FSBO vs REALTORS®
The Trouble with FSBO’s (For Sale by Owner’s)
Understanding the Complexities of the Transaction
The world of real estate has changed dramatically over the years. A hand-shake is no longer a prudent way of sealing the deal, and closing at the kitchen table is definitely out. Unfortunately, the type of person who tries to sell “by owner” doesn’t seem to understand the true complexities of selling real estate in the year 2004 and beyond. Selling real estate today requires a great awareness of current law, contracts, and the intricacies of closing the transaction. Probably the best way to illustrate the shortcomings of dealing with the typical FSBO or Private For Sale company is to provide a snapshot of the complexities that FUTURE HOMES must navigate in the sale of a simple residential home. Let’s begin with a look at what FUTURE HOMES must do to prepare a home for the most routine transaction. Before the home is even offered for sale, FUTURE HOMES must:
- Research the condition of title to determine if any deeds will be required from a prior owners. This is common where the previous owner has provided financing to the current seller.
- Discover whether there are any unpaid liens or special assessments that would be accelerated for collection upon sale. Many owners don’t realize that the new sewers, or other similar municipal improvements, which are amortized and paid for over many years, may become due in full, upon closing.
- Check the assessment and assessor’s records for pertinent information.
- Obtain and complete proper disclosure forms per provincial law.
- Conduct substantial research to assure that the property is marketed at a price which not only will result in a fair sale, but can be supported by the future buyer’s lender. (This is a crucial and integral point of any sale being financed).
- Determine whether there are any unique factors that would make the property difficult to finance with the typical lender. Older homes, properties with private well water and sewer, propane or oil heat, non-conforming zoning use or even homes with substantial acreage or numerous out-buildings can all be difficult to finance.
- Obtain an updated Certificate of Occupancy in many municipalities requiring substantial advance planning.
- Review the existing financing to determine it’s assumablility. And, if it is indeed assumable, then the lender must be contacted to determine the steps necessary to complete this kind of transaction.
- Perform a financial analysis to assess whether or not the owner can or should offer to finance the sale themselves, if the owner has substantial equity.
- Contact local municipalities and land surveyors, if there is substantial property being sold, or any planned partitioning will occur. Additionally, many provincial & municipal agencies may be involved in this process or at least must be consulted to ensure that accurate information is conveyed to the purchaser about the property’s future zoning and development potential.
- Review the rules and regulations if the property is a condominium or subject to a Homeowner’s Association to determine if there are any limitations on the use of the property of which a potential purchaser should be informed.While there are countless other intricacies that may apply to the typical transaction, the above list alone clearly demonstrates what few outside of the real estate profession realize: that the path to successfully selling real estate today contains numerous steps, many of which are mined with obstacles large enough to cause the transaction to fail. That is the number one reason why working with FSBO’s and Private For Sale Companies is such a risk – and yield to a high rate of failure to close.
Why the Transaction Doesn’t Close
The “typical” problem that occurs when dealing with a FSBO is the failure of the transaction to close. Only after a buyer is found, and a contract entered into, is it likely to be discovered that the sale cannot, in fact, be completed. Usually, this is due to failure to understand, and research, the details outlined above – preparing the home for sale legally. The result is that both the buyer and seller end up wasting valuable time and incurring expenses only to find that:
1) The seller cannot convey the property as promised.
Typically this is due to provincial, municipal or association restrictions. Example: The purchaser agrees to buy for the purpose of using the property for a home based business, or for keeping horses, or with the intention of adding a garage only to find out that the desired use is prohibited.
2) The seller cannot sell within the time frame specified in the contract.
The failure to realize that a deed will be required from the previous owner, or that it will take 45 days in order to obtain a Certificate of Occupancy (from inspection through repairs, re-inspection and issuance) or even that the local building department cannot approve the purchaser’s building plans in a timely fashion often terminates a sale that could have been completed if it had been proper planned.
3) The seller cannot sell according to the terms of the contract.
It’s not uncommon for sellers to agree to sell their property and allow the purchaser to assume the loan, only to find out the loan is either “due on sale” or permitted only if the purchaser applies for and obtains approval from the original lender. Many a seller has also attempted to sell part of their real estate in a manner that would require partitioning or subject to severance. This is common for the sale of vacant land, but also occurs when the home is being sold, but the seller wishes to keep part of the land for themselves. The average FSBO is completely unprepared to fully understand the complexities that many governmental agencies now place on the partitioning of real estate; and is often unable to complete the sale as negotiated due to this restrictions.
4) The seller cannot afford to sell.
Without fully understanding the costs associated with the sale of real estate, or the common requirement that future payments on special assessments be paid at closing, it is not unusual for a seller to find that they must actually bring money to the closing table. This is most common where the owner has only purchased the property recently, has a government backed loan where the closing costs were added to the loan amount (creating a mortgage that’s actually greater than the purchase price) or where substantial municipal improvements have been performed in the last few years, but are collected in smaller payments on the annual tax collection. Once a seller in this position is faced with a closing statement that clearly requires they bring money to the closing, they may very well back out of the transaction. While the buyer may have the legal right to sue for performance, the length and cost of this type of proceeding seldom warrant it.
5) The purchaser cannot obtain financing
Failure to shop for an appropriate lender prior to offering the home for sale can often result in the purchaser’s lender rejecting the loan. This may occur for any number of reasons, ranging from non-conforming zoning use to the need for minor repairs. It all depends on the home, the purchaser, the loan program selected and the customs in the local market. Issues of this nature can commonly be avoided, if they are known prior to offering the property for sale, and remedial measures are taken to either eliminate the objectionable condition or locate a lender who is willing to overlook the specific problem. These types of financing problems are the most difficult to deal with, since they are not spelled out in any local ordinance or “home selling handbook.”
It is usually only experience that teaches FUTURE HOMES what areas of concern exists for financing property in each specific marketplace; and with which local lenders. To say that the above examples represent only a partial list of the potential legal and technical problems that occur when dealing with “private sellers” is a understatement of vast proportion. Most owners simply do not have the knowledge, skills or experience to perform the necessary research, to correctly interpret the information or even to understand what factors must be considered prior to offering their homes for sale.
The typical result falls into one of two outcomes:
1) The sale does not go through.
This may not initially sound as devastating as it really is. When the sale fails, it is usually only after weeks or even months from the date the contract was signed. The purchaser has undoubtedly taken steps to terminate their previous living arrangements; invested in numerous non-refundable expenses with lenders, appraisers, inspectors and related acquisition costs; paid a heavy toll in terms of the stress that the sale’s failure has created and will continue to create well into the future.
2) The sale is consummated, at less than favorable terms.
Given the consequences outlined above, it is unfortunately not uncommon for the purchaser to continue the sale, but only by suffering a valuable loss. This loss might be manifested in paying excessive costs, that should not have to be borne by the purchaser. Excessive closing fees, transfer costs, or repairs required by the lender of a governmental agency would be common examples. Or the buyer may very well end up purchasing less than he/she bargained for originally. Perhaps the buyer will have to accept less land, greater building and use restriction or the abandonment of their dream of owning horses and/or building a barn. The real life concessions that buyers often must make to keep the ill-planned sale together are as varied as the homes themselves.
While working with a competent real estate professional is no guarantee of a smooth and flawless transaction each and every time, however, when a buyer works directly with a “For Sale By Owner” it is an open invitation to a wide variety of potentially devastating problems.