3 Things You Need to Know About 'For Sale by Owner' (FSBO)

If you're interested in exploring your FSBO options, here are a few things you should know.

When a homeowner markets a house on their own, without the help of a seller's agent, the property is classified "for sale by owner" (FSBO). FSBO properties can be hidden gems, or they can be a bit of a nightmare. Here are three things you should know about FSBO.

1. Sellers still pay fees

Most people who sell their own homes do so because they want to save the 6% fees typically collected by real estate companies (3% to the seller's agent and 3% to the buyer's agent). It's easy to forget that selling costs money, even when the seller goes it alone. Here are a few of those fees:

• Advertising: When a seller works with an agent, the agent absorbs advertising costs. If a seller strikes out on their own, they must pay this expense.
• Legal expenses: More than 20 states require sellers to hire an attorney to cover real estate closings, which can set a buyer back $500-$1,500.
• Seller-related closing costs: These expenses typically run from 1% to 3% of the sales price.
• Buyer's agent: If a real estate agent brings a buyer to view an FSBO property (some won't), and their clients end up buying the house, the seller owes the buyer's agent their commission.

If you're a seller: Plan on paying for advertising, closing costs, and possibly attorney and buyer agent fees.

If you're a buyer: Don't automatically expect an FSBO owner to split potential savings with you. Chances are, they need every last penny out of the property.

2. A poorly-priced home could linger

The seller sets the price on an FSBO property. Unless they know the market well, the price can cause problems. If they set the price too low, it's likely to sell fast but potentially below market value. If they set it too high, it could scare off buyers. The worst thing that can happen to a poorly-priced home is that it remains on the market for so long that buyers begin to believe there must be something wrong with it. A listing that's gone stale can become a tough sell.

If you're a seller: Study comps in your area before setting a price. "Comps" are homes similar to yours that have recently sold. Their sales price will give you a fair idea of how much your home is worth. If you're nervous about setting a price, spring for a home appraisal. It will cost $200-$600 but will leave you with a better idea of your home's worth.

If you're a buyer: Unless the seller has paid for a home appraisal, the mortgage lender will require that you get one (to make sure they're not loaning more than the home is worth). If you make an offer on a property, make sure it's contingent on the home appraisal. Most standard home purchases spell out this contingency, but essential details could fall through the cracks if you're not working with an agent.

3. FSBO deals can work

At some point, the National Association of Realtors proclaimed that homeowners who sell without an agent get less money for their property. This belief has been repeated often enough to be accepted as truth. However, studies show that it's not that FSBO properties sell for less. The truth is that the owners of less expensive homes -- like condos, mobile homes, and single-family properties in rural areas -- are more likely to sell their homes independently than owners of more expensive properties. When researchers compared the median price of FSBO properties to the median price of homes sold by agents, the homes sold by agents naturally sold for more. That's because they were more valuable properties to begin with.

In one study, researchers from the National Bureau of Economic Research compared the prices of 15,606 FSBO and non-FSBO homes in similar neighborhoods in Madison, Wisconsin. Although it was not a huge study, they found no difference in the prices.

The bottom line is this: Things that can go wrong in an FSBO deal, including poor pricing and negotiations that veer off track. But there's also a lot that can go right. A seller can save a bit of money by going it alone, and a buyer may find a home that fits them perfectly. The absence of agents does not mean the absence of potential.

If you're a seller: Before you put your house on the market, do your homework. Learn everything you can about the best way to advertise and how to prepare your home for sale. Also study the most professional ways to negotiate and which contracts to use. And figure out if there are any experts you may need to hire.

If you're a buyer: Don't be afraid to check FSBO properties as you search for homes. The house you've been dreaming of just might be for sale by owner.

People tend to have strong feelings for and against FSBO deals. All that matters is whether it works for you. If you give it a try and it doesn't work, you can always revert to the more traditional home sales model.