Think twice about looking at for-sale-by-owner homes (on your own)

Hank Bailey
Hank Bailey
Published on April 9, 2019

We are moving into that time of year were the housing market is moving at light speed with homes that are in move in ready condition, and priced right, flying off the shelf in a matter of days. When it will end, nobody knows.

One thing that is a common constant is that the percentage of homes being sold “by owner” sits normally at about eight percent of homes that are on the market for sale at any given time. So for many home buyers who both are struggling through a housing market with low inventory in the MLS to also being mortally wounded in bidding wars, some are tempted to pursue anything and everything that has a heartbeat or a pulse including FSBOs, which is short for for-sale-by-owner.

Sure, buying directly from the owner may seem workable, at first glance, but there are some very real problems that I’ve experienced as a buyer’s agent who has sold FSBO properties to buyer clients over the years that can and will commonly occur when neither the buyer nor the seller is represented by a real estate agent. Let’s take a look at three of these.

Ah the Devil is in the details

The 2018 National Association of Realtors’ Profile of Home Buyers and Sellers showed that “paperwork” is one of the most challenging aspects of selling a home without an agent. The FSBO 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, 1,550,000,000 results.

Homelight, in a blog post in August 2018 noted that the forms needed to sell a home are pretty extensive. As a buyer, you may have an agent working in your behalf and you will have a mortgage lender, but what expert is that FSBO seller working with for guidance to make sure they do things the right way? The answer is nobody.

The post in Homelight goes on to state wistfully, “If only you could seal the deal with a handshake and a smile, and be on your way. Ha, ha, ha, quite the contrary—real estate transactions call for stacks of paperwork as tall as Mount Everest. We’re talking about 180 sheets give or take in some states (sorry, trees!) While your buyers sign (and sign, and sign) their life away to their lender, you’ve got your own mounds of documentation to round up and face head on.”

Let’s look at it as if we were on the other side of the table for a moment. If you were the seller, would you personally know about all potential documents and where to find them to list and sell your home to make sure your contract would be ‘air tight?’ If that proposition scares you a little, the seller on that FSBO is probably no different!

Many FSBO sellers go the route of online discount brokers, but these aren’t all that helpful when it comes to the proper forms, either. Sure, they’ll put the FSBO in the MLS for a $500 fee, but then it’s in the hands of the seller from that point.  One of the largest discount brokers out there offers only a purchase agreement. So, what happens when you as a buyer want to amend that agreement with a request for repairs? What form will the seller and buyer use and where will they get it to keep the contract legal and binding to both? A scarier proposition, what happens if the house does not appraise for full contract value? What do you do? It happens, trust me.

On the buying side of things, let’s say you are not working with an agent of your own. You go straight to the FSBO seller and try and negotiate your deal, but then who do you trust do handle the home inspection? Do you know what inspections are typically needed or required? How do you get a grasp for what sellers typically should or would be required to agree to do regarding repairs? I got an email from a past client just last night where she said a friend of hers was looking for a home inspector. Didn’t know anyone she could trust so my past client (her friend) sought out the help of me, a real estate agent.

Next, in the 2018 National Association of Realtors’ Profile of Home Buyers and Sellers, challenges facing FSBOs after they have with the paperwork is trying to understand it. Unless the seller is a lawyer or a real estate agent, or has a deep understanding of state law, this is perfectly understandable. 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 to you the buyer. 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. As a real estate agent and a broker, I know for ‘newbie’ agents one of the biggest mistakes they make is when ‘they assume’ anything to do with a contract.  If a new agent can make these errors, you better believe a novice home seller will do so.

Follow the money

During the FSBO 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 FSBO could conceivably cost you far more out of your own pocket than were you working with a real estate agent, whose services don’t cost the buyer a dime to buy a home.

Three additional seldom-considered financial pitfalls when dealing with a homeowner directly that most don’t even know to consider until it’s too late. The first is pricing on the home. While coming up with a list price is easy, determining what buyers will actually pay for a home is a bit trickier and most homeowners haven’t have as good of a feel as to the true market value of their homes.

Even if the homeowner is using the services of an online discount broker or a for-sale-by-owner company, these services just get the home listed in the MLS (multiple listing service), they don’t give advice on how to price the property so there’s no guarantee that the seller will have accurately priced the home for the market.

