Fsbo cautionary tales?

Question

Are there any known real estate scams involving for sale by owner sellers?

I am a new investor and found an fsbo. It has a very good roi, and the seller said he needs cash for his son’s tuition. If that’s the case why isn’t he using an agent?  Seems like he isn’t desperate at the time for the money which is ok.

He noted asking price is 105k, but if we do 100k we probably have a deal.  Later in the conversation he said the same thing about 90k.  I first thought it was great he was negotiating w himself, but now I’m worried he’s trying to pull a fast one.

It seems like he has done a lot of projects in his day. He said he is retiring to the beach and is buying an expensive property there, so he’s consolidating property into that one.

Next he says he saw a storage property near another investment he has and is kicking the tires there. I asked well why would you buy more if you’re looking for money for your sons college tuition? He says oh well my father has a bunch of money that I can always borrow. I did not ask him why he didn’t borrow the tuition and save a cash flowing property.

I worry he is selling me a money pit. I walked the property w a property manager I will use; she said it seems fine. Rents seem below market and she didn’t see any issues w the property. There were some sloping on the first floor and there’s a crawl basement that didn’t have easy access so I couldn’t see below the first floor for any problem.

I plan to have a title company draw up the contract, perform a title search, and obtain property insurance.

I plan to have an inspection.

not a whole lot of comps but it seems to be in line.

I am currently calling lenders for the best rates, so a lender will get an appraisal too.

property is on public sewer.

Is there anything else for which I should watch out?

Mindy Jensen · Answer

The biggest thing to be careful of is giving any money directly to the homeowner. Only go through a third party like a title company or attorney. And definitely get title insurance.

Lynnette E. · Answer

There have been cases of FSBO where the person selling the property is not really the owner.  Sometimes it is a relative acting for an owner who is not competent to sign and no legal declaration to that affect giving authority, sometimes just someone pretending to be the owner, sometimes just scammers.

Make sure that you have clear government issued id for the seller and it is really the owner, and all owners are checked out.

Also you need to ensure that the renters do not have issues or long term agreements.  Do they have a 5 year lease with rent that will be more and more under market?  Are they violent, job hoppers who do not pay regularly?  Does the landlord pay for utilities and they use lots?  How long until you can evict them?

Also check with your insurer.  He can look up past claims on the property.  Check with utilities, are the prices in line, or indicate a water leak, etc.  Check main water and sewer lines and termite history and current situation.  Drive by at night time and weekends, maybe a neighborhood nuisance.  Check for register sex offenders, maybe one just bought next door.  And new community upgrades such as sewer going in at a high cost per house?  Maybe ask the neighbors what they know, or the renters what improvements the house needs?

My guess is that there may be a major issue of some sort.

The story seems off.

Bob Woelfel · Answer

@Ken Tsui He may be trying to do something and he may not.  That's why you always close with an attorney or title company as they help make sure the deal is in order.  If you have already walked the property and everything seems fine with the actual house then that's one part of your due diligence.  Why don't you look up the county tax records and make sure he is the actual owner of record before you go through the trouble of putting it under contract.  If he is not ask him why.  Don't give him any money up front and do everything through the proper channels with the title company.   You should be fine.

Amanda G. · Answer

@Ken Tsui, people generally assume that each other are telling the truth, we are designed that way. So if you are getting warning bells, it is a sign that you are probably noticing something real. Title insurance and inspections are important, but if your gut says something bad is happening here, trust yourself and walk away. It is super easy to get caught up in a deal, especially if it looks good on the surface, but investing is a long term game. There will be another deal.

Ken Tsui · Answer

@Mindy Jensen thanks - definitely will be going through title and getting title insurance if I continue.

You must get this a lot, but it’s nice to interact with such a celebrity!

Ken Tsui · Answer

@Bob Woelfel - great tips!  He indeed is the owner, although I don’t know if who I’m speaking with is. I for sure will not hand him any money.  Definitely would use a title company. Thanks for the advice!!

Ken Tsui · Answer

@Lynnette E. These are great tips I can put in my tool bag for future purchases. Thanks a lot!

I also just spoke with the property manager who walked through with me. She said she thinks one of the units will be difficult to rent in 2 months if it becomes vacant.  Because of that I may pass...

Amanda G. · Answer

@Ken Tsui, because of the warning bells and your conservative nature you will watch those inspections and title results more closely than the average person. I hope it works out well for you!

Ken Tsui · Answer

@Amanda G. Thanks, but I am also an accountant by trade so I fear I get analysis paralysis and am very conservative in nature! I am probably going to go through with the deal because I have not found many that make financial sense where I am, and I need to get started!  It’s interesting to get different perspectives because many people have told me trust the process - inspection and title work will ensure there’s nothing disastrous.

Fsbo cautionary tales?

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