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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 out.
Unfortunately, the type of person who tries to sell "by
owner" doesn't seem to understand the complexities of
selling real estate as the year 2000 approaches. 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 is to provide a snapshot of
the complexities that a real estate agent must navigate in
the sale of a simple residential home. Let's begin with a
look at what the real estate agent must do to prepare a home
for the most routine transaction.
Before the home is even offered for sale, the agent 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 paid for
over many years, are typically due in full, upon closing.
- Check the assessment and assessor's records for pertinent
information.
- Obtain and complete proper disclosure forms per state 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.
- Determine whether there are any unique factors that would
make the property difficult to finance with the typical
lender. Older homes, properties with private water and
sewer, 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 state 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 is
such a risk - the high rate of failure to close.
The Trouble with FSBO's: 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 state, local 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. 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 the successful agent 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.
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 end up purchasing less than 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 real estate professional is no
guarantee of a smooth and flawless transaction, when a buyer
works directly with a "For Sale By Owner" it is an open
invitation to a wide variety of potentially devastating
problems.
Desert Showcase
