When you buy real estate, the route you take to get from contract to closing depends on the laws in your area. In some states, attorneys do title searches and act as closing agents. In other states, a title company might process your paperwork.
There's also a large amount of variation regarding home inspections. In some areas they are completed only after the offer to purchase is finalized and becomes a true contract, but in other areas the contract itself is not complete until the inspection has been completed. The same is true with surveys. In some areas, banks do not require surveys to close on a property, although real estate agents nearly always recommend that their buyers order a survey or have the survey updated. In other areas nearly every real estate closing includes a survey. With all the differences in real estate transactions, there's no way to foresee every possible situation for your specific geographic location, but there are some general tips that should help you avoid problems when you work with a for sale by owner seller, no matter where you live.
Good Faith Deposits
A good faith deposit, also called earnest money, is money you give to a seller when you sign an offer to purchase. Your willingness to make a deposit shows the seller that you are serious about buying the property. Remember that until the deal closes the deposit belongs to you, not to the seller, unless your offer says otherwise. Your offer should always state what happens to the deposit money if the deal falls through. Typically, the deposit money is returned to the buyer if any of the buyer's contingencies cannot be met, such as problems with financing or a home that's in need of more repairs than anticipated.
Deposit money often goes to the seller if you back out of the contract without a good reason.
Most real estate agents use offers with pre-formatted wording that describes what happens to the money if a real estate contract falls through. Attorneys might use standard contracts or write their own. If you are using a generic form to make an offer, be sure it is written in a way that protects your rights to the deposit.
Where Does the Money Go?
The earnest money deposit is credited to you when your real estate transaction closes--the time the property actually becomes yours.
Unfortunately, some for sale by owner sellers think that the deposit money is theirs to spend as they wish ahead of time. In one situation a seller cashed a buyer's check, then couldn't come up with the money to refund the buyer when the contract was cancelled. It’s not usually a case of dishonest sellers, most of them just don't understand that the money is not theirs until after the closing. The solution is to have a neutral third party hold the deposit in trust. A real estate attorney, your title insurance company or another closing agent will probably do that for you.
Check Your State Laws
Your real estate contract states who receives the earnest money when a certain event happens, but a refund might not be automatic. Find out if both seller and buyer must agree in writing before a deposit held in trust can be given to either party.
Property Disclosures
Most states require that sellers disclose facts about the property they are selling. They are not generally excused from disclosure just because they are for sale by owner, but there could be other exclusions that allow them to bypass the property disclosure. For example, home sellers might not be required to disclose facts about a house they have never actually lived in, such a home that is part of an estate, or if they bought the house but never occupied it.
Laws Vary
Laws regarding disclosure can vary from state to state. Check your state laws to find out what types of information a seller must disclose. Check with your states real estate commissions web sites where they provide blank copies of property disclosure forms, download the forms for yourself and to give to the seller if needed.