Learning how to find and buy homes for sale by owner (FSBO) is challenging for investors as it requires you to work without the assistance of a real estate agent. Finding for sale by owner homes demands in-depth knowledge of the local market and a firm understanding of the sales process. The steps of this process include researching and locating an FSBO listing, obtaining and securing financing, and going through the entire closing process. In this article, we explore the challenges, pros and cons, and detailed steps of how to find homes for sale by owner and purchase them for your property investment portfolio.
1. Understand the Challenges of For Sale By Owner
Every real estate transaction has benefits and drawbacks, and for sale by owner properties are no exception. The most recent data from the National Association of Realtors (NAR) disclosed that FSBO sales accounted for only 7% of recent house sales in 2020. Additionally, FSBOs often sell for less than comparable properties.
In 2019, the median price of an FSBO home sold for $260,000, considerably less than the median price of an agent-assisted home, which was $318,000. Furthermore, NAR claimed that 57% of FSBO sellers knew the house’s buyer.
Although they are known to sell for less than homes listed by agents, which is beneficial for investors, they can be a more demanding process since a real estate expert isn’t involved. If you’re unsure whether you should buy a for sale by owner home, the following are the pros and cons of purchasing a FSBO property:
|The seller can be more flexible on the price since they aren’t paying a listing agent’s commission.||The process and the paperwork can be overwhelming since sellers don’t have a real estate agent.|
|Buying a house directly from the owner allows the buyer to work and communicate directly with them.||Because a real estate professional didn't assess and value the home, you could overpay for it.|
|Since the house isn't being advertised as heavily as a home on the traditional real estate market, there won't be as much competition when you bid on it.|
2. Choose a Neighborhood
Consider the convenience, price ranges, amenities, school ratings, and overall curb appeal of various neighborhoods when choosing one. Use online real estate directories like Zillow or Realtor.com to take into account details you might have overlooked, like accessibility to retail stores and how close they are to highways. Then, limit your options to one or two areas where you feel confident making a purchase.
It won’t be as desirable for you, renters, or resale value if there are several distressed houses on one street, businesses closing, or low-quality school districts. Below are a few neighborhood factors that can increase the value of your for sale by owner home and a few that can decrease its value:
Highly rated schools*
Well-kept neighboring homes with mowed lawns, tidy yards, and neat exteriors
Unmaintained neighboring homes with overgrown weeds, peeling paint, and junk-laden yards
Convenient amenities like nearby shopping, dining, and parks
Lack of nearby amenities, local parks, and faraway shopping and dining
Local employment opportunities, nearby businesses, and a low unemployment rate
Nearby firms or companies are closing, and a high area unemployment rate
High concentration of homeowners in the neighborhood
High concentration of renters in the neighborhood
*To check out school ratings, visit greatschools.com
3. Research & Locate a Property
Once you’ve decided on a neighborhood, you need to find a home you want to buy. Drive through the area to get a sense of the community, the people who live there, the open businesses, and how the houses differ from the pictures you’ve seen online.
In addition to physically visiting the neighborhood, search online for FSBO listings. Individuals selling their own homes lack access to the multiple listing service (MLS) since it is a platform made for real estate agents and brokers. Instead, you’ll need to conduct your search on other websites like Zillow, local newspaper websites, or FSBO-specific listing sites. Here are the top FSBO sites to find for sale by owner homes:
Closing assistance service for buyers and sellers
Buyers and sellers seeking high monthly site traffic
Free classified listings
Customizable plan for FSBO home sellers
Free; paid plan costs $495 (one-time fee)
$95 (flat fee)
After you learn how to find homes for sale by owner that you want to invest in, reach out to FSBO sellers and schedule property viewings. When visiting the property, come prepared with questions about the home, such as:
- What is the age of the home, appliances, and major utilities (e.g., water heater, HVAC system, etc.)?
- What do you pay in taxes?
- What renovations and upgrades have been done to the home, and when?
