FSBO Contracts Explained
A contract for sale of house by owner, also referred to as a "For Sale By Owner," or a FSBO contract, is an important legal document in real estate transactions. It allows homeowners to sell their home without the need of a real estate agent or broker. However, creating an effective FSBO is key to ensuring a successful sale.
In general, FSBO contracts should outline all of the details of the transaction and highlight important information such as purchase price, closing costs and contingencies. In addition to this information, FSBO contracts must also include all material facts regarding the property, including the address, and any other information that would be important to a potential buyer. The seller may also wish to include additional terms, such as financing details or an explanation of contingencies. When an FSBO is drafted correctly, it can save parties considerable amounts of time and money .
While these types of contracts can be incredibly beneficial for homeowners as they save on real estate broker fees, there are potential pitfalls to avoid. If the FSBO contract contains language that is unclear, the buyer may attempt to renegotiate the sale with regards to other terms. Homeowners who seek to sell their home on their own must understand all local, state and national laws that could affect the contract. In addition, FSBO contracts are similar to contracts involving contractors, as such agreements also involve a person or business providing construction services for property and improvements.
Ultimately, an FSBO contract is one of the most important documents in the real estate community. Being able to sell a home without the input of a real estate agent is valuable to sellers as it saves them substantial money in the real estate transaction. While these types of purchases and sales are not for everyone, homeowners should understand how a FSBO contract can help and what it can do in simplifying the sale of your house.
Essentials for a House Sale Contract
The Contract to Sell Your Home is fairly straightforward when looked at in broad strokes. To begin with, the number of items that you absolutely must include in the contract is limited and focused.
For example, the contract should include the following items:
Description of the Property for Sale
Property’s Selling Price
Sale Terms
Buyer’s Financing Contingency
Inspection Contingencies and Closing Date
Property Disclosures
While these considerations may seem unnecessary or tedious for some, the reality is that they are necessary parts of the agreement, and failure to include them can lead to problems down the road.
Let’s go through these key elements in more detail:
Property Description – The first order of business is to describe the property for sale in as much detail as possible. Most FSBO or For Sale By Owner housing sales tend to be preferable in the first place precisely because those doing the selling are familiar with what makes their home unique. For example, did you know that the words "home" and "house" have different meanings from a legal standpoint? The law defines a house as the structure itself, while a home encompasses the associated property that surrounds the land on which it sits. That translation means that some FSBO sellers can make the unfortunate mistake of selling the land under a home separately from the structure itself. Don’t make this mistake! Be sure to include your parcel number, such as APN 101-001-001 through APN 101-001-023. If you live in a planned community, you should also spell out any details you have about the Homeowners Association, with particular emphasis on any HOA rules, fees, special assessments, fines or other relevant issues.
Sale Price – This may seem like a no-brainer, but the sale price must be clearly and unequivocally described in the contract. Preferably in words, and not just numbers. Many FSBO sellers will use words like "ten-thousand dollars and no cents ($10,000)" to describe the sale price. Always use the words spelled out on a line at the bottom of the numbers. If you have a set amount in mind that you don’t want to go below during negotiations, say so in the offer. Doing this will strengthen your position in the transaction.
Terms of Sale – If the sale is subject to any specific notes or contingencies, document those. For example, if the buyer must sell his or her own home before closing, or if the buyer expects the FSBO seller to make specific repairs before closing, those should be spelled out in writing.
Buyer’s Financing Contingency – The Financing Contingency is an important part of FSBO contracts. If a buyer is financing the purchase through a bank loan, they will undoubtedly require the seller to provide documentation regarding the property itself.
Inspection Contingencies and Closing Dates – Finally, the Contract should state firm dates on which the sale will take place, as well as the closing date. Also, FHA and VA buyers will request a Home Inspection prior to committing to a purchase. This can be done at the buyer’s expense. Sometimes, the buyer may ask that the seller pay for the inspector, but that is highly unlikely in most cases.
Property Disclosures – The final consideration is whether or not to disclose any significant issues with your home or the surrounding area. For example, if liens or easements exist on the property, you must disclose them. Also, if your home has suffered from mold, you need to disclose that.
