In this 3 part series we are going to cover the dangers you will face when deciding to buy a home for sale by the owner, also known as “FSBO”. While we do not discourage our clients from purchasing these homes, we do want them to be aware when you are investing in Kitchener or Waterloo real estate, or any other areas, it is important to have the knowledge and tools to make the best financial decision possible.
Part 1: Paying the Right Price for your home.
In most cases For Sale By Owners in Waterloo real estate markets, or other hot markets, will look within their neighborhood at houses that are listed on realtor.ca or attend open houses to come up with a listing price for their home. The property owners than list their house based on what everything else is listed at. There are 2 problems with this strategy:
- The Market determines the price of the home. There is a big difference between the “Selling Price” and the “Listing Price”
- Greed. Many property owners believe with the modern FSBO tools, they do not need a real estate agent and can capitalize on the additional profits.
The market determines the price of a home. The only way to get an accurate representation of market value is by completing a Comparative Market Analysis (CMA) which compares the features and finishes of recent neighborhood sales against the subject home. Realtors have access to this type of information so you can make an educated decision about the list price or if you are the buyer the purchase price. Too often I hear sellers list their home based on the following:
Greed. I find many FSBO’s are overpriced either because the seller is trying to maximize their return or simply because they are not in tune with the Waterloo real estate market, or their local market. As we mentioned earlier, most FSBO’s will go through neighbourhood open houses to come up with a price. But there is a big difference between List Price and Actual Sale Price. I always hear “But the house up the street was listed for $300,000!” But little do they know it only sold for $270,000. A realtor has access to what houses sold for so you can ensure you are not overpaying. It is important to know that most mortgage companies require an appraisal on the property before approving the financing. If the appraisal comes back less than what you paid the mortgage company will only issue funds for the lesser of the two values, therefore knowing the REAL VALUE of the property is mandatory, not simply trusting what other houses are “LISTED FOR”. We constantly run into sellers (FSBO or MLS) who want to price their home above market value because they “need the money” for the purchase of their next home. Just because you need the money doesn’t mean a buyer is willing to pay it. Realtors are often accused of artificially inflating prices to compensate them though their commissions. But in my experience most FSBO’s are listed the same or even higher than those properties listed through the MLS system. If they are saving commissions shouldn’t the price be lower or at least have to standard commissions ( usually 5%) backed out of the price? We will discuss this more in Part 2.
Below is an example –This Property Guys listing Sold for $169,900 when most neighborhood sales sold between $140,000-150,000. This Buyer clearly over paid for the home and will have a difficult time recouping their money especially if he or she needs to sell in the short term. In our next series we will talk about Net Proceeds and why many property For Sale By Owners are actually willing to work with a Real Estate agents to help close the sale.