Pros and cons of selling real estate 'by-owner'

Negotiating price, settling deal tricky for some
By: Robert J. Bruss: Inman News
A few days ago on a flight to San Francisco, I was seated next to well-known neurosurgeon Dr. Richard Parkinson from Sydney, Australia. He had been involved in a symposium at Northwestern University Medical Center in Chicago and was returning home.

After I told him my two neurosurgery stories, including how a University of Minnesota medical center neurosurgeon saved my father's life, Dr. Parkinson wisely changed the topic by asking, "And what do you do?"

"I write about and invest in real estate" was my quick "elevator speech" reply. That gave us plenty of conversation for several hundred miles after I discovered he is very interested in real estate.

My seatmate told me he and his wife live in a Sydney "duplex." Then I learned a duplex in Australia is a two-story house, not a two-family residence as it means in the U.S.

Dr. Parkinson then asked me about "by owner" home sales, which he said are very popular in Australia.

Thinking fast, I presumed that meant "for sale by owner," or FSBO "fizzbo," home sales. I explained in the United States only about 20 percent of home sales don't involve real estate agents. Many of those home sales are between friends and relatives who really don't need a realty agent to market the home.

Of course, I couldn't fail to then share the pros and cons of such transactions that don't involve a professional real estate agent. Then I shared the possible FSBO pitfalls.

1. CORRECTLY SET THE ASKING PRICE FOR YOUR HOME. The first FSBO challenge, I explained, is the difficultly a do-it-yourself home seller has correctly setting the asking price. Without consulting professional realty agents, a "home alone" seller doesn't know the local market home sales prices.

For this reason, do-it-yourself home sellers should interview at least three successful realty agents who sell homes in your vicinity. The agents interviewed won't mind if you tell them you are considering selling your home without an agent.

The reason is they know most "for sale by owner" sellers fail and list their home with a professional agent within 30 to 60 days. The agent most likely to get the listing is one of the agents who was previously interviewed.

Each agent interviewed should provide the home seller with a written CMA (comparative market analysis) showing the recent sales prices of comparable nearly homes and the asking prices of similar nearby homes now listed for sale (the competition).

The CMA "mini-appraisal" form also includes the asking prices of comparable neighborhood homes that didn't sell, usually because their asking prices were too high. Each agent interviewed should then recommend an asking price for the residence.

The prime reason at least three agents should be interviewed is the home seller then has three expert opinions of market value. If one estimate is very high, that's called "buying the listing." When a market-value estimate is very low compared to the others, that agent could be hoping for a quick sale.

2. SUCCESSFULLY SELL YOUR HOME ALONE. As I explained to Dr. Parkinson, in a local "hot market" where there are more qualified home buyers than homes available for sale (called a "seller's market"), it's very easy to sell a home by placing a newspaper ad and waiting for the purchase offers from buyers. But when there are more homes for sale than qualified buyers, that is a "buyer's market."

However, most local home sales markets are currently "neutral" with an adequate supply of homes available for sale and many qualified buyers eager to purchase.

Although there are several "for sale by owner" Web sites with a small inventory of homes for sale in most communities, the majority of today's prospective home buyers start their search on the Internet at www.realtor.com. Statistics show more than 70 percent of home buyers begin their quest here.

For a home to be shown for sale at this Web site, it must be listed for sale with a realty agent who belongs to the local multiple listing service (MLS). That entitles the listing to be shown at www.realtor.com and on other major Web sites.

Unless your home is listed with a member of the local MLS, who then markets the listing at this major Web site, your residence won't be exposed to the largest number of prospective home buyers in your community. FSBO sellers lack this big advantage.

3. PREPARE A LEGALLY BINDING PURCHASE OFFER. A major problem for most "fizzbo" home sellers is how to create a legally binding purchase contract without a listing agent being involved. Lacking a listing agent, this task can be a major challenge because the home sale forms sold at stationery stores usually are worthless.

In addition, home sellers must comply with local disclosure ordinances, such as providing written defect disclosures (to prevent after-sale lawsuits), building code compliance, energy reports, radon reports, natural hazard disclosures, lead-based-paint disclosure and booklet, and other applicable disclosures.

FSBO home sellers who don't have a listing agent should arrange with a local real estate attorney to be ready to prepare the necessary legal paperwork. Unfortunately, most real estate attorneys are not available on weekends when most home sales take place. Without a signed purchase contract, it is easy for a prospective buyer to withdraw a non-binding oral promise to buy and the sale is lost.

4. WATCH OUT FOR CONTRACT CONTINGENCY CLAUSES. Virtually every home buyer needs to include, for the buyer's protection, at least two or three contingency clauses in their purchase offers.

The first customary contingency is for a satisfactory appraisal of the home by the lender's professional appraiser. If the appraisal doesn't reflect the sales price agreed upon in writing by the buyer and seller, the buyer probably won't be able to arrange satisfactory financing.

The second contingency clause requires the buyer's approval of their professional home inspector's report. Because most home sales today involve such an inspection, smart home sellers have their own professional inspections made before putting the home on the market for sale so the seller knows about its defects and can repair any significant defects.

The third contingency clause that most home buyers insist upon is a professional termite or pest control inspection clearance. Again, smart home sellers have such a report completed before listing so they can take care of any discovered problems prior to the home being put on the market for sale.

5. HELP THE BUYER OBTAIN MORTGAGE FINANCING. Although today's smartest home buyers obtain written pre-approval letters or certificates from mortgage lenders before beginning their home purchase quest, shockingly many buyers don't start shopping for mortgage money until after they sign a home purchase contract.

Many of these "unapproved" home buyers have difficulty obtaining a mortgage due to low FICO (Fair, Isaac and Co.) credit scores, insufficient income, or other problems. Savvy realty agents know which local lenders can help these buyers, but do-it-yourself home sellers usually waste time waiting for these buyers to locate mortgage financing.

6. ARRANGE THE HOME SALE CLOSING DETAILS. Another task FSBO home sellers have is to arrange for the closing settlement for the transaction. Depending on local custom, the location might be in a real estate attorney's office, a bank, a real estate office, a title insurance company, or an escrow firm. Do-it-yourself sellers should make advance arrangements for this all-important final step in the home sales process.

7. PREPARE TO NEGOTIATE A PRICE REDUCTION BECAUSE THERE IS NO SALES COMMISSION OR BE READY TO PAY A BUYER'S AGENT HALF OF A CUSTOMARY COMMISSION. Closely related to preparing a binding sales contract and obtaining a significant earnest money or good faith deposit, FSBO home sellers should be prepared to negotiate a price reduction most buyers expect if there is no sales commission paid to a listing agent involved.

Closely related is the for-sale-by-owner issue of how to handle buyer's agents who represent prospective buyers. Successful "fizzbo" home sellers quickly learn these agents expect to receive about 3 percent (half of the customary sales commission) or the buyer's agent won't even show the home to the prospects.

IS IT WORTH THE HASSLE TO SELL YOUR HOME ALONE? After considering these pros and cons of selling a home alone without a professional real estate agent, home sellers should ask themselves "Is it worth the hassle to sell my home alone in the hope of perhaps saving about 3 percent of the sales price?"

Because most FSBO sellers eventually realize they aren't capable of selling without a professional agent, within 30 to 60 days after trying to sell alone, most for-sale-by-owners list with a realty agent, usually one of the agents previously interviewed. Since selling homes is a complicated business, according to the National Association of Realtors over 80 percent of U.S. resale homes are sold with the help of a professional realty agent.