Those 4 magic letters…F S B O…
A frustrated buyer has spent days, weeks, or months looking for the perfect house…
- He has looked online at all the websites that bring the listings to him – until he discovers a large majority are inaccurate and the houses are under contract.
- He has looked at the smaller list of truly available properties his Realtor sends him.
- He has driven around looking for signs in the front yards, found one that looks promising, calls the Realtor to hear those frustrating words…”Sorry, it’s already under contract, closing next week.”
- Then he finds that perfect yard sign…For Sale By Owner.
“I’ve struck the Mother Lode!” thinks the anxious buyer. He calls the homeowner and asks for an appointment to come see the house. The homeowner offers “Tonight is fine or tomorrow night after I get home from work”. He finally gets someone on the hook. “That was easy,” thinks the homeowner.
The buyer goes over, and is in awe over the new windows and floors, fresh paint, new flowers in the garden. He loves it – better than anything he has looked at previously. “How much will you take?”
“Well, I’m listed at $230,000, but I can go a little lower…”
Wow – magic words to a buyer’s ears. “Will you take $225,000?”
“Yes, I guess I could. Let’s write it up.”
Wow – wasn’t that easy? So the buyer and seller get out a piece of paper, agree on a price and what day they will close. Then the buyer calls his lender…”I bought a house today!”
The lender says, “Great! Bring me your purchase contract so I can start working on the loan. When are you closing?”
“The end of the month,” says the buyer. “I just gave notice on my apartment!”
“Uh oh…that’s only 3 weeks away. I need at least 45 days to make this happen. What about your closing costs – who’s paying for those?”
“Uh…what closing costs? We’re not paying a commission.”
“Not the commission,” the lender says. “I’m talking about the costs of your loan. You barely have enough money to cover your 5% down payment – there are a few thousand dollars more in points, PMI, fire insurance, title insurance, pro-rated property taxes, the escrow agent’s fee – who’ going to pay all those?”
“Shoot – we didn’t talk about any of that. What’s PMI? I don’t have enough money to pay for all those things, ” says the buyer as his bubble starts to deflate.
“Well, you could have asked the seller to pay them – but it’s a little late now that you’ve negotiated a sales price already. Who is paying for the title insurance? When is your termite inspection scheduled? Who’s going to pay for the termite repairs? What about a home inspection? Did you get a Property Condition Disclosure? Did you ask for a Home Warranty? I need you to bring in a check for your credit report and $450 for the appraisal.”
“But, we didn’t talk about any of that… what appraisal?.”
“The appraisal is to make sure you’re not paying too much for the house, and to protect our position as the lender too. We have to order that right up front. You’re going have to go back to the seller and ask for closing costs – you don’t have enough money to pay for all those things on top of your down payment. What about the price – did you have a CMA done before you made your offer?” The lender is burying his head in his hands, knowing what the answer is going to be.
“WHAT’S A CMA???”
That’s what your Realtor would have prepared for you before ever writing an offer – a Comparative Market Analysis – so you knew what other homes in the neighborhood had sold for in the last 6 months, so you didn’t pay too much for the house.”
“I’ll call the seller and get back to you.” So the buyer calls the homeowner…
“Ahhh, we may have a problem. Can you pay my closing costs?”
“What are you talking about? We already agreed on a price! I can’t pay anything more at this point – that was the lowest I can go – I have a loan to pay off and need money for my next house.”
The buyer asks timidly, “Did you ever have a CMA done?”
“Yep - but that doesn’t mean anything – my house is better than all of those. When the insurance adjuster came out last year, I had one done when I was thinking of selling instead of repairing.”
“So you’re asking more than what the CMA says your house is worth? Why did you have an insurance adjuster and repairs?” The buyer is getting nervous now.
“It doesn’t matter – we have a deal!” says the unhappy homeowner to the more unhappy buyer.
Unfortunately, this story is based on truth. Good and bad. Notice I did not use the word “Seller”, as the sale never closed. The house did not appraise because the homeowner was overpriced by $25,000 because he owed too much on his mortgage. There was hidden damage due to a flood two years ago. The buyer lost $450 on an appraisal that he cannot use on another home. The buyer had given notice on his apartment, and had to move – to another rental. The homeowner lost the spring marketing time, with his house tied up in this transaction for weeks. If it had been an FHA sale, the low appraisal would have been tied to the house for six months.
If a Realtor would have been involved in the transaction, there would have been a multiple page purchase contract giving the buyer (and seller) protection from start to finish. The Realtor would have been available during business hours to show property. The buyer would have been provided sales history to help come up with an informed offer price. The offer would have included who was to pay for title insurance, closing costs, termite repairs and a home warranty. They would have been able to access the Property Condition Disclosure, that would have told why repairs were done. The offer would have included an inspection period for the buyer to perform his due diligence.
This is just the tip of the iceberg of everything that would have been provided to a buyer and seller if a Realtor would have been involved in the transaction. It’s about a lot more than just the commission. There are many successful For Sale By Owner transactions. particularly with sophisticated buyers and sellers, or a Realtor selling his own property. But in many situations, the prospect of saving the commission is far outweighed by the pending disaster lurking below the surface.