What to Know When Buying or Selling a For Sale by Owner (FSBO) Property

I took this great article from Inman news. The author is Tara-Nicholle Nelson. In today’s economy, there are still many people with the mindset that they can do it on their own without the help and advice of a licensed and experienced Realtor.

We, as Realtors, are a highly regulated industry with continuing education and ethics standards. We truly earn our commission despite what some FSBO (for sale by owner) companies say. We cannot not give advice to anyone whom we do not have a fiduciary obligation with. I have sellers of these FSBOs ask me for advice and help with real Estate related items. We can’t do it without the proper contracts in place. We would jeopardize our license and reputation. Please read this if you have thought about selling your own property, or buying without proper advice and representation.

Question: I saw a home in the newspaper being sold by a private seller. What are all of the pros and cons of buying from a private seller?

Answer: What you call a private seller is what real estate folk would call a home “for sale by owner,” or FSBO. It’s very common for homeowners considering having a go at selling their homes sans agent to write in and ask me about the pros and cons of selling FSBO.

It’s much less common for a buyer to ask about the advisability of buying from an unrepresented seller, so your question presents a fabulous opportunity to clear some things up! Generally, there is only one reason sellers list and try to sell their homes without using an agent: to save money on commissions.

Some sellers are experienced in real estate matters and just don’t think they need an agent’s help enough to warrant the cost of the commissions; others owe so much on their homes that they believe they cannot afford the commissions. Still, others just don’t understand enough of what an agent does to understand why they should pay for these services.

No matter what the seller’s situation is, there are some functions that a listing agent would normally play on the seller’s side that FSBO buyers also miss out on and should consider when buying a home listed by its owner. In the current market climate, listing agents do a lot of reality-checking and expectation management with their sellers at every stage of the process.

From setting a list price that is based on the reality of today’s market (which often means using the facts and recent sales data to bring the seller’s list price down to reality) to helping sellers understand how their home truly compares to the other homes that are on the market in the same price range, to explaining why an offer that has come in below the asking price is or is not a strong offer, listing agents perform a large number of reality-checking functions that are very difficult for a buyer to do, or simply do not get done when the seller has no agent at all.

While these functions are important in any transaction, they become extremely important in the case of a FSBO because these sellers are more likely than others to have unrealistic expectations. Why do I say this? Well, my experience with FSBO sellers has been, that more often than not, they don’t want to pay an agent’s commission, but they want to receive a price for their home that is on par with—or even higher than—that fetched by the sellers of similar homes.

But those comparable sales prices did include agent commissions! And, generally, the FSBO seller is looking to save the commission off of their side of the transaction—they are not usually looking to pass the commission savings onto the buyer. This is unrealistic, especially given the highly educated, savvy mindset of many home buyers today.

If the transaction is going to be done without the advantage of the professional expertise of an agent, then why shouldn’t the buyer demand a discount from the comparable sales prices, which includes agents’ services?

Buyers who buy FSBOs should, in my opinion, insist on receiving a discount from the home’s fair market value for the buyer-side commissions the seller is not paying, and then use some of that savings to go hire a broker or attorney to advise them through the rest of the transaction. (Many attorneys will review contracts and disclosures, or a buyer’s broker will help a buyer execute a FSBO transaction for far less than the 2.5 percent, or 3 percent commission they would have charged for finding the property and doing the deal).

Actually, before going this route, buyers of FSBO properties should ask the seller to pay the buyer’s agent or attorney, so that the buyer will have the professional representation they need on this major transaction, including the contracts and disclosures. If, after the seller pays the buyer’s representative, or gives the buyer a discount for their side’s representation, there’s any discount room left, it’s fair for the seller to realize that savings from not having hired a listing agent on their side of the transaction.

This brings us to some of the other major gaps that occur frequently in these FSBO transactions. FSBO sellers (and their homes’ buyers) miss out on the professional advice on making disclosures and the contacts, expertise, and efficiencies of scale that make real estate transactions run smoothly—from securing an escrow provider to ensuring that disclosures are properly and thoroughly completed, to obtaining title insurance. Some buyers experience FSBO transactions as particularly bumpy and difficult to close, as a result.

And finally, if you are buying a FSBO property with cash, as the non-published portion of your email leads me to believe you might want to do, it can be especially easy to forgo many of the protections that a real estate broker or mortgage lender would have required in a standard transaction, like obtaining the inspections you need, running a title search to ensure title is clear, and obtaining a title insurance policy, or having the home appraised.

None of these concerns I’ve mentioned are reasons to absolutely avoid a FSBO sale, but they are very good reasons to avoid buying a FSBO property without your own broker or attorney representation.

I’d strongly encourage any buyer considering purchasing a home that is being sold by owner to get their own broker and/or attorney. Try to negotiate for the seller to pay for it—but if they won’t, it’s worth the cash to pay for it yourself and make sure the transaction is executed in such a manner that your interests are protected. And just for your information, there are also buyer’s brokers who shy away from representing even the buyer in these FSBO transactions.

They feel—rightly so, in many cases—that to represent their client properly, they essentially have to do double work advising the seller of their obligations and duties to the buyer the same way a listing agent would ordinarily do. Given that many of these sellers are somewhat unrealistic or otherwise difficult, doing twice the work for half the pay is an unattractive option.

But many other brokers and attorneys will represent your interests in a transaction where the home is being sold FSBO, despite the extra trouble. If you go that route, find one! I have represented buyers in these types of transactions and, most of the time, a seller will recognize the need for that and agree to pay our portion of the commission. Please ask me for advice on this, or any other real estate question.

Rustin
808-281-1625
rustin@hawaiilife.com