Here is a list of typical steps for a successful For-Sale-By-Owner (FSBO) transaction:
• Tour – The buyer tours the property. Sometimes the seller will also present the buyer during the tour (or shortly afterwards) with pre-completed inspection reports, such as:
o Transfer Disclosure Statement (TDS), which is a two-page form describing the condition of the property
o Wood Destroying Organisms Report, which is an approximately 10-page inspection report discussing any observable evidence of termites or moisture/mold (or any other things that may have affected the wood or foundation of the property)
o Natural Hazard Zone Disclosure Report, which is an approximately 40-page document providing lots of boilerplate information about the geographic area and taxes and so forth
o Any other pertinent inspection reports, such as a water well report or a septic system report
• Negotiate – Before a formal offer/contract is written up, the parties will usually get together to negotiate less formally (in person or by phone or email) regarding the purchase price and other key items of the sale. For example, this is a nice time to discuss details about the property’s condition (i.e., any needed pre-sale repairs) and the fixtures that will come with the property (i.e., home appliances). It is also useful to discuss the desired move-in date (close of escrow date) and whether the buyer is also selling their current home (and whether such sale will be a condition precedent to the current sale). Another item to negotiate is how the parties would like to apportion closing costs (i.e., escrow fee, title insurance) – you generally either want to split the closing costs 50/50, or just use the customary closing costs allocation for your county. Expect closing costs to total about 1.5-3% of the purchase price.
• Bank Pre-Approval – Buyers usually obtain a pre-approval letter from their bank before writing up a formal offer on a home. The buyer provides a copy of this letter to the seller at the same time the formal offer is written up, or within about 1-3 days of the offer.
• Contract – The parties write up the formal offer/contract. Where the buyer does not have a real estate agent, usually it is the seller (or a FSBO attorney such as myself) who prepares the purchase contract. Where both parties have agents, the process is generally more formalized around the use of forms and tends to involve counteroffers as well. I also use the standard forms because typically third parties and institutions involved in the sale are most comfortable with them (i.e., escrow, lenders) and they help speed up the process.
• Prepare a Checklist or Timeline – Often it is helpful to make a checklist or timeline to track each party’s responsibilities. For example, usually the seller needs to secure a termite inspection within 10 days or so, and the buyer needs to secure a home inspection within about 17 days, and then the seller needs to confirm the loan is going to go forward (remove the loan contingency) within 30 days or so.
• Escrow & Title – Within about three days of signing the purchase contract, the parties open an escrow account (often with a local title company) and give the escrow holder a copy of the Purchase Agreement. The title company then provides a preliminary title report and offer of insurance (i.e. CLTA or ALTA). The buyer also deposits with the escrow holder any initial deposit (earnest money) defined in the purchase agreement (i.e., 1% of the purchase price).
•Disclosures – Within the first couple weeks or so of completing the purchase contract, the seller provides the buyer with all the required legal and real estate disclosures. A FSBO attorney such as myself often helps prepare the required disclosures.
• Inspections – The seller ensures the property is available at some convenient times to the buyer’s property inspector(s). By law, the buyer has a certain amount of time (i.e. 72 hours) after receiving a home inspection report to decide whether to cancel the agreement and receive a full refund of his initial deposit. The law requires that any such termination decision be made in good faith by the buyer, so for example it should not be over a trivial matter or something the buyer already knew the details about.
• Funding the Purchase – The buyer works with this bank to ensure the bank makes timely payment into escrow of the loan amount, and then the buyer makes payment of any additional funds described in the purchase agreement to cover the purchase (i.e. 20% of the purchase price, plus the buyer’s share of the closing costs).
• Pre-closing Walk Through – Contracts usually provide the buyer the option to do a walk through of the home about 3-5 days before the close of escrow date. The buyer’s approval of the exact physical state of the home is not supposed to be a condition of the closing, but rather this walk-through is just an opportunity for the parties to open up a dialogue regarding any small items or loose ends. For example, this might be a nice opportunity to discuss transferring utilities, mail forwarding, etc. As always, parties should be reasonable with one another. If the property is not in perfect condition, or not totally clean, generally that is a risk accepted by the buyer (unless the purchase contract states that the buyer will receive the property in perfect condition and perfectly clean). That is the nature of an ‘as-is’ sale, and rightfully so.
• Legal Transfer – Within 1-3 days of ‘closing date’, escrow pays out funds to all the relevant parties and simultaneously records the new deed. A portion of these escrow funds go to the seller’s lenders (any banks holding a mortgage on title), and any remaining funds go to the seller. Once these parties have been paid and the deed has been recorded, and the old lender releases the old deed of trust, and the new lender records the new deed of trust, escrow is closed.
• Possession – The buyer receives the keys to his new home. The parties are encouraged to accomplish this transfer of the keys anytime that is convenient, whether shortly before or after close of escrow.
Please remember that these steps above are general. Home sales are by their very nature unique (each property is unique, and every person is special just as your kindergarten teacher advised you – she was right about a lot of other things too!)
So these steps can and should be customized, and even rearranged, with the expectations and flexibility of the parties.