3 Reasons Buying a For Sale By Owner Home is Dangerous

Jeff Peterson
Jeff Peterson
Published on July 16, 2017

The housing market is moving at warp speed, with homes that are in decent condition and priced right, flying off the market in a matter of days. 

The percentage of for sale by owner homes on the market sits at around eight 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 a for sale by owner seller may seem attractive, at first glance. But, there are very real problems that commonly occur when the seller (and the buyer) aren’t represented by a real estate agent. Let’s take a look at three of them.

1. The Paperwork

The 2015 National Association of Realtors’ Profile of Home Buyers and Sellers showed that “paperwork” is one of the most challenging aspects of selling a home as a for sale by owner. The for sale by owner seller’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, 118,000,000 results.

The online discount brokers aren’t all that helpful either, when it comes to the proper forms. So, what happens when a for sale by owner buyer wants to amend the purchase agreement with a demand for repairs? What form will the for sale by owner seller and buyer use and where will they get it?

The next challenge for sale by owner seller claim they have with the paperwork, is understanding it. Unless the for sale by owner seller is a lawyer or has a deep understanding of state law, the paperwork when selling for sale by owner is extremely confusing. 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 – be overly cautious about assumptions made by a legal and real estate novice when buying something as expensive as a home.

2. The Money

During the for sale by owner purchase process, you’ll require the services of an attorney. It’s just far too dangerous to proceed without professional consultation. So, from the outset, buying a house that is for sale by owner is going to cost you far more than if you were 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 for sale by owner seller 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 for sale buy owner sellers haven’t a clue as to the true market value of their homes.  Don not rely on Zillow’s zestimates either as those are just a computer algorithm of a standard formula.

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 helmed by real estate professionals, there’s a very real possibility that the for sale by owner seller 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 when buying a for sale by owner home.

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 willing buyer will pay for the home. The proof of that amount of money is reflected only in recently 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 a for sale by owner home?

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 in your for sale by owner purchase?

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. For sale by owner sellers do not have the worry of losing their license and occupation for misrepresentation.

In the hands of an unscrupulous or ignorant for sale by owner 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 interests.

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 lender how to set this up) – never give it to the seller.
  • Never waive the home inspection and be willing to pay for additional inspections if conditions warrant.
  • Ensure that the for sale by owner 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 for for sale by owner home by communicating with your 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.

 

 

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