBO home, Allen says, “We would reach out to that owner and say that we have a buyer that’s interested in your property. We wanted to see what compensation you’re offering.” If the owner isn’t offering to pay a buyer’s agent commission, Allen says the buyer can agree to put the commission on their side of the closing costs.
If you choose not to work with an agent to find a house and make an offer, you can still hire one to facilitate the transaction, typically for a reduced fee. Allen says that in this case, “We’ll provide the contract, we’ll make sure everything is signed and dated just like it needs to be, we’ll make sure their lender gets it, and it gets sent to the title company. We do everything on the back end for the transaction just as if we represented both sides. The only difference is that we have no part in negotiations.”
2b. Hire a real estate attorney if you choose not to hire a buyer’s agent
If you choose not to hire a buyer’s agent, a real estate attorney will be necessary to help you with the purchase agreement and advise you on the process. Allen explains that if you’re deciding between an agent and an attorney, it’s important to understand how they’ll be compensated.
“As an agent,” he shares, “we look at [compensation] as a percentage whereas attorneys typically look at things as either a flat fee or an hourly rate, and it really depends on how complicated the transaction is.” He recommends shopping around to make sure you’re working with someone in your price range.
3. Find a property if you haven’t already
It’s time to take matters into your own hands. Scour Facebook and local bulletin boards (in person or electronically), talk to friends and family, drive around neighborhoods you love, or send letters to homeowners in your area until you find a home for sale.
If you are working with a buyer’s agent, they might be familiar with local FSBO listings and can point you in the right direction.
4. Contact the owner for a showing and ask, ask, ask
Get in contact with the owner and ask to set up a showing. At the showing, ask questions about the property, the neighborhood, the schools, and local crime rates and safety. You will also want to request to see the seller’s disclosures to note any issues with the property.
Chances are, you might be able to get more information about what living in that particular neighborhood is like by speaking to the homeowner directly compared to speaking with a listing agent.
5. Make an offer
If you have a buyer’s agent, they’ll have an offer document ready to fill out and submit. If you’re going it alone, you’ll have to work with your real estate attorney to write one up or find a template yourself.
When you make an offer, be sure to include any contingencies that you want fulfilled.
Common contingencies include, but aren’t limited to:
Also, be sure to include your earnest money deposit amount, closing dates, and who will be responsible for certain closing costs.
6. Sign the purchase agreement
Once the seller accepts, your offer will turn into the purchase contract to be signed by both parties. This can usually be signed electronically via docusign but if you’re old-school, it can be signed in person.
7. Order a title search from a reputable title company and open escrow
Before you buy a home, you have to ensure that the seller has full rights to sell it. If there is a lien or judgment against a property, the seller may have financial obligations to meet before they can legally sell the home.
Once the purchase agreement has been signed, so begins the escrow process. In some areas, it will be up to the seller to choose the escrow and title company, but in others, it will be the buyer’s choice. The escrow and title company will order a title search to make sure that the title is in the seller’s name and there is what is known as marketable title, aka title free from any encumbrances.
Buyer’s agents typically have title companies that they work with and can help you decide on one that has a good reputation.
8. Send your earnest money deposit
When you make an offer on a home, you’ll likely agree to put down an earnest money deposit. This is a percentage of the sale price, usually between 1% and 3%, that is held in an escrow account by the escrow company facilitating the transaction. The earnest money deposit becomes part of the down payment and will be disbursed to the seller upon closing.
9. Schedule inspections and appraisals
If an inspection contingency was part of your accepted offer, you’ll have to schedule any inspections you need. This could include a standard home inspection, which covers most of the property and costs around $340, as well as specialty inspections for pests, mold, radon, or foundation issues.
An appraisal may be required by mortgage lenders to determine the value of a home so they can ensure that they are not lending you more money than the home is worth. If the appraisal comes in low, you may have to either negotiate a concession on price or increase your down payment to cover the difference between the asking price and the appraised value. If the appraisal comes in higher than the asking price, you may have found yourself a deal!
Not only will buyer’s agents have a network of inspectors and other vendors to call on, but they will also help get the necessary inspections scheduled and act as an intermediary, so it doesn’t all fall on your shoulders.
10. Negotiate repairs
Armed with information from your inspection, you’ll know whether or not you need to ask the seller to complete any repairs before you close. This is where negotiation can get tricky again, and if you don’t have an agent, you’ll be the one doing the negotiating with the seller directly.
If the seller is unwilling to come down on price or complete repairs before the home becomes yours, consider asking for a seller credit to cover some of your closing costs. This might not be ideal if you are looking to move in without needing to do any work on the home yourself, but it is better than nothing! If you are financing your home with a mortgage, any safety or health concerns must be fixed before closing, so keep this in mind when negotiating repairs.
11. Shop for homeowners insurance
Homeowners insurance will always be required if you are financing your new home with a mortgage. Even if you are paying cash, you should always have your home insured against potential disasters to protect your investment.
Be sure to shop around to a few different providers, if available in your area, to compare premium costs, deductibles, and coverages. If you’re working with a real estate agent, they will be able to give you their recommendations and let you know if you need any specialty hazard insurance.
If you are in a flood zone, or if your area is prone to wildfires, you will want to purchase specialty policies that will cover those kinds of losses. Homeowners insurance can get quite expensive, but it is well worth it to know that you will be compensated if disaster strikes.
12. Finalize your mortgage application
Throughout the buying process, your mortgage lender will review your documentation and complete a full underwrite of your loan. You will receive multiple Loan Estimates and eventually a Closing Disclosure, outlining all closing costs, your mortgage payment, and your loan terms.
Be sure to answer any questions your lender might have promptly and respond to updated document requests as quickly as possible. A buyer’s agent can help keep you on track throughout this process and make sure you’re submitting the right things at the right time.
13. Final walkthrough
The final walkthrough is your last chance to see the house before you finalize the purchase. At this point, you’ll be verifying that the seller made the repairs they agreed to (they should be able to provide the receipts), making sure that the sellers did not damage anything while moving out, and checking that they are not leaving anything behind.
The sellers should have the home in “broom-clean” condition by this stage, so be sure to thoroughly inspect the parts of the home that might have been covered by furniture to make sure there are no damages. This is basically your last chance to address any issues before the home becomes yours.
Having a buyer’s agent there adds an extra set of eyes that will be on the lookout for any issues. Since they’ve likely done this a lot, they’ll know exactly what to look for.
14. Review your closing documents
Closing will take place at the title company or at your real estate attorney’s office. You’ll have a large stack of final closing documents to sign, including your final Closing Disclosure, deed of trust, grant deed, and various lender documents.
It is very important to review every document you sign for accuracy, and while this may take a while, it is necessary to understand exactly what you are signing. Plan to spend a minimum of one hour at the closing table and ask as many questions as you need. A buyer’s agent will act as your advocate during closing and can help answer questions.
15. Close on the home
Here you are! Once you’ve completed all of the above steps you’ll be able to get the keys and move in.
Bottom line: Should you buy a FSBO home?
In some cases, buying a FSBO home makes sense. For instance, if a family member, good friend, or neighbor is selling their home and you have a good idea of what to expect, FSBO can be a great experience for all.
But the process of buying a home directly from the owner can get complicated quickly, and you may find yourself in need of advice or guidance. That’s why partnering with a trusted professional can help the homebuying process go much more smoothly — especially with a FSBO home.
Header Image Source: (Roger Starnes Sr / Unsplash)