You've seen those red and white yard signs that advertise the home is For Sale By Owner. In today's market of rising home prices and a prolonged home buying process, choosing to step out of the rat race and into an FSBO negotiation may seem tamer. If this sounds like you, here's how to buy a house for sale by owner.
What is FSBO?
Sellers are always looking for ways to save money during the home selling process, and it really shouldn't be a surprise. With fees for closing costs and real estate agent commission, it's difficult to let so much of that profit get spoken for before it even touches your hands. Those sellers who are comfortable trying their hand at selling their own house (and forgoing a real estate agent) sell their homes For Sale By Owner (FSBO).
FSBO essentially means that the owner is representing themselves in the sale of their house. Although it's pretty clear what that means for the seller, what does this mean for the buyer?
Why buy a FSBO?
Just as sellers are looking for a great deal by selling FSBO, buyers of FSBOs are often looking for the same thing. Because there is no real estate agent on one or both sides, there is often more room for negotiation. There is also the option of moving the sale along quicker than the average transaction.
Buyer Beware: Downsides of Buying FSBO
As previously mentioned, there is the option of gaining a few benefits through selling your house FSBO. Beyond those, however, the transaction tends to favor the seller rather than the buyer. Here's why.
Your Real Estate Agent
A buyer's agent may not be too keen to work on an FSBO case, as this typically means they pull double duty. They'll be the ones drawing up the contracts and working with the seller who may not be too excited to work with them, either.
In fact, the seller can just decide not to cooperate with your real estate agent. While this doesn't happen often, it could make it more difficult to get through the home buying process.
Selling a home is a largely an emotional transaction. That means that although the seller wants to sell their house, they are biased on what they think the house is worth—even if the market says otherwise. This may come out in negotiations. While many buyers look at houses listed for sale by owner as a way to save some money, it's not uncommon for the sellers to stick to their asking price (which may be very high indeed).
During the negotiation process, it's a good idea to keep in mind what you can actually afford. Remember— there are more expenses than just your mortgage payments. You've got to factor in homeowner insurance as well as taxes, utilities, and PMI.
The seller may have some stipulations of the sale that you may not agree with. For example, they may want you to "take my word" on the condition of the house and waive your inspection contingency (you are including an inspection contingency, right?).
Before you make any solid commitments and agree to their terms, keep in mind the many people who have been burned from doing just that.
How to Buy a House For Sale By Owner
The process of buying a house for sale by owner isn't all that different from buying a house listed with a real estate agent. Here's how it'll go down:
Mortgage Loan Process
Before you even get to offering an amount to the seller, you'll probably want to get pre-approved through a mortgage lender. They'll check your credit scores and give you a loan estimate based on your income and the loan programs you're approved for. The scores on your credit report will help you lock in your interest rate and give you peace of mind while you look for the property of your dreams.
Once you make an offer on the house, the next step is to fill out a mortgage application. Your lender supplies you with your loan options, and gives you the corresponding loan application to fill out.
As part of the home loan process, your lender will send out someone to complete a home appraisal. This is the part that trips up many throughout the FSBO process, as some homeowners are unwilling to negotiate on prices, which leads to a home appraisal that is below the asking price. If this happens, you should negotiate on the purchase price or look into your financial options.
The next step is getting a home inspection. This inspection is something many people waive because it's an added expense many homeowners say there is nothing wrong with the house. Getting a home inspection could end up saving you tens of thousands of dollars in the long run, though.
If everything passes and you are ready to close on the home, you'll work on your down payment with your lender. Your down payment determines your loan amount as well as if you need PMI. Your PMI, along with your interest rates and title insurance go all factor into your monthly payments.
Buying FSBO vs. Buying With an Agent-Represented Seller
All in all, the main thing that is different between buying a home through an agent-represented seller or a seller selling FSBO is the communication with the seller themselves. Although issues may arise with your real estate agent, the lending process is typically the same with any conforming loan transaction.
Remember to use a real estate lawyer if you choose not to work with a real estate agent. They'll make sure there are no unwanted surprises in the contract and you understand everything well. Do that, as get an inspection, and your home buying process should be smooth sailing.
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