FSBO: It's Benefits and Challenges

An Introduction
You have seen it throughout this site but this is your formal introduction to For Sale By Owner, or FSBO for short. The term FSBO has become an independent term that I have heard used in speech as a noun, a verb, an adjective and at times as an expletive (by agents and sellers alike). It is a home selling method that receives mixed reviews. Let’s explore some of the pros and cons of selling your own home.

Okay, yes, I am a Realtor. However, before becoming a Realtor I spent a career objectively analyzing corporate business processes to identify pros and cons, and to develop better processes. I have learned, first and foremost, there is NO one-size-fits-all solution to any ordinary problem. The same applies to selling a home. Going FSBO may be the appropriate path for some home sellers but not appropriate for others. The following is my attempt to objectively look at both sides of this issue and identify some of the things you are likely to encounter.

A Little History
FSBO is not new; it has always been a method used by some home sellers who have at least some knowledge of real estate and the time to devote to the marketing and sales process. While there have been some successes, make no mistake, the vast majority of home sellers rely on a Realtor. Even the vast majority of sellers who start off trying to sell their own home, elect to sell through an agent.

The FSBO movement became very popular back during the unprecedented red-hot sellers’ market of 2003-2005. It was a time when interest rates were at rock bottom and buyers were everywhere looking for a chance to obtain the American Dream – home ownership. Sellers needed only to stick a For Sale sign on their lawn and buyers would flock to it. Sellers did not have to invest much time in the marketing process because the buyers were everywhere. The only task left for the sellers was to separate and verify the true “ready, willing and able buyers” from the herd.

During this boom, FSBO blossomed as an industry unto itself. Companies offered all sorts of merchandise and services. They promoted the idea that every home seller should, "buy our stuff, sell your own home and save thousands of dollars". While FSBO has worked for some, I suggest that home sellers must ultimately decide for themselves whether or not FSBO is something they want to try.

The market has changed. Mortgage rates remain relatively low but the banking industry has changed immensely. Banks scrutinize loan applicants very closely and have tightened the reins on the creative financing programs that were popular several years ago. From what I hear and see on some home selling forums, the FSBO support industry appears to be fighting for it’s survival. FSBO vendors seem to be pushing their approach by now portraying Realtors as evil-doers - as if the change in the market was created by Realtors. The truth is, the market is simply going back to normal and that does not support the FSBO methodology. (Note: the prime rate in January 2001 was 9.50%). Click here to see the 10-year prime rate history.

A Closer Look

This section contains a collection of findings and experiences that I have encountered with FSBO sellers. I have tried to organize the information in outline form. Refer to the section or sections that concern you. I hope the information provides insight and answers your questions about selling your own home. If you want to talk about it - call me.

1. Let’s be honest, the #1 reason why sellers attempt to sell their own home and that is they want to avoid paying real estate commissions. Some frequently stated reasons are:

A. Sellers believe the commission is too high:

1) Possibly because they do not understand how the commission gets distributed among ALL parties (Sellers’ agents, Buyers’ agents, respective brokerages, etc. [see commissions] ) When you consider an agents actual operating expenses, an agent nets less than 20% of that overall commission.

When a seller tries to save the commission, they are still most likely to encounter buyer’s agents and still have to develop (and pay for) a marketing plan. So the seller who is not represented will still pay about 2/3 of a full commission anyway, plus they are out there on their own without a life-net. The buyer's agent may seem helpful and willing to "do the paperwork for you" but remember who that agent represents. Who is guarding your interests?

2) Possibly because they do not see the value of an agent’s service. If so, they are very likely to believe they are able to do the job just as well themselves. The seller's perception here is reinforced by two factors:

first, honestly, there are some agents who probably are not worth their commission, and

second, the majority of agents (Realtors) who save clients the huge dollars by avoiding problems, negotiating a strong deal and keeping the whole deal together during the process usually do so very skillfully and often behind the scenes that it creates the illusion that anyone can do it.

Remember, more than 90% of FSBOs wind up going to a Realtor. The problem is that many of them lose significant time and funds in the process and than ask the agent to sell a property that has already tarnished in the eyes of prospective buyers.

B. Other sellers feel forced to sell the property themselves because they honestly believe they cannot afford the services of a Realtor. (In some cases they may be correct. Remember, commissions get paid from the proceeds of the sale, that is, the equity that has accrued over the period the sellers have owned the property.) Some cases that I have experienced where the proceeds may not be adequate to pay the commissions are:

1) They have been in the home only a short time with 100% financing.

2) Longtime residents have refinanced to 100% (or more) or market value and now have little or no equity in the property.

3) There are liens (tax and/or creditor obligations) that have been attached on the property to be resolved when the property transfers.

4) The home owner has fallen on difficult times and their credit rating is in jeopardy.

5) The home owner has fallen behind in mortgage payments and is in danger of being foreclosed.

