What is a FSBO Contract?
A "For Sale by Owner" contract is a type of real estate agreement between a property seller and a buyer to convey the ownership of the property to the buyer in exchange for an agreed-upon purchase price. This includes the obligations of both parties should the sale of the property go through as expected. In other words, the agreed terms and conditions of the sale are spelled out in the contract to be upheld by both the seller and buyer. It is important to understand how a FSBO contract works if you are attempting to sell your home without the services of a real estate agent. This type of contract is legally binding and demands the cooperation of both the seller and buyer in order to complete the sale of the property . The contract includes such basic information as the names of the seller and buyer, an accurate description of the property involved, the date the property will be transferred, and how much the buyer will be paying for the property. There are many other details included in a FSBO contract, such as how the closing of the property will take place, how it will be conveyed, how the title company will be selected, and where the escrow will be held. A thorough and comprehensive FSBO contract should address any complications that might arise during the sale of the property and spell out how the parties will handle these issues.
Contents of a FSBO Contract
A successful FSBO contract will typically include several key items. The property to be sold, as well as the price and terms of any financing should be clear and precise. Contingencies for closing should also be specifically laid out. For example, the acceptance of the offer may be conditional on the seller obtaining a new job, or the buyer securing a loan for the purchase price.
The closing date should be within a period that gives the parties a reasonable time to obtain any necessary approvals or financing. State law may also determine how long the buyer has to complete financing. Likewise, if there is to be a home inspection the contract may be contingent upon the buyer approving the results of the inspection.
The contract should give the parties notice to allow the buyer an opportunity to complete a survey or a title search. If the survey and title survey are not satisfactory to the buyer he or she may have recourse against the seller. If the contract allows for deposits, it should be clear to whom the deposit is given and the conditions under which it can be returned and when.
Unless otherwise specified in the FSBO contract, your earnest money deposit will usually serve as prompt payment and will typically not be refundable except in very limited circumstances. Usually, the earnest money is fully applied toward your down payment at closing.
Legal Implications and Requirements
Legal Requirements and Considerations
For any contract to be valid and binding, certain conditions must be met by each party. In essence, a contract requires an "offer" by one party and an "acceptance" by another, along with a "mutual assent," which equates to an "understanding" or "meeting of the minds." Without these components, a contract would not be legally enforceable, and could result in expensive legal consequences (i.e. litigation). Optional contract clauses may be utilized to fulfill your "needs" after you have fulfilled the "mandatory requirements" set forth below.
The most critical contractual issues are listed below:
Most people are aware that oral contracts are not legally binding in real estate transactions, meaning that home buyers and sellers should always put their agreements in writing in order to enforce them. A "home for sale by owner" transaction is no different. Written contracts provide protection to both parties and create obligations for you and the buyer to live up to the terms of the agreement. The contract is important as it takes care of the potential risks and pitfalls that can arise during a real estate transaction.
The potential claims that can arise if the mandatory requirements for a contract have not been satisfied include:
In addition to the mandatory contract requirements, each state has contract laws that regulate the agreements. For example, every state has laws dictating when certain disclosures must be made in connection with the sale of residential properties, such as lead-based paint and mold. Some states impose additional disclosure requirements depending on the circumstances. In addition, some states have promulgated standard contracts containing required terms and clauses.
FSBO Mistakes to Avoid
When buying or selling a home, timing is often critical. From closing date to contingency periods, the process can be complicated and stressful. Many FSBOs have difficulty deciphering legal terminology and steering clear of common pitfalls. In Florida, a party that breaches the contract may be liable for extra-contractual damages, including attorney’s fees.
Disclosure of the Home’s Condition: To avoid future disputes, have your property inspected before you sell. If there are any material defects, remedy them, but don’t try to hide them. Such actions, as well as failing to disclose the condition of your home, could subject you to liability. As one court decided:
The general rule is that a vendor must disclose a defect if it is known to him and such that a purchaser, dealing with an ordinary degree of precaution, would not be likely to discover it. This exception does not apply unless the purchaser was in fact deceived. If both vendor and purchaser knew of a defect, or both were at credit of discovering it, the former has no liability.
Not Including Complete Names and Descriptions: Do not be specific with someone’s name or property address. Even one letter off can change your direction. The contract must be clear on exactly whom you are trying to deal with to avoid disputes later. Both vendor(s) and purchaser(s) should be correctly named at the beginning of an agreement, and the real estate being sold should be properly identified.
Not Using the Proper Form: Every real estate deal is different, which is why there is a choice of generic forms available for different transactions. Make sure you choose the correct form so your real estate business can proceed smoothly.
Not Understanding Contract Terms: Whether you are selling or buying, make sure that you understand what you are signing. Breach of contract litigation over mortgage commitments is one of the most common reasons FSBOs end up in court. If you do not clearly understand all the contractual terms, consider hiring an attorney.
Role of Real Estate Attorney
In virtually every state a home, or any other piece of real estate, that is sold requires a contract of sale. This is true even when there are only verbal agreements between the parties. In many states, and even in all states with sizeable metropolitan markets and sizeable population growth, the vast majority of home sales or purchases are handled by real estate agents. However, more and more frequently we are seeing "FSBO" ("for sale by owner") transactions. Without agents, these sales and purchases are usually made with the use of the Internet and with the preparation of a sales contract between the parties.
Although a contract for sale is a contract just like any other, and some real estate agents still make their living based on simply printing out an agreement of sale from a piece of software, often between two parties with no real feelings about the contract or where it is going, and an attorney’s involvement with such contracts is almost always very limited, this does not mean that as a seller or purchaser you should not have the benefit of legal counsel and advice. Nevertheless, in many areas, particularly those without substantial real estate investments or in areas outside of major cities, the nature, location, or just basic remoteness of real estate practitioners make such a practicality impossible, and the parties are simply forced to do it themselves with a standard form or contract.