“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 and Hubzu) claims in an article he contributed to

The one thing Mr. Udelson said that bothers me most regarding his advice or opinion about variables involved in pricing a home is that little phrase that included, “the sellers’ personal and financial objectives.” Home buyers everywhere please listen up! The sellers’ personal and financial objectives mean nothing to market value and what buyers in a free market will be willing to pay for any piece of real estate!

For any listing, pricing should come down to past sales and how they compare to the subject property.  That information, by the way, isn’t easy to come by without a real estate professional’s access to the Multiple Listing Service statistics. What you see on the big aggregator websites like Zillow is not typically taken from the MLS and is by their own admission, off between 5-8%.  This is a big margin of error when looking at the size of the asset we’re talking about!

There is also a common assumption among homebuyers at times that, since the seller is saving money by not having to pay a real estate commission, he or she will pass some of that savings on to the buyer.

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.

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?

The integrity factor

In general, 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 or hazardous materials related to the property.

The main stipulation to know however is that the seller is only required to disclose items that are within his or her knowledge. As an agent having closed close to 500 sales in my career, my focus when entering a home like most people is noticing the updates to the kitchen, baths, etc.., but then I’m quickly turning my attention to potential ‘red flags.’ I’ve found that if I can see red flag issues around a home, that a home inspector would tear that same home apart.  Yet I have seen a lot over my career. Most sellers haven’t had the same experience level that a typical agent has and might miss things on a disclosure out of simply not knowing.

In the hands of an unscrupulous or even a “well meaning” but ignorant seller, this may an open door or opportunity to “fudge” on the details. Sellers represented by professional real estate agents, on the other hand, are warned that anything less than full disclosure is not in their best interests.

The best protection for you as a home buyer however is that before looking at FSBOs, communicate your desires to see any and every house with your real estate agent. This includes the FSBO. 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.

Finally, who is getting the best deal by you not having an agent

This applies not just to FSBO listings, but also to listings where I see an unwary home buyer go directly to the builder’s agent or listing agent on a resale to “get the best deal” and then they realize they are in this on their own with no help or representation.

Let’s talk about who pays the commission on a home sale for a moment as I think this helps to establish my point.  Years ago, while taking “Real Estate 101” at the UGA Terry College of Business, I was told by the professor that the seller pays the commission on a sale of real estate. If two properties were sold side by side, the lesson went, one a for sale “By Owner” and one listed on the market with a real estate broker, the one with the brokerage fee or commission is not going to appraise for more or sell for more because there is a commission attached. That fee is part of the seller’s closing costs.

Let me share an example from a couple of years ago. I remember the day they called me. They had not yet sold their house, were not even ready to list it yet, but saw a home that needed some work that they fell in love with.  Not meaning to find that perfect next house, they did.  The husband called me to say that they had spoken to the listing agent a couple of times, didn’t want to bother me or waste my time initially, but then they fell in love with the house and the other agent said that if they were not working with another agent that the seller, his client, would knock $40k off the sales price.  Now that is all well and good, but beyond that my client conveyed that he still wanted me to write up an offer to help them. You see he still saw the need to have his own buyer’s agent yet he was told he was going to get a better deal by cutting out his own representation.  He said he would pay me out of his own pocket a fee to write up the offer and give advice.

My first response to him was that if the listing agent, who once again represents the seller not him, is saying the seller would take “$X” amount of dollars, then chances are very good “they will take less!”  This is “Negotiating 101” so to speak.  While my buyers were telling me how much they wanted the house and how it was a dream home to them and didn’t want to lose it, my thoughts were to obviously get them the best deal I could.  Not the $300k they were willing to pay per conversations with the seller’s agent!

They agreed to let me negotiate this deal for them and in the end I was pleased to negotiate a deal over $15,000 lower than they were willing and eager to pay when they thought the listing agent was offering them the best deal possible!  And in the end, the seller paid my commission through the contract that covered the fee to my broker for buyer representation.  My buyers paid nothing for my services.

The moral of the story is to find a good buyer’s agent and never go it alone when home buying. Having that intermediary negotiate in your behalf will help you get the best deal and have someone in you corner working through repairs to appraisal issues that can and do occur to help you successfully close your next dream home!

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