What Are FSBOs?

When a property is For Sale by Owner (FSBO), it is being listed without the help of an agent.

Potential benefits for a buyer:

• More personal information and insights – Usually, you’re dealing with the seller’s broker throughout the process, so you won’t have the deeper insights into the neighborhood, the neighbors, and the property’s history and quirks as you would from dealing directly with the owner.
• More flexibility – Since FSBOs aren’t paying a seller agent commission (it’s still customary for them to pay the buyer agent), they may be more open to negotiating on price.

Potential downsides for a buyer:

• Inaccurate list price – Most FSBOs aren’t as knowledgeable in the market and may price their home incorrectly. They could overvalue the property and be stubborn about coming down to its appropriate market value.
• Incomplete disclosures – Without a real estate professional to guide them, a seller could misrepresent the home in the disclosure statement. Some states, like California, have more stringent disclosure laws and an inexperienced seller may neglect to provide all necessary information.
• Delayed close – There is a lot of paperwork that goes into making an offer, negotiating, and closing. A seller on their own may not complete everything in time or complete documents incorrectly and cause delays.
• More work for buyer agent – Your agent will have to be more diligent about following up with the seller, completing documents they may have missed, and track down housing data (zoning, lot size, building codes) that a casual seller wouldn’t know offhand.
• Lack of accountability – When the seller’s agent is responsible for the disclosures, the judgment as to what is material, the compliance with permit, and lender and escrow requirements, you as a buyer are in a better position to seek recourse if something turns out to be amiss. Brokerage institutions will have financial resources and insurance to pay for problems. Conversely, you might purchase a FSBO property that turns out to have termites, but it’ll be too late—the seller has already taken the money and gone to Panama.

How to Protect Your Investment in a FSBO

This doesn’t mean you should avoid buying an FSBO. Buying from an owner who is conducting their own sale isn’t too different from buying from an owner with an agent, and shouldn’t discourage you if you find a great home for the right price. You just have to ensure you cover your bases.

• Hire a real estate lawyer – You’ll want someone with extensive real estate law know-how to make sure your purchase agreement has all the contingencies you need to ensure you’re covered in case there’s a problem with the property and to double check all the documents you’re signing.
• Hire an aggressive inspector – When you get the house inspected, spring for a licensed and accredited inspector who will be especially thorough. That means getting into crawl spaces, getting on the roof, checking the condition of the fixtures, making sure all renovations or work were done with proper permits, verifying the accuracy of the acreage and square footage and property lines, and—like with the title report—generally making sure you’re getting what you think you’re getting. And it’s always best to be present for the inspection and ask any questions that might come to mind. When it comes to a big-time transaction like buying a home, there’s no such thing as a bad question.
• Ask for a Comprehensive Loss Underwriting Exchange (CLUE) report – A CLUE report is a free report generated by LexisNexis that documents all the insurance claims the owner has made on the property. It does for homes what a Carfax does for used cars.
• Triple check the disclosures – Make sure your agent is well versed in your state’s disclosure requirements and checks the disclosure document carefully.