8 Tips When Buying a House "For Sale by Owner"

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When you are looking to buy a house, you are likely to come across an occasional “For Sale by Owner” sign. If one or more of these houses strongly appeal to you, you may be wondering how to go about looking at and purchasing this type of home. Buying a For Sale by Owner house can present a few risks and challenges, as you will not have the benefit of working with a real estate agent, but it can be done if you know what to watch out for and how to go about making the transaction go as smoothly as possible.

What Is a For Sale by Owner House?

When someone lists their home through a real estate agent, they will be responsible for paying realtor’s fees to both their agent and the agent representing the buyer. Some people prefer to save this money by listing and selling the house on their own. Sometimes this means the opportunity for a better deal for both the buyer and the seller.

If you are interested in a property that is For Sale by Owner, you will have to look at it and make any offers or negotiations with the seller without the benefit of a real estate agent’s help. If this sort of transaction appeals to you, be sure to take the advice offered in the following eight tips to help you make the purchase as smoothly as possible.

Tip #1: Understand that You Are Sacrificing the Services Provided by Realtors

If you have been working with a realtor while looking at other properties, but then set your eyes on an FSBO property, you will not be able to turn to your realtor for help with the sale. Your realtor works for commissions and in a For Sale by Owner deal, there are none to be had.

States Susan Elder, a real estate professional with  Keller Williams Classic Realty Northwest in Minnesota, “As agents, we work with other licensed professionals such as home inspectors and appraisers to help you see if you are making a sound investment. We also make sure the cities have no assessments assigned to the properties as it is the not always made known in a listing.” If you purchase your home For Sale By Owner, you will need to give up these agent-provided services and will therefore need to handle them on your own.

Tip #2: Get Pre-Approval for a Mortgage

Before you start looking at houses, it is a good idea to obtain pre-approval from a mortgage company. According to Robert Irwin of owners.com, presenting a pre-approval letter to the seller enables you to let the seller know that you can afford to buy their property without the need to discuss your personal finances. It can also be used as a negotiating tool. “If there are other bidders on the property, the one who doesn't have a pre-approval letter is odd man out,” states Irwin. “The one with the strongest pre-approval letter, all else being equal, often gets the house.”

Tip #3: Stay Focused when Looking at the House

Because there is no real-estate agent working as the “middleman” in these transactions, you will be dealing directly with the home owner yourself. This means that when you view the property, it will likely be with the owner giving you a guided tour.

ForSaleByOwner.com warns that “to some degree, the owner is emotionally invested in the house and how it looks.” This can make some potential buyers uncomfortable, as it can be difficult to take a close and critical look at the property when the home owner is watching your every move. But if you are giving serious consideration to buying the house, it is important that you look inside closets, open cabinets and look carefully at all parts of it.

Tip #4: Obtain a copy of a C.L.U.E. Report

A Comprehensive Loss Underwriting Exchange, or C.L.U.E., report will show you a five-year history of insurance claims that have been filed for the property in question. You do need to get the seller’s permission to run this report, but once you do, it can be obtained for under $20.

The reason this is so important is that not only will it reveal problems that the house may be prone to, it can also alert you to the potential for higher insurance rates for the property. Most insurance companies will use the claims history on a property when calculating rates. You do not want to be surprised by very high insurance quotes when you try to insure the property.

Tip #5: Never Skip the Home Inspection

When you buy a house For Sale by Owner, you are taking a bit of a risk. The home owner may have failed to reveal problems with the house and could have potentially hidden a lot of problems or diverted your attention from them while you were looking at the property. In other cases, the seller may simply be unaware of problems.

A well-trained home inspector can find many of these problems so that you are fully aware of what you are getting into. Penny Doherty of the Wall Street Journal advises that you do more than just hire a home inspector. She says to “hire a ‘vicious’ home inspector to check electrical wiring, moisture levels, carbon monoxide, asbestos, lead electromagnetic fields and radon.”

Tip #6: Enlist the Services of a Real Estate Attorney

With a purchase this big, it is very important that you have a real estate attorney helping you through the sales contract. In some states, according to nolo.com, it is mandatory that a real estate attorney handle the transfer documents and closing. In this case, you will want to be certain that you are properly represented by an attorney of your choosing.

Your attorney can ensure that your contract contains contingencies to enable you to back out of the contract if there are problems found during the home inspection, appraisal or with liens or other problems that prevent the seller from having a clean title. Your attorney can also help you work with the seller to determine who pays certain costs such as the title transfer fee, transfer taxes and so forth. These are things that you and the seller may have never thought to work out on your own. A good real estate lawyer will work with you to provide advice and legal aid all the way through the closing on the property.

Tip #7:  Use Neighboring Sales Prices as a Guide When Making an Offer

If you have found a house that you are interested in purchasing, it is time for you to make an offer. The listing price quoted by the seller may be arbitrary, as realtors typically help home owners determine what price to list their homes at. You can use the asking price as a starting point, but you will want to make sure that your offer is in line with property values in the neighborhood where the house is located.

Warns Dana Dratch of Bankrate, “Buyers are just as likely to be offering too much as too little. Your job is to get an idea of what the place is really worth before you start talking money.”  One way to do this is to obtain a valuation report. These reports will use a number of different metrics such as trends, title records, market conditions and tax assessments, to determine the home’s value. You can also look at recent sales of similar houses in the neighborhood where he house you are interested in is located. These will also give you an idea of how much the house is worth.

Tip #8: Use a Third-Party Service to Manage the Earnest Money

When you make your offer, you will likely be required to pay out some earnest money to secure the deal. Like many other industry experts, Shannon O’Brien of RealEstate.com cautions that you should “Never allow the seller to hold your earnest money deposit but instead ask that it be deposited into an escrow account. The ideal time to open one is with the deposit of your earnest money.”

By putting your money into an escrow account, you can rest assured that if something goes wrong between when you put the money down and the closing, you will be able to get your money back with very little hassle. O’Brien advises that there is usually a small fee involved with setting up an escrow account. She recommends that you request that the seller pay this fee and include this request in your purchase agreement.

Best Wishes for Happiness in Your New Home

Here at Trusted Choice®, we wish you the best of luck in closing on your new home. Be sure to speak with one of our local independent agents for help finding affordable and inclusive home insurance to cover your investment. Agents in the Trusted Choice network can save you time and money by doing the comparison shopping for you, so you have time to do the important things, like paint and unpack.

Have you ever bought or sold a house For Sale by Owner? We’d love to hear about your experience. Share it in the comments section!

meg stefanac blogger

About the author: Financial blogger and business owner, Meg Stefanac, has more than 15 years experience working in the financial services industry and enjoys helping individuals make solid financial decisions. Meg has extensive experience writing about insurance and finances and is a key contributor to TrustedChoice.com.

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