Buying property that’s “For Sale by Owner” (FSBO) can have advantages. Perhaps chief among them is that no one has to pay a real estate agent’s commissions or fees.
When buying an FSBO property, there are a few matters that need consideration. But by the time you finish this blog post, you should be prepared to secure the home of your dreams.
If you found the perfect FSBO property, your first task is to complete the purchase agreement. You may not necessarily have a real estate agent around to help, but you just need to provide some basic information in order to get the home under contract. Provide your mortgage banker with a copy of the agreement, making sure it includes the following:
- Buyer and seller first and last name – if there’s more than one buyer or seller, be sure to include all names
- Full property address, including the county – also add the unit number if applicable
- Purchase price of the property
- Buyer’s indication of satisfaction with the inspection results
- Target closing date – if you need help determining what’s realistic, ask your lender.
- The signature of all buyers and sellers
There are additional items that may be included in your purchase agreement that won’t necessarily apply in every transaction.
If there’s any other property being transferred other than the house, it would be included in the purchase agreement. For example, is the seller leaving behind the kitchen appliances or the ATV sitting in the shed? It all goes in the agreement. It should be noted in the purchase agreement that the seller is including such items and that those items have zero value.
If the seller is providing any credits to help with closing costs (prepaid mortgage interest points, title insurance, etc.), this will also need to be included in your purchase agreement. Closing costs credits are concessions from the seller to the buyer at closing. For example, if at your closing the seller agreed to a $5,000 credit, that is $5,000 less the buyer has to bring to the closing. This money is reflected in the seller’s sale proceeds, so it’s not necessarily coming directly out of pocket and can help move the closing along quickly.
It’s also common for the buyer to pay the seller a small amount of earnest money deposit up front as a show of good faith for the owner to take the property off the market while the mortgage process moves forward. This amount would be included in the purchase agreement. Once the loan closes, this amount is applied to your down payment.
As part of a real estate sales transaction, there are matters related to title and settlement that will need to be considered. Purchasing title insurance helps to ensure any parties who have an interest in that property are satisfied and cannot later return to stake a claim in the property.
In a purchase transaction, there are typically two types of title policies. Both protect the insured against financial loss or damage related to title, but the type of policy indicates who is insured. Lender title policies are required because the lender’s loan to the borrower has to be protected against loss. With this policy in place, the lender is insured against title problems that could impact the mortgage. The lender’s policy does not provide protection to the buyer, however. That’s what an owner’s policy is for.
The owner’s policy is an optional expense but a long-term investment, because it’s valid for as long as the policyholder owns the home. Unlike other common types of insurance, an owner’s policy is paid for with a one-time payment due at closing. For many home buyers, this can provide some peace of mind to what’s likely the biggest financial investment of their life. Mainly, the owner’s policy protects the owner from potential title claims in the future. If another party comes forward and makes an unbeatable claim to the property – without an owner’s policy in place, the title insurance pays off the lender, but any equity established by the owner will be lost.
Typically, the purchase agreement outlines information about whether an owner’s policy is being provided and who is paying for it, as well as other details, like who will be covering the cost of the transfer of title. If you’re putting the purchase agreement together yourself, you may want to do some research or consult with a professional with purchase agreement drafting experience.
It’s important to select a title agent at an early stage in the process because of the time it takes to review the history of the property. If you need help finding one, talk to your lender for help.
No lender will do a loan for a home that doesn’t have homeowners insurance. Just as homeowners insurance protects you from loss of investment due to property damage, it protects the lender and mortgage investor from losing the huge investment they put in your home.
It helps to shop around because different homeowners insurance policies have different limits and stipulations about what is and isn’t covered. You might want to start with your current auto or life insurance company. Typically, they’ll offer discounts if you begin to bundle services with them. It’s a bit like deals for cable television, phone and internet services.
In any case, make sure you have your insurance lined up before closing because the lender will need to see proof.
Appraisal vs. Inspection
An appraiser is responsible for determining the value of a property. The appraiser is always an independent third party who measures the value of a property against comparable homes in the area (e.g. three-bedroom, ranch-style houses are compared with other three-bedroom ranches).
The mortgage lender is not allowed to loan more than the property is worth, so if the appraisal comes in lower than the sales price, the buyer must renegotiate or bring the difference to the closing table.
In addition to determining the value of the property, the appraiser also has to look out for repairs that have to be completed before the loan can close. These include any structural repairs or that affect the livability/safety of the property. The appraiser also has to make sure any repairs the seller agreed to make as part of the purchase agreement are completed.
Since you won’t be relying on the expertise of a real estate agent about passing the appraisal, communicate closely with your lender. Although many of the safety and repair requirements are similar, they do vary a little depending on what one you’re trying to get. For example, FHA loans have specific requirements, including having both you and the seller sign documentation stating whether the home contains lead-based paint.
An inspection is optional, but it’s always a very good idea to get one. The inspector will walk through the home and be able to tell you which problems they see – big or small. They’ll also be able to indicate what may need maintenance in the future.
A buyer may choose to negotiate with the seller in advance to have them pay for repairs that may be required following an appraisal or inspection. This arrangement would be made in the purchase agreement.
Gifts of Equity
In many cases, FSBO sales take place between family members. Who needs a real estate agent to buy grandma’s house? There’s another benefit here.
Family members can gift their equity to you by lowering the purchase price below the appraised value. The difference between the purchase price and the appraised value is used toward your down payment. Nonprofits can also make a gift on FHA loans. The one caveat here is that depending on the loan and the size of the equity gift, a client may still be required to make a minimum contribution of their own funds in order to close the mortgage. Ask your lender for further details and additional acceptable gift sources.
Other Things to Know
Finally, there are some general guidelines you should know before you head to the closing table.
- Bring your valid identification to the closing table along with your Social Security Card or relevant citizenship documentation.
- Make sure any funds needed to close are ready prior to closing. Your lender can walk you through how the funds need to be transferred. It’s important to note that the lender needs to see a paper trail of where all these funds come from, including any large deposits, as soon as possible in order to close smoothly.
- If you’re using power of attorney to act on someone else’s behalf, the lender and closing agent need to know as soon as possible.
- Have proof of homeowners insurance.
- If you’re married, your spouse may need to sign documents as well.
In addition to your mortgage documents, both you and the seller need to sign the purchase agreement and seller’s disclosure statement in which a seller discloses any known issues with the property.
You should feel more confident making an offer on the FSBO house you’ve had your eyes on. Go ahead and get started online. If you still have questions, leave us a comment below.
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