You’ve decided you’re buying a home, and suddenly you spot a gem that reads, “For Sale by Owner.” What should you do? Real estate agents can be extremely helpful for guiding homebuyers through the purchase of a home, and the idea of buying a home without that guidance can seem intimidating, especially if you are purchasing a first home. Despite this, every year approximately 20 percent of home sales in the United States are transacted directly between the buyer and the seller. It’s not difficult buying a home from for sale by owner listings, but you will need to understand the important steps listed below.
How To Buy For Sale By Owner Homes
- Know Your Budget. Before buying a home from for sale by owner, figure out how much you can afford to pay for a house. Your existing debts will dictate your mortgage limit. Lenders typically require a down payment of 10 to 20 percent, so consider these factors and know your budget before buying a home from for sale by owner.
- Get Pre-Approved. When a home is for sale by owner, the seller will want to know that you are able to purchase his or her home. Getting pre-approval for a home loan is one of the most important steps in the home buying process, and it’s the best negotiating tool you can have when buying a home from for sale by owner.
- Contact the For Sale by Owner Directly. When buying a home from for sale by owner, there’s no need for a middleman. When you see a home listed as for sale by owner, e-mail or call the owner directly to request more information and set up an appointment to see the home. The owner will probably give you a tour of the house.
- Get a Comparative Market Analysis (CMA) or Valuation Report of the Home. Compare prices of other homes in the neighborhood to ensure the home that is for sale by owner is not overpriced. Question the owners about how they arrived at the asking price. The CMA may or may not factor in foreclosures and short sales, which depress the average selling price in the neighborhood, but an appraiser will consider these factors when he appraises the home for the lender.
- Hire an Attorney. A real estate attorney can provide you with all the advice needed to buy a home from for sale by owner. Use a local attorney who is knowledgeable about your town’s real estate-related ordinances as well as your state’s disclosure and tax laws. Your lawyer can also advise you through the offer negotiations.
- Make an Offer. Make an offer based on comparable prices in the neighborhood, not on the homeowner’s listed price. After you have toured the home, have a property valuation report, and have hired a real estate attorney, you are ready to present the seller with an initial offer. Your attorney should have the necessary offer forms. Make an offer that gives you room for negotiation but is not so low that it is offensive to the owner. Continue negotiating until you have an agreement with the seller on the terms: the price, closing date, and any seller concessions, such as paying part of the closing costs or including personal property such as furniture.
- Lock in Your Mortgage Rate. Once you have an agreement, the home is “under contract.” Now, you must get several critical steps done simultaneously. First, bring your offer to your lender for a firm commitment for the mortgage. Even if you are pre-qualified, shop around one last time for the best terms and lowest mortgage rate. Once you have settled on a lender and a mortgage, the mortgage will be “locked in” for 30 to 60 days, which should be enough time to complete the rest of the paperwork and close the sale. The lender’s appraiser will examine the terms of the sale and the property itself. If your accepted offer is significantly above the recent sale prices of comparable properties in the neighborhood, the appraiser may object. That could put the deal in trouble because the lender will not make a loan for a home that is being sold for more than the market value indicated by the appraiser. You may need to renegotiate the deal.
- Get the Home Inspected. Hire your own licensed home inspector, not one recommended by the owner of the home. You will get an inspection report detailing any mechanical, structural, or pest problems. The inspector may not confirm that the house is in compliance with local building codes, so if the home has been recently renovated, ask the inspector to confirm that the improvements comply with local building codes. If the improvements are not up to code, and you buy the home, you will be responsible for the costs of bringing the home into code compliance. Depending on the results of the inspection, you may want to re-negotiate the purchase price. For example, if the roof needs to be replaced, re-negotiate with the owner to lower the price to compensate for that replacement cost. Alternatively, negotiate for the seller to give you an allowance at closing for the repairs.
- Close the Deal on the Home. Have a real estate attorney look over contracts and agreements before signing. Your attorney will handle most of the details at closing and will advise you on the paperwork that needs to be completed. Your attorney and your mortgage lender will help you with organizing the financing and providing payment to the seller. On closing day, the seller of the home will sign over the deed. You will complete all the mortgage paperwork, and you’ll get the keys to your new home.
Buying a home from for sale by owner does not need to be complicated, and you can save money on commissions if you follow the above steps.