- What items in the home are included in the home sale?
In addition, perform a comparative marketing analysis (CMA) report to assess the property’s value and ensure it is worth investing in.
If you want to find more FSBO sellers, consider REDX. REDX is one of the fastest and most efficient ways to find FSBO sellers and leads (as well as preforeclosure and expired leads). REDX offers the most recent FSBO property data in your county for $39.99 per month. To give you an advantage over the competition, it will incorporate hard-to-find homeowner contact information and organize it in a database.
4. Obtain & Secure Financing
After you’ve decided on an FSBO property to purchase, it’s time to obtain and secure home financing. Some for sale by owner buyers pay the total purchase price in cash, but most use short- or long-term financing like bridge and portfolio loans. We’ve identified various for sale by owner financing options, like short-term, long-term, and seller financing options, to help you determine the best type of financing for your investment goals.
Short-term FSBO Financing Options
Short-term FSBO financing is excellent for investors who want to buy a property, rehab it, and then sell it within a year. Long-term investors occasionally use short-term financing to rehab or season an FSBO before refinancing. Short-term FSBO financing enables investors to compete with cash buyers’ timelines by purchasing a home quickly.
Short-term FSBO financing options include:
- Hard money loans: These allow investors to buy properties in any condition with the intent to flip them or refinance them into a long-term loan.
- Bridge loans: This loan is used on commercial properties or to buy a residential property quickly before losing out on a deal.
- Rehab loans: This loan helps investors fund the acquisition and rehab of a distressed property before selling it or refinancing.
- Investment property lines of credit: Based on the equity in an investor’s investment property, this loan can be used to rehab or purchase a property.
- Home equity lines of credit (HELOCs): Based on the equity in an owner-occupant’s primary residence, this loan can be used to rehab or purchase a property.
Long-term FSBO Financing Options
Long-term FSBO financing is the best choice for someone who wants to be an owner-occupant or buy and hold a real estate investment property without immediate plans to sell. Investors typically prefer competitive, long-term rates on a property that doesn’t require a complete renovation.
Long-term FSBO financing options include:
- Portfolio loans: These loans, for investors or owner-occupants, don’t conform to Federal Housing Administration (FHA) standards and are often kept on the lender’s balance sheet.
- Conforming loans: This loan is the most common loan type, and it offers competitive FHA standard rates for owner-occupants.
- FHA 203(k) loans: This allows an owner-occupant to buy and renovate a home that needs updates or repairs.
- Blanket mortgages: This is good for investors looking to finance multiple FSBOs together under a single loan, known as cross-collateralization.
- Homestyle renovation mortgages: Government-backed loans are for owner-occupants buying one- to four-unit properties or investors buying a single-unit second property.
An alternative method of financing FSBO properties is seller financing. Seller financing allows a buyer to purchase real estate without taking out a mortgage from a lender. In most cases, seller financing is used when the buyer cannot secure funding for a mortgage due to the buyer’s financial or credit history or the property’s condition. Investors can use seller financing to purchase any property, including commercial real estate, residential properties, and raw land.
Since the seller essentially acts as the bank, it is a more flexible and negotiable financing option than other more regulated loans like hard money loans or conforming loans. But like a traditional mortgage, seller financing requires legal paperwork, including promissory notes, mortgages, and trust deeds. The paperwork is standard and protects all parties involved in the transaction.
Moreover, the buyer and seller of the FSBO home must agree on the requirements for seller financing. Typically, if a buyer meets specific conditions, such as having a 25% down payment and credit and financial history to show proof of income and employment, the seller will work with them. The terms should be agreed upon by both the buyer and the seller, and the interest rate is usually around 7% or higher.
To learn more about seller financing as a purchase option, visit our article Owner Financing: What It Is & How It Works.
