FSBO Mortgage Broker Persepctive
For Sale by Owner VS Working with A Realtor a Mortgage Brokers Perspective
I thought I would share with you from a lending standpoint how both my process and the lenders process differ when we are financing a privately sold home. Not only is the entire process slower in a FSBO transaction, but the seller can also quickly end up with less money in hand at the end of the day.
There is a wide range of realtor commission models available today that consumers can select from when it comes to selling their property. For purposes of this email though, Im working with a standard 5% commission that is paid by the seller with 2.5% of that amount being paid to the purchasers realtor. Im confident that regardless of the commission model the seller goes with; it just doesnt make sense to take the realtor out of the equation.
I hope you find the information presented in a way that it can be easily shared with a client and that it provides them with some useful information before they decide how to sell their home.
Right Out of the Gate
1) When a buyer uses the services of a realtor to purchase a home, they are getting everything the realtor offers and paying nothing for it, as it is the seller that pays the commission.
2) When the seller pays a 5% commission to the realtorit doesnt all go to the realtor. The sellers realtor must pay a portion to the purchasers realtor (typically 2.5%), and from what is left, they pay an amount to their brokerage, must then cover the expenses they incurred listing and marketing your home, and then like the rest of us, must pay their income tax.
The reality is that some sellers dont see value in paying that 5% commission, and it can just represent a bill they want to avoid. The seller can also get hung up on the idea of giving someone 20K commission (for example) to sell their home. The reality is though that there isnt a realtor anywhere regardless of their commission model that is receiving that 20K. I strongly encourage you to read my example at the end of this article to see what that 5% commission is getting you.... the realtor is your friend.
Many people looking to purchase a property that is For Sale by Owner will deduct at least 5% from the asking price of the property as they know the seller isnt paying a realtor to sell their home. This same group of buyers often includes the bargain hunters that scour the internet daily looking for a property that needs to be sold quickly due to divorce, loss of job, illness, etc. Many of these buyers have been looking for months or years (for a deal) and have gone thru multiple realtors as they are either unwilling or unable to pay fair market price for a property. My numbers show that 99% of privately listed properties are sold to someone represented by a realtor, and there are reasons for that.
Lenders do a higher level of due diligence when it comes to financing homes that are FSBO. The reason being that there was no licensed professional (realtor) pricing the property and or disclosing any issues of concern with the property and so they are missing a layer of protection.
Its important to understand that EVERY SINGLE LENDER before deciding whether to approve a mortgage application does so under the premise that the purchaser could default, and they will need to take back the property. If that happens, they want to make sure they can sell the property for enough money so that after deducting the costs of repairs, cleaning, legal fees and the commission they will pay a realtor they can cover what is owing on the mortgage. If the buyer paid too much for the property, or there are any issues with the property that were not disclosed initially, that will likely prevent a quick sale, so the lender may end up taking a loss. Therefore, the lender requires a full appraisal be done (at the buyers expense) on any privately sold property to mitigate their risks. As you can imagine, most buyers are not happy when they find out that they must pay $400-$600 for an appraisal report and dont even get to see it as it goes directly to the lender. Its worth mentioning that the appraisal is in addition to the Home Inspection costs. Essentially the appraisal is for the lender, and the home inspection is for the buyer.
A licensed appraiser is engaged to do a thorough evaluation of the property being purchased. The value of the property is determined based on how much similar properties have sold for within the past few months with price adjustments made for both the condition and features the home offers.
I have seen many purchases fall apart on financing as a direct result of the information contained in the 10 to 20-page appraisal report that is presented to the lender. The lender will not lend on a property that is being sold for more than it is worth. In this situation, the buyer must either increase their down payment to cover the shortfall that exists between the purchase price and appraised value, or the seller will need to reduce the cost of their property.
Now if the appraisal report turns up anything that can affect the marketability of the property such as roof shingles that are lifting, a crack in the foundation, bricks that need to be repointed, evidence of water entering the home, etc., even a unique layout that may not appeal to mostthe financing will be declined in almost every case. Even if the buyer is aware of the concerns with the property and is okay with itthe lender is not okay.
