Any real estate investor looking to buy an investment property should consider ‘For Sale By Owner’ (FSBO) houses. These are basically properties that homeowners are selling without using the help of a real estate listing agent. If you drive around any neighborhood, you are likely to come across several ‘For Sale By Owner’ signs. You will also find FSBO properties being advertised on real estate websites, as well as in your local newspaper. Sometimes, however, these investment properties stay off major listing sites and are considered off market properties.
Related: How to Find Off-Market Real Estate Properties
Before we get into our tips for how to buy for sale by owner homes, you should know what you’re getting into. Let’s take a quick look at the pros and cons of buying FSBO homes.
The Benefits of Buying a ‘For Sale By Owner’ House for Investment
- Direct communication – Purchasing homes for sale by owner means eliminating the listing agent (middleman) and dealing directly with the property owner. This could give you more leeway to negotiate for a good real estate investment deal.
- Potential savings – Buying a house for sale by owner without a realtor could save you up to 6% of the sales price of the house. This is the amount usually paid to agents as commission. For example, if you buy a home for $300,000, you will save a whopping $18,000.
- Detailed information – No one has as much information about a home than the owner. Therefore, when buying rental property, you can get more information about the home’s features, local attractions, and the neighborhood by speaking directly with the owner.
The Downsides of Buying a ‘For Sale By Owner’ House for Investment
- Inflated home value – In most cases, homeowners selling their properties have little or no experience in the real estate market. As a result, they might have an unrealistic estimate of the actual value of their real estate property. This could cause problems when a home appraisal is conducted.
- Non-disclosure – According to the law, sellers should disclose information about known problems with a house during the sales process. Defects such as plumbing issues, roof damage, and mold should be mentioned before closing. However, some independent sellers choose to withhold crucial information from buyers. Even though you could decide to sue the seller, the process can be very costly and time-consuming.
- Difficulty getting repairs done – Convincing ‘For Sale By Owner’ sellers to make repairs is not easy. Most sellers are not willing to spend any money on a house that they are trying to get rid of.
How to Buy a House for Sale by Owner: 6 Tips
1. Select a good neighborhood for real estate investing
The first step in buying a house for investment is to choose a profitable neighborhood. This means that your search for ‘For Sale By Owner’ homes shouldn’t start with a hunt for FSBO signs in any neighborhood within walking or driving distance. Instead, you should look at several neighborhoods before settling on one.
In your real estate market research, consider if the neighborhood has homes that are within your budget, how convenient the location is, and what amenities it offers. Other things to consider are the overall curb appeal, walkability, proximity to highways, and the school rating. You should also conduct a neighborhood analysis to get an idea of the return on investment to expect after buying a house for sale by owner. For this, you will need to use a Real Estate Heatmap. Try Mashvisor’s now.
After checking out several neighborhoods in person or via real estate sites, focus on one or two neighborhoods that fit your criteria.
2. Get a mortgage pre-approval
Getting pre-approved for a mortgage is very crucial when buying a house for sale by owner. The pre-approval will show how much you are allowed to borrow from your lender. Some property buyers think that they can skip this step when it comes to FSBO sales, but this is one element that doesn’t differ with these transactions. So be sure to look at your investment property financing options and apply for pre-approval.
Some of the permanent financing options to consider include conforming loans, portfolio loans, blanket mortgages, and homestyle renovation mortgages. Short-term financing options for buying a house for sale by owner include bridge loans, rehab loans, investment property lines of credit, and Home Equity Lines of Credit (HELOC).
Related: Investment Property Mortgage Rates in 2020: All You Need to Know
3. Consider hiring a buyer’s agent
Once you’ve been pre-approved for financing, it would be advisable to hire a real estate agent. Even if you have already decided what investment property you want to buy, an experienced realtor will handle the complex paperwork on your behalf and help in the negotiating process. Buying a house for sale by owner with a realtor will ensure that you don’t run into any legal problems. Make sure the property owner consents to pay your agent’s fees as part of the purchase agreement.
4. Get a home inspection done
A home inspection is a must when buying a house for sale by owner. Ideally, it should be conducted by a trained and qualified home inspector. Before working with an inspector, find out if they are bonded and insured. You should also check if they are members of any professional organization for inspectors. Finally, ask for references from previous customers.
According to the law, a home inspection should be accompanied with a pre-inspection agreement and an inspection report. The property buyer can then make an informed decision using the findings from the home inspection. In case the inspection reveals some major problems, you could ask the seller to:
- Make repairs before buying a house for sale by owner
- Credit you the cash so you can fix the problem yourself after closing
- Lower the sales price by an amount equivalent to the costs of repairs
5. Make an offer based on a CMA
Once the inspection is completed, it is time to make an offer on the FSBO. To avoid paying too much when buying a house for sale by owner, be sure to conduct a comparative market analysis first. This will show you how much comparable investment properties in the area have been sold for in the recent past. If you’re working with a real estate agent, he/she can check the Multiple Listing Service (MLS) to look for properties that have the same number of bedrooms and bathrooms and other characteristics. If you’re buying a house for sale by owner without a realtor, use online comparative market analysis tools like Mashvisor.
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Once you have decided how much to offer on a house, your agent will draft a purchase contract. However, the offer should be subject to property inspection and appraisal.
6. Consult a title company before closing
Closing is the last step in buying a house for sale by owner. To facilitate the transfer of ownership, you will need to find a title company. Real estate agents can provide a list of title companies that you can choose from. The title company will conduct a title search on the house and then offer you title insurance. This document protects you if the seller lacked a clear title, and also guarantees that the property is free from liens. Once you have the title insurance, all you need to do is pay and the house is yours.
Related: Real Estate Investors Want to Know: How Much Are Closing Costs?
Conclusion
By following the real estate tips for buyers above, anyone can find and buy an FSBO property. However, be sure to look at the pros and cons before deciding whether FSBOs are right for you. Don’t just jump into buying a house for sale by owner because it seems like a good deal. Above all else, be sure to conduct an investment property analysis to make sure this property will give you a good return on investment!
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