5. Make an Offer
After finding a property and securing financing, it’s time to make an offer. To make the right offer on a for sale by owner property, you should research what comparable properties sell for and know the ins and outs of the sales contract and negotiating process. You must explore what similar homes in the area have sold for within the past six months.
You must know how to execute your offer once you have determined your offer price. When purchasing a for sale by owner property, the buyer submits their offer to the seller via a legal contract. A real estate agent will normally have the contracts to write the proposal. However, in an FSBO transaction, many homebuyers hire an attorney to review these contracts before submitting the offer because they differ by state and can be complex.
If you plan to buy an FSBO without the assistance of a real estate agent, visit Rocket Lawyer for its real estate purchase agreement and other provided real estate legal documents. This will give you an excellent template to work with. Examine it ahead of time to familiarize yourself with it. Rocket Lawyer also enables you to ask a lawyer a question or have them review your document.
6. Perform Home Inspections & Appraisal
After your offer has been accepted, conduct a home inspection and appraisal. A licensed property inspector will examine the FSBO property to inform the buyer and seller of the current state of the house and if there will be any significant repairs that need to be remedied. The buyer typically hires the inspector, and prices can range from $300 to $500, depending on the inspections required by your state and insurance company. Repairs will be negotiated between the buyer and seller, but must be completed by a licensed repair person (e.g., contractor, plumber, electrician), as needed.
Most purchase agreements include an inspection contingency period. Depending on the state, it may take five to 15 days. For example, the inspection contingency in California gives the buyer 17 days to complete all inspections before deciding if they move forward with the transaction or back out.
When both parties sign and accept the contract, the time frame begins. If the home is being sold in “as is” condition or if you waive the inspection contingency, then you’re obligated to purchase the property even if you elect to have a property inspection conducted.
Additionally, all lenders mandate an appraisal before disbursing funds to buy a property. The home’s purchase price must be equal to or lower than the appraised value of the property to qualify for financing. If you purchase a home with all-cash, you can choose to forgo the appraisal. For a single-family home, an appraisal typically costs between $375 and $450, and the bank will automatically send an appraiser to the home to complete the report.
If you want to become a real estate appraiser, read our step-by-step guide on How to Become a Real Estate Appraiser and the 6 Best Online Real Estate Appraiser Training Providers to know which provider is suitable for you to successfully become a real estate appraiser.
7. Close the Deal
The final step in buying a for sale by owner property is closing on the deal. It means that you have found and financed your property, gone through an inspection and appraisal, and are ready to go to settlement. To make this property transfer possible, locate a title and property insurance company.
The title company will execute a title search on the property, issue you title insurance, and keep funds in an escrow account for distribution at closing. This is crucial because it will protect you and your lender if the seller does not have a clear title or if previous liens pop up in the future. If the property is free and clear, settlement or closing will typically occur at the title company’s office, where all checks and closing papers will be distributed.
In addition, you must purchase property insurance after obtaining title insurance as part of the closing process. Owner-occupants and investors can choose from a variety of insurance options. Weather-related losses to your property, such as damage from snow, wind, or rain, are covered by property insurance. If someone gets hurt on your for sale by owner property or if it is vandalized, it may also protect you from legal action.
Moreover, closing a deal takes about 30 to 45 days on average, from submitting your mortgage loan application to showing up at the closing table. If everything goes according to plan, closing day—the day you sign the final paperwork—should take between one and two hours.
Visit our articles, Real Estate Closing Checklist for Buyers & Sellers and For Sale By Owner Checklist [+ Free Checklist Download]. This makes it easier to streamline and keep track of each step of the closing process and lessen the stress that comes from closing the deal.
One of the biggest challenges of FSBO is learning how to find homes for sale by owner. Even though finding and buying FSBO properties is more complicated than a traditional real estate transaction, it can be completed by using the seven steps listed in this comprehensive guide. Weigh the advantages and disadvantages of working the FSBO process, conduct diligent property research, and complete all proper paperwork to guarantee the purchase process goes as smoothly as possible.