Buying Real Estate from a For Sale By Owner Seller
by Janet Wickell
from http://about.com/

Handling Real Estate Deposits and Property Disclosures
When you buy real estate, the route you take to get from contract to closing depends on the laws and customs in your area. In some states, attorneys do title searches and act as closing agents. In other states your paperwork might be processed by a title company.
There's also a huge amount of variation in customs regarding home inspections. Where I live they are done after the offer to purchase is finalized and becomes a true contract, but in other areas the contract itself is not complete until the inspections are behind you.

The same is true with boundary surveys. In my region banks do not usually require them to close on a property--although as agents we nearly always recommend that our buyers order a survey or survey update. In other areas nearly every real estate closing includes a survey.

With all the differences in real estate transactions, there's no way I can give you a sure-fire closing scenario for your specific location, but there are a few general tips that might 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, but 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 to a seller 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 before closing. I know of instances where sellers cashed a buyer's check, then couldn't come up with the cash to refund the buyer when the contract was cancelled. It isn't usually a case of dishonest sellers--most of them simply don't understand that the money is not theirs until the property changes hands.

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
The wording in your real estate contract states who gets the earnest money when a certain event happens, but a refund might not be automatic. Find out if both parties must agree in writing before a deposit held in trust can be given to either party.

Property Disclosures
Most states requires that sellers disclose facts about the property they are selling. They are not generally excused from disclosure just because they are selling for sale by owner, but there could be other exclusions that allow them to bypass the property disclosure. For instance, 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.

Lead Paint Disclosures
The Federal government requires disclosure of known lead paint in homes built prior to 1978. Sellers must also give buyers the opportunity to test for lead paints.

Laws Vary
Laws regarding disclosure vary tremendously by location. Check your state and local laws to find out what types of information sellers must disclose.
Most state real estate commissions have Web sites where they provide blank copies of property disclosure forms. Visit your state's real estate Web site and download disclosure forms for your own review and to give to the seller if necessary.