Requirements for a FSBO Agreement
In order to avoid legal entanglements later on, several requirements must be met when creating a FSBO contract. One important aspect is state-specific laws, which dictate the legal requirements in your state that must be followed to enforce the contract. For example, there are many state-specific environmental disclosure requirements, such as potential problems with lead paint or radon gas. There may be other areas of environmental concern, such as wetlands, that must also be disclosed. Full disclosure of any material defects with the home is imperative to protect you from later claims that you did not disclose something you knew or should have known about. There are also several disclosures or inspections often required by state law. For instance, most states require a residential smoke detector inspection and a WDO (wood destroying organism) inspection (to look for termites or related pests). These inspections must be conforming to the state’s governing body, and if they are performed through an inspection service, the report must be on a form prescribed by the state. Legal precautions sellers should take when "Going FSBO": Sellers should use their best efforts to get the names and contact information for all persons living in the home. This could include roommates, adult children, etc. If any occupant will not vacate prior to closing, you will need them to sign a lease at closing, at a minimum allowing the buyer to take possession of the home after closing. This could also be a lease purchase agreement, allowing this person to remain in the home for an agreed period of time after closing. You may also need to create a short-term lease and get the other people’s signature on that lease. Another common "mistake" made by home sellers is leaving a few pieces of furniture or personal items in the home post-closing, mistakenly thinking they can come back later to retrieve them. Typically, the buyer has taken possession of the home at or before closing, and your items may not be covered by their homeowner’s insurance policy. If they have already taken possession under a lease, they may also have a renters policy, but that usually covers their contents but not yours. It’s highly advisable that you remove all of your personal items from the home. If you desire to leave some items, clearly indicate in your contract that the items are "excluded from the sale of the property." For example, if you want to exclude your refrigerator from the sale and take it with you, note, "Refrigerator, model XXX-XXY, serial number ZZZ-1324, and all other appliances except washing machine and dryer currently located at the property excluded from the sale of the home."
How to Write a FSBO Contract
The term "For Sale by Owner" refers to selling a house without the use of a real estate professional. Making that decision is entirely up to you, but if you do choose to go the FSBO route, you’ll need to be extra diligent about getting the right paperwork in place and following all the proper procedures. How do you do all this?
I mentioned "due diligence" in the prior paragraph for one major reason: it bears mentioning again. People who sell their home without a realtor often end up being taken advantage of because of their unfamiliarity with the home selling process. The Internet is full of scam artists looking to take advantage of people looking to move. You can mitigate this risk by being diligent about doing your own due diligence.
The best way to protect yourself is to draft up a well-crafted contract for sale of house by owner. It’s important to know that a verbal agreement is not legally binding, no matter what state you’re in. There’s no 3-day grace period for the other party to back out. You need to have a written contract that legally binds each party to the agreement.
If you’re selling "Anytown," USA, you may think you can just copy the template form you find on the Internet from the "free contract for sale of house by owner pdf download." Wrong. No two deals are the same, so you need to make sure every one of your contracts is tailored for every house. It’s also important to ensure that your contract contains provisions that comply with your state’s property laws. Many people who attempt to write up their own contracts end up leaving out key details for their state, invaliding the whole thing. Then what? You have to start from scratch anyway or hire a lawyer to do it for you.
This isn’t to say that you can’t write your own contract. In fact, it’s highly encouraged, as you learn more about your state’s laws and the relevant terminology you need to finalize your sale. But writing your own FSBO contract doesn’t mean writing a sloppy one. Take a look at samples of contracts so you have an idea of what you’re looking for . Review the laws in your state to understand the basics. These will help you understand how to structure your agreement with the necessary clauses and terms and conditions.
There are really only three things you need to include in your FSBO contract: closing details, disclosures, and contingencies. You also shouldn’t forget the legalese—the things such as attorney general notifications mandated by your state government. What’s your first thought when you hear, "legalese?" I know what my first thought is—too boring to read. But it’s really important when you’re drafting a contract to include all this information, especially in a state like, say, Ohio. The legalese outlines your responsibilities in relation to your property, your obligations to disclose certain problems with your home, and any other needs and conditions you must fulfill before the transfer can go through.