Recommendation: If you find yourself in a situation where it looks as if your home may be in danger, start developing a plan as early as possible. Some tend to “stick their head in the sand” and that is not a responsible act. If your credit begins to take a hit, many options may close down to you – stay on top of things. Selling through an agent may be difficult and many agents may not even talk to you. I will talk to you and at least give you the benefit of my experience – whether it is a deal or no deal. At a minimum you should fully understand the dangers.

2. If your primary motivation is not an attempt to increase the sales proceeds, you are apparently a die-hard do-it-yourselfer and figure “what’s the harm?” There are volumes written about the dangers and potential problems that can occur – too much to go into here. The quick main points are:

A. Remember, you are dealing with real property which is highly regulated. Realtors are highly trained, undergo strict and continuing education requirements, must stay current on local market and real estate issues. For your protection, make sure that any agent you consider to represent you is a Realtor® (i.e. a current member of the National Association of Realtors) who are bound to a strict Code of Conduct.

B. Meetings and discussions between buyers and sellers are not good for the sales process.

1) Buyers feel they cannot objectively tour the home and comment among themselves with the owner lurking about (see Walk The Goldfish).

2) Sellers often become unnerved if buyers discuss their dislikes, especially if it is a feature that the seller takes great pride in.

3) With the sellers present, the buyers may ask some questions that can better be handled agent-to-agent. The last thing you want to do is say sometime that becomes a primary reason for the sale that does not fully, 100%, live up to the buyers’ expectations.

4) Maybe the seller and the buyer really hit it off and you become instant buddies. Lost in the conversation, the seller assumes the buyer is qualified and accepts the buyers’ offer. 30 to 45 days later the seller finds out they are not qualified. Do you start over or lower the price $50,000? Remember, this is not a social tea.

C. Market prices include the cost of real estate commissions (Broker Fees). Properties sold without a Realtor seem to automatically receive offers 8 to 10% below the market price. So you are more likely to get a higher price (and bottom line proceeds) when using a Realtor.

(Actually, research conducted by the NAR (National Association of Realtors) show that the median selling price of a FSBO (For Sale By Owner) was $198,200 compared with $230,000 for Realtor assisted home sales. Whether it be this (over 16%) statistic or the automatic 8 to 10% that buyers deduct, not only does a Realtor DO all the work and take the burden off your shoulders, a good Realtor will more than pay for him or her self.)

D. Buyers are often skeptical and do not feel the integrity and security that comes from having a Realtor standing behind the deal. Buyers know a Realtor is bound by a strict code of ethics - to be honest and truthful with all parties. They also know where to find the Realtor after the sale – they do not have that feeling about the seller.

E. Buyers know that since sellers are more personally and emotionally attached to the property, they are much more likely to eventually cave-in to a sub-par offer.

3. If you are comfortable with the items above and feel you must give it a try – then I guess you just have to go for it. I wish you clear sailing and may the wind be at your back. Just remember, finding someone who wants to buy is the easy part. Getting them to the settlement table is the challenge.

Understand how the people looking at your home may view the deal. Buyers are often skeptical of sale by owner deals. Buyers see one person selling a property and are concerned about unseen problems (especially if they have no realtor guiding them.) The buyer does NOT even know “where the seller lives” (after the deal). Buyers often view FSBO’s as bargain bin sales and expect bargain prices.

Compare this to a car deal for a certain make/model car you are looking for. The car is on the lot of a reputable car dealer priced (accurately) at say $20,000. If you found an identical car (including mileage, apparent condition and goodies) parked on the side of the road with a “For Sale” sign on it, how tempted would you be to check it out? How secure would you feel about the off-the-street deal? Stop and think now: how much would you be willing to pay for the off-the-street car if you suspect you will never see the seller after the deal? Calculate the difference and multiply that difference by the number of times 20,000 goes into the value of your home. THAT is approximately how much a good Realtor is worth to you when you sell your home.

If you decide to go-it-alone, here are more tips. As a bare minimum:

A. Sellers must verify each potential buyer’s financial ability. (It’s been found that unqualified buyers – those with bad credit, no credit, no down payment – think they can get around their money troubles by pursuing sales by owners.) You do not want to accept an offer to will obviously fall apart 30 or 45 days down the line.

B. Research the actual lender (not a broker who may write the pre-approval letter) and particularly their underwriting procedures: that is where many problems occur.

C. Gain as much exposure as possible. You want as many people to be aware of the property as possible. An online presence, with plenty of photographs and/or a professional virtual tour, is highly recommended. You want to strive for multiple offers and the ability to select the best possible offer (TIP: the property and it's features should be the subject of each photograph, not stuff like furniture – you are not selling the furniture.) DO NOT PHOTOGRAPH VALUABLE ARTIFACTS OR COLLECTIONS – you do not want people casing the place.

D. BE SAFE! Have a sign-in sheet that YOU fill out for each person as they enter your home. You complete the name and address from the buyer’s driver’s license and add other contact information such as their e-mail address and phone number(s). Look under Stuff For FREE for a free sign-in sheet. Over the years, it has been my site's most downloaded item.

E. Contact me to see if you qualify for my 21 point, flat-fee marketing program that gives the do-it-yourself home seller world class marketing.

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