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Pitfalls of Buying “For Sale By Owner”

In a hot market, you’ll see a lot of homes being sold by the owners themselves instead of with the help of a selling agent. I thought about looking at For Sale By Owner’s (FSBO’s) because I figured I could get a part of the break the seller’s were getting for not listing it with an agent. But the more I thought about it, the less I liked the idea because there are very clear and obvious downfalls with this strategy. They essentially revolve around the fact that no matter what, neither I nor the seller will have the experience and knowledge of a real estate professional. The transfer of a property from one party to another is not an easy process and if you don’t know what you’re doing you can mess it up big time.

As a buyer, there is zero incentive for you to seek out a FSBO without a buyer’s agent. In theory, you don’t pay the commission, the seller does; but as is any “tax,” the commission is built into the listing price. (If there was 0% commission, the price of the property would be lower, reflecting this difference) The problem with this theory is that FSBO’s are typically listed at around the same price as other agent listed homes, so going with a FSBO doesn’t save you money, it only saves the seller money.

The buyer’s agent is a powerful person to have on your side and will be reluctant to show you a FSBO because the commissions will be very low or non-existent, so for the purposes of this discussion I’ll assume purchasing a FSBO will be done without an agent. So why’s the agent important for you? The agent will also have contacts with lenders, title agencies, and other people who may help you in the closing process. While this isn’t necessary, if you have a special situation they may be able to help you figure out a solution. I wouldn’t consider an agent’s contacts as something to pay a premium for (so to speak) – you can find a lender, title agency, and others on your own – but it’s something to consider.

The single most important thing about the buyer agent, especially if you haven’t ever purchased a home, is they will typically draft a boilerplate offer letter and then put in your specifics. They will be able to translate most of the fine print legalese so you can understand what you’re signing. If you’re a lawyer, you probably won’t need this (though if I were a lawyer, I’d rather spent my time litigating and not reading this drudgery) but the rest of us regular folks will. You can get yourself into a tough spot if you make a mistake on the contract and you’re bound to it.

Finally, if you’re scouring the For Sale By Owner websites then you’ll probably notice the databases aren’t particularly well populated. I looked in some Maryland zip codes at some of them and the selection really isn’t that great. Not having the MLS (Multiple Listing Service) databases and their seemingly limitless databases of homes is an incredible plus.

Honestly, I see no reason for a buyer to ever purchase a home without a buyer’s agent. That being said, I don’t know how keen buying agent’s are to show you a FSBO – I’d guess they don’t like it at all. That leaves me to wonder why buyers would ever consider For Sale By Owner. You are looking in a smaller pool, dealing with legal contracts, and after all is said and done you’ll have committed to a six figure debt – why wouldn’t you want a professional on your side?

[As an aside, here’s a great article on FSBO’s for Buyers from the WSJ.com [3]]