In this section, you’d add things such as:
Disclosure statements and closing details are a couple of major facets of your FSBO contract. They’ll help you avoid closing problems, which can sidetrack your entire sale. You need to disclose the status of your property in order to protect yourself from any potential lawsuits. Your buyer needs to know about your property’s reported defects and repairs you’ve done to fix them. You should also disclose any liens on the property.
Laws governing FSBO contracts aren’t universal. State laws vary for disclosures, home sales, and other relevant matters, and they directly affect the way you should compose your contract. As I mentioned earlier in the article, what worked in "Anytown," USA, may not have the same effect in "Any Village," USA.
Here are a few things to keep in mind:
If after reading this you feel like a lawyer would help you finalize the sale with a contract you can trust, you should seek one out. At the very least, you should check with a lawyer after you’ve written one up yourself to ensure you haven’t missed anything or made any amateur mistakes that can cost you hundreds of dollars.
Common Pitfalls of Selling a House FSBO
Common mistakes sellers can make when crafting a FSBO contract
There are many pitfalls associated with For Sale By Owner (FSBO) sales and it’s not unusual for those selling their own homes to encounter the same mistakes repeatedly. Here a few of the most common mistakes that private sellers make when drafting and executing a FSBO contract and how you can avoid them:
Having insufficient seller information
It’s critical that you provide sufficient seller information in the contract. That sounds simple enough, but it’s important enough that it needs reminder. It’s particularly important that the seller fully spells out who is selling the property.
Omitting other parties from the contract
Although they may not have an ownership stake in the property, a significant other or other family member may also need to be part of the transaction. An omitted spouse can bring a FSBO deal to a grinding halt and or create legal challenges. It’s important the seller include all other parties in a sale, so they don’t face conflicts after the sale.
Failing to note any liens against the property
While you won’t be able to sell a property until any outstanding liens have been cleared, sometimes sellers forget to include clear title insurance. And, sometimes FSBO sellers don’t have such insurance in the first place. It’s vital to disclose to your buyer any issues with the title of the property, even if it’s not an issue at the time of writing the contract.
Misrepresenting the property
The FSBO contract should clearly describe the property. Both parties need to agree on the lot size and property boundaries, the location of any outbuildings, in-ground pools, sidewalks, etc. While it may seem unnecessary to get so detail-oriented, the FSBO contract should include as much detail as needed to ensure the former owner doesn’t have any legal claims to property after the sale closes.
Not communicating with – or using – the buyer or sellers agent
Communication is key to making a FSBO deal a success. Even though you’re the one selling the property, you need to speak with both parties in the negotiations to ensure everyone is on the same page. When selling through a real estate agent, the agent will nearly always be the middle person, although the seller can work directly with the agent and the buyer’s agent.
The Right Time to Hire a Professional
A real estate attorney or trained consultant can be hired to assist in the preparation of a FSBO contract. If the buyer of your house is using a real estate agent, hiring an attorney to assist in drafting the FSBO contract can level the playing field.
For complicated circumstances, it can save you the headache and hours of time to hire an attorney (or consultant) for an hour or two to help you prepare the FSBO contract:
• You are selling your house because of a divorce.
• You are selling your house because of a job transfer to another city.
• Your house has been damaged by flood, fire, or other disaster and you are receiving insurance proceeds to make repairs.
• You have judgment liens against your house.
• You are selling a house that was inherited and, as a result of a Will, there are multiple owners.
• You need help listing exceptions to title on the FSBO contract.
• You have multiple mortgages against the property.
• You are a current member of the military and a seller’s agent is citing the Servicemembers Civil Relief Act .
• You have tenants who will need to be notified of closing and offered a fair opportunity to vacate the property.
• There are property owners who have not signed the FSBO contract and there are deed restrictions against your ability to sell the property without their consent.
• You want to draft contingencies (e.g. home inspection, buyer’s ability to obtain financing) and you have no experience with how to do so.
Some states’ laws require that parties represented by an attorney or licensed real estate professionals receive different protections or have certain "defaults" in the contract. For example, in Florida, if you do not have an accurate and thorough listing on the HUD-1 Settlement Statement (a commonly used closing statement format), you may be entitled to recover certain fees and costs from an unrepresented seller, such as if the settlement broker fee is out of line with industry standards, unpaid property taxes, unpaid homeowners association dues from prior years, homeowners association dues for the year in which the sale occurs, and/or utility closing costs.