From the time the appraisal is ordered to the point where the bank reviews and signs off on it a period of 4 to 10 business days can elapse. This means that the sellers property is off the market (conditionally sold) on average for an extra week during the time the buyer is allotted to arrange their financing.
Here is a Great Example:
Ross and Jenn both List their Properties for Sale March 1st for 400K (Ross Privately and Jenn w Realtor)
House will be on the market on average for 90 days and is therefore sold as of June 1st... hopefully.
Ross does all the marketing, all the showings, and must agree to have his property off the market conditionally sold until the buyers lender signs off on the appraisal report. Rosss buyer may not have been qualified by a professional, so they may not even be able to secure mortgage financing. Ross will incur an extra expense either to get a Purchase and Sale Agreement drawn up or to have the buyers agreement reviewed by a lawyer to ensure that he is protected in case something goes sideways.
Financial Summary of Rosss Transaction
Final Selling price is 376,000 (400,000 less 5% discount (as no realtor) plus another 1% negotiation off the purchase price for a total reduction in price of 24,000 (400x6%)
Ross pays the buyers realtor a commission of 2.5% of 376,000 or 9,400, so his remainder is now 366,600. (Chances are excellent that the buyer has an agent)
Rosss Expenses, marketing $750, legal $750, time spent screening buyers, showing property and negotiating pricelets say only $600
Ross walks away with $364,500
House will be on the market on average for 45 days and is therefore sold as of April 15th
(Jenns realtor will weed out the non-qualified buyers and bargain hunters)
Financial Summary of Jenns Transaction
Final Selling price is 392,000 (400,000 less 2% negotiation or 8,000 as Jenns realtor negotiates for a living)
Realtor Commission is 5% of 392,000 or 19,600
She does no showings, screening, negotiating, marketing, and gets a free Purchase and Sale Agreement fully completed that protects her.
Jenn does incur the expense of sitting in a coffee shop during showings (assume 2.50/cup x 6 showings = $15)
Jenn walks away with $372,385 (392,000-19,600-15.00)
The Bottom Line
Jenn sold with a realtor in half the time, paid the full commission and walked away with 7,885 more than Ross. She was also wide awake to scan the MLS late into the night for a new home and found a great deal due to all the coffee she drank.
Most homes that are for sale by owner are listed privately for roughly 90 days before being either taken off the market by the seller, or with seller re-listing it with a realtor so that the property can finally be sold.
Most sellers at that moment would give anything to have done this the right way from the start but couldnt get past paying a realtor a 20K commission as they didnt see the value in doing so.
About 50% of Pre-Approvals Aren't Worth the Paper they are Written on in 2017
You CAN increase the chances significantly of determining whether the Pre-Approval you havewill stand up after you remove your financing condition.
Ask Yourself3 Questions
1) Where were you Pre-Approved?
Ifit was done at the bank; chances are greater that the associate that did the P/A simply did a Pre-Qualification...which amounts to a rate hold.
2) Did the Bank or Broker ask you to provide any documentation to support your income and down payment?
If the answer is no; then this IS only a Pre-Qualification / Rate Hold
3) Were you able to get the Pre-Approval done on the spot or did you do it online?
If you answer yes to either; then there is a high likelihood that youhave a Pre-Qualification and Rate Hold once again. It is almost impossible to do a Pre-Approval on the spot
Financing Declined - Doesn't Mean You Cannot Be Financed
Financing Declined - does NOT mean its over
Never before has it been more necessary to structure a mortgage application properly, apply to the right lender, and ensure that the bank/broker can demonstrate to the lender why that deal should be approved.
The days of taking the applicants information, pressing submit and crossing your fingers are gone. In 2017, a Broker needs to broker the deal from start to finish. If you know someone that was recently declined, keep in mind that it does not mean that they cant get mortgage financing.