There are, however, many occasions where you should consider again having the assistance of a real estate lawyer to help paint a picture that makes it easier to finalize the contract, and appears to prospective buyers or sellers such that they understand the magnitude of what they are doing and are not mechanically involved in the process to the detriment of the parties or other family members.
Following are items to consider concerning real estate attorneys in a FSBO contract:
- Although for most individual sellers or buyers of real estate they’ll usually have an agent helping them with it, if there is a price or legal interest in the property that is about to be sold, it may be beneficial to have the assistance of legal counsel, either to evaluate the terms or price of a contract or to have the attorney prepare the contract .
- Another reason may have nothing to do with the price or value of the property, but may rather relate to family relationships involved in the FSBO contract. It may be helpful, rather than having to recruit a family member or friend, to have a lawyer involved to evaluate the terms of the contract.
- Even if the contract is ready to be drafted or signed, the position has been agreed to, the parties have spoken to their family members or friends, and everyone is satisfied the contract is accurate, it is still worthwhile for the attorney to check the record or history of the property and make sure that nothing is lingering that would spoil the deal. In the case of a sale, particularly where mortgages and liens are involved, such as a short sale, you want to make sure that where basic due diligence is exercised, be it a Google search or phone call, you don’t find something that no one anticipated back when the FSBO deal was struck.
- In many areas where disputes or lawsuits are rare for a property or community, a dispute may have already arisen that you’re not aware of because the property is being acquired or financed through a special program with an agency. It may be beneficial to ask an attorney to make sure that no recent disputes are pending concerning the property.
- In many cases, the right to sale is attached to a property. For example, if there is a fee simple absolute on the property, you want to make certain that there are no limitations on your ability to sell it.
- If the seller is being required to contribute or pay something in return for the property, such as a home warranty or repairs, similar to the above items, you want to make certain that the requested amounts are fair, reasonable, and don’t create problems.
- In the case of parties or owners who are not living at the property or the property being acquired, it may be worthwhile to get determination terms. If this is the purchase of a property, there may be renovations or improvements, or the terms may involve high personal contact, and it is worthwhile that the terms are clear and that there are mandatory guidelines for the property based on the parties’ desires.
How to Negotiate the Terms
Negotiating the terms of a home sales contract is an integral part of the process, with the goal of reaching a fair and mutually beneficial agreement that protects both parties’ interests. Effective negotiation involves clear communication, an understanding of the market, and awareness of legal obligations and rights throughout the transaction process. Here are some effective strategies for conducting a successful negotiation:
The starting point in any negotiation should be a discussion about the contract price. The listing price should be in line with recent sales of comparable properties in the area to ensure that it is reasonable. A competitive price is critical, as overpriced properties tend to look neglected and uninviting to buyers who may feel they are wasting their time if they believe a seller will not agree to a price that reflects fair market value.
The seller should anticipate some interest from a buyer to conduct a professional inspection of the property. This is standard practice, and a seller should not be offended by a buyer’s request for such a process. It is advisable that instead of making the buyer pay to hire an inspector of their choice, to make the house available to be inspected by the seller’s personal inspector. The former practice can make a buyer feel that the seller does not wish to enter negotiations in good faith.
The disclosure statement for the house should not contain anything that is false or misleading. Otherwise, the buyer will have justification for ending negotiations and breaking the deal. To avoid this situation, a seller should be honest in answering questions and providing information to the buyer.
Buyers, more commonly than sellers, may be unreasonable in their requests and demands during the negotiations process. This could backfire, however, as it may cause the buyer to lose an otherwise great property.
Buyers should eliminate or reduce any objectionable provisions in the contract that relate to finance, repairs and miscellaneous items prior to accepting the contract. Building a relationship of trust with a seller is important during the contract negotiations.
Closing the Sale
Once the FSBO real estate purchase contract has been executed by the buyer and seller, the next step to take is to finalize the sale itself. If everything is going smoothly, the next thing to happen is to have the home appraised.
Appraisal of the Property
The bank needs to send an appraiser out to the property to assess the value of the home, and the buyer pays for this service. If the appraisal comes in under the price, the seller may need to come down to meet the buyer’s upper limit on what he or she is willing to pay. If the appraisal comes in above the sale price, the deal is still good to go. Sellers should always get an idea of what the home is worth in the market before setting a price.
Home Inspection
The buyer may request an inspection of the home. This is usually done by a professional who will inspect the home for any serious problems that could create issues down the road. The seller will then make the decision whether to fix any issues or to leave them as they are prior to closing.
The Closing
At the time set forth in the contract, the closing is held and final payments are made. The closing may occur in the residence of the seller , or it may be done in-office with all parties present. Essentially, the buyer will pay with a certified check (or via electronic funds transfer), and the money will be turned over to the seller at this time. If applicable, the closing costs will also be paid at this time, which will enable the lender to release funds to the seller. Closing costs can include attorney fees (if either party has an attorney present), points to refinance their existing mortgage, or agent commissions. The closing should also be the time when title insurance is taken care of, which protects the lender from any liens to the home or other encumbrances that may not have been disclosed by the seller. At this point, the deed and title are transferred to the buyer, the buyer receives possession of the home, and the sale is finalized.
Preparing for the Final Closing
There are a few things that sellers can do to help speed up and finalize the closing process. These are just a few steps that can be taken on the part of the seller to make the process easier. Like all other steps in a FSBO contract, it is best to read the fine print to see if there is anything additional that is required prior to the final closing.