Buyer Beware!

(This article originally ran on June 23, 2003, by Ms. Doherty is a free-lance writer in Seattle)
 
“Buyer beware -- very wary.”
That's the advice that real-estate agents give clients who plan to purchase a home in a for-sale-by-owner transaction. They claim that homes that are for-sale-by-owner -- typically abbreviated to FSBO and pronounced "fizbo" -- often cost 10% to 20% above market price, may conceal problems that owners don't know of or hope to disguise, and can take longer to close than broker-marketed homes.

But FSBO experts say such claims are unfounded. Sellers they say, decide to sell their own property because they want to keep the commission they'd otherwise pay a realtor and feel they know its attributes better than a busy real-estate agent. An agent doesn't necessarily know about the details of the neighborhood or lifestyle a buyer is seeking -- school districts, babysitting, park access, the neighbors and other factors.

It's not surprising that real-estate agents and FSBO experts don't see eye to eye on the issue. Both have a vested interest in it.

Fear that a FSBO transaction may not go as smoothly as one handled by a seller's agent doesn't mean you should avoid a home you'd like to own because it's being sold directly by the owners. You might find one while surfing the Internet or driving through a neighborhood you'd like to live in. 

Or you might find one through a buyer's agent -- a representative for the buyer who casts a wide net to find appropriate homes for sale -- regardless of whether a real-estate agent or owner is selling it. Buyer's agents often research homes using FSBO magazines or Web sites and other channels beyond the MLS, where real-estate agents (but not owners) can list homes they represent.

Professionals They're Not 

Buyer's agents say that not all FSBO homes are overpriced or sold by owners who plan to conceal problems. Most FSBO sellers, however, share a few psychological traits that demand extra tire-kicking from a buyer or buyer's agent.

FSBO owners have a reputation among agents for being tight with a buck: They're generally trying to sell a home themselves to avoid paying commission fees to a real-estate broker. Further, they may have an emotional and personal attachment to their property. They can take it personally when buyers or their agents want to negotiate.

Logistically speaking, they may also do paperwork at the last minute or lack housing data -- like exact square footage or full zoning details -- that a real-estate agent would get from a local jurisdiction before listing a home.
Under state law, sellers must provide disclosure forms that detail the condition of the home. Adorna Carroll, a buyer's agent at Realty 3 Carroll & Agostini in Berlin, Conn., urges buyers to secure these forms from sellers, so that negotiations will proceed more smoothly.

"Every state has different disclosure requirements," Ms. Carroll says. Buyers of FSBOs should learn what those requirements are and demand the most extensive disclosure.
"Buyer's agents have a lot more work to do when the home is a FSBO," says Ms. Carroll. "Every FSBO transaction is unique."

The Commission Issue
 
Despite their reputation, FSBO sellers may become more flexible the longer a house sits on the market in order to close a sale. Janet Branton saw that happen when she considered buying a FSBO condominium in Chicago. She hired a buyer's agent to help with her condo hunt, and after identifying a building she'd like to live in, her agent located two units there that were on the market -- one a FSBO, the other represented by a real-estate agent. The units weren't substantially different in terms of their size and layout, and their prices were similar.

However, as Ms. Branton began preparing to make an offer she grew worried about whether the FSBO sellers would pay the commission she'd owe her buyer's agent. FSBO sellers are stereotyped as stubborn when it comes to paying commissions for buyers and negotiating prices downward. 

But she knew she could negotiate the commission with the real-estate agent representing the other unit. Ms. Branton, however, was pleasantly surprised to learn the FSBO seller was open to paying her agent's fee.
"They were more than willing to compensate my agent," Ms. Branton says. "The property had been on the market for three months."

What You Need to Know
 
Buyers can take several steps to minimize potential problems when evaluating a FSBO home. Perhaps the most important is to make sure you have a mortgage pre-approval before you put in an offer. FSBO sellers may be trying to sell the home fast and entertaining multiple bids, and you may have to act quickly, says Terry Watson, a buyer's agent in Chicago-based GM King Realty.

Another critical measure is to arrange for a bank or other neutral entity to manage the escrow or "earnest money" applied to the down payment on the home, something a licensed real-estate agent would normally do, he says. Don't let the seller hold the money in escrow.

Additional precautions that buyers should take (or make sure that their agents take) before buying a FSBO home include:

1. Secure a seller's permission to buy what's known as a "C.L.U.E. report" -- a five-year insurance claims history of a particular property.
C.L.U.E. stands for Comprehensive Loss Underwriting Exchange. A C.L.U.E. report is similar to a credit report, but with insurance-claims data. The reports require seller permission, but cost only $13 and are available online from a company called Choice Trust.

"The big thing to look for is a water-related claim… and the possibility of mold," Mr. Watson says. "Sellers don't always tell buyers about this."
Mr. Watson says that C.L.U.E. reports will reveal any claims that sellers haven't mentioned. But, equally important, they will help buyers who have become owners. Many buyers purchase a one-year initial insurance policy when closing on a home. Most insurers will, at renewal, look at a C.L.U.E. report to evaluate recalibrating rates and coverage. If a C.L.U.E. report wasn't used initially, he says, owners may get a rude awakening upon learning their own – or their home's – insurance history is damaging.
"They can cancel on you if you don't get a good C.L.U.E. report," he says.

2. Get a competitive market analysis (CMA) for the neighborhood where the home is located.
Real-estate agents -- even if not involved in the transaction – may be willing to provide them. This is a document that outlines selling prices on homes of varying sizes in different neighborhoods. Separately, Choice Trust will, for $9.95, sell property-value data gathered from tax assessors' offices – at either the street address or ZIP code level.

Fred Turner, vice president and co-owner of Homes for Sale By Owner Inc., a Chicago-based producer of FSBO magazines and seminars, says that he encourages owners to do this research on the assumption that their prospective buyers may be doing it. For instance, he recommends that FSBO sellers get three separate real-estate agents to provide CMA quotes -- if they can locate willing agents -- or go to the city's deeds office to look at "green sheet" data used to determine property taxes. In major markets, some limited home-price data are available online at no charge at www.homeradar.com and www.domania.com.

If you can, try to research recent FSBO sales in your neighborhood. A CMA will only represent MLS data – that is, data on homes sold by agents, which exclude homes sold by owners -- so "it's not the whole picture," Mr. Turner says. He adds that he once bought a home from a seller who was represented by an agent at 25% off the original price.

Learning that a FSBO is overpriced before a bid is made can save a lot of time and effort, as buyers and sellers often learn in the middle of the purchase process or from a bank declining to make a loan because it's for more than a home is worth.

3. Hire a "vicious" home inspector to check electrical wiring, moisture levels, carbon monoxide, asbestos, lead, electromagnetic fields and radon.
Many sellers aren't lying to buyers when they don't disclose problems in their home, Mr. Watson says. "They just don't know or tell them [the extent of a problem]," he says.

"It's a seller's market right now. I'd say about 25% of the transactions we do are for sale by owner," Ms. Carroll says, noting her market is particularly active with respect to FSBO transactions. "Initially, [a FSBO listing] doesn't raise any flags for the buyer," she says. "Afterward it does."