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The Trouble with FSBO's (For Sale by Owner's):
Understanding the Complexities of the Transaction
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 definitely out. Unfortunately, the type of
person who tries to sell "by owner" doesn't seem to understand the true
complexities of selling real estate in the year 2004 and beyond. 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 or Private For Sale company
is to provide a snapshot of the complexities that FUTURE HOMES must
navigate in the sale of a simple residential home. Let's begin with a look
at what FUTURE HOMES
must do to prepare a home for the most routine transaction. Before the home is even offered for sale, FUTURE
HOMES
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.
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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
amortized and
paid for over many years, may become due in full, upon closing.
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Check the assessment and assessor's records for pertinent information.
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Obtain and complete proper disclosure forms per provincial law.
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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. (This is a crucial and integral point of any
sale being financed).
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Determine whether there are any unique factors that would make the
property difficult to finance with the typical lender. Older homes,
properties with private well water and sewer, propane or oil heat,
non-conforming zoning use or even homes with substantial acreage or
numerous out-buildings can all be difficult to finance.
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Obtain an updated Certificate of Occupancy in many municipalities
requiring substantial advance planning.
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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.
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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.
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Contact local municipalities and land surveyors, if there is substantial
property being sold, or any planned partitioning will occur. Additionally,
many provincial & municipal 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.
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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 and Private For Sale
Companies is such a risk - and yield to a
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 provincial, municipal 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 or subject to severance. 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
FUTURE HOMES
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.
Most 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 well end up purchasing less than he/she 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
competent real estate professional is no guarantee of a smooth and
flawless transaction each and every time, however, when a buyer works
directly with a "For Sale By Owner" it is an open
invitation to a wide variety of potentially devastating problems.
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