diff --git a/CHANGES.md b/CHANGES.md
index b74bc41..2ddfad8 100644
--- a/CHANGES.md
+++ b/CHANGES.md
@@ -18,6 +18,10 @@
   `mx.ini` setting, on both checkout and update. Expected VCS errors are no longer reported
   with a full Python traceback (the traceback is kept at debug level). [jensens]
 
+- Document the `fs` (filesystem) VCS type in the README: it only verifies that a package
+  directory already exists under the sources directory and does not fetch, copy, or symlink
+  anything (refs #76). [jensens]
+
 
 ## 5.3.2 (2026-05-30)
 
diff --git a/README.md b/README.md
index 6250efe..c03e1e4 100644
--- a/README.md
+++ b/README.md
@@ -282,6 +282,37 @@ When you run `git push` in the checked-out repository, Git will push to all conf
 
 **Note:** Multiple pushurls only work with the `git` VCS type. This mirrors Git's native behavior where a remote can have multiple push URLs.
 
+#### Filesystem (`fs`) Sources
+
+The `fs` VCS type does **not** fetch, copy, or symlink anything. It is a marker for a package
+that is **already present** inside your sources/target directory: mxdev only verifies that the
+directory exists at `<target>/<name>` and otherwise leaves it untouched.
+
+Accordingly, `url` is the **directory name** (which must equal the section name / package name),
+not a path:
+
+```ini
+[my.addon]
+vcs = fs
+url = my.addon
+```
+
+This expects `sources/my.addon/` to exist already (e.g. a checkout you manage yourself, or a
+symlink you created). If the directory is missing, mxdev raises a `FilesystemError`.
+
+**Common pitfall:** `fs` does not turn an external path into a checkout. Setting
+`url = /abs/path/to/my.addon` does **not** make mxdev link that directory into `sources/` — you
+must place or symlink it there yourself first:
+
+```bash
+mkdir -p sources
+ln -s /abs/path/to/my.addon sources/my.addon
+```
+
+To have mxdev manage a local package for you instead, point a normal `git` source at the local
+repository (`url = /abs/path/to/my.addon`, `vcs = git`), or — for uv-managed projects — add a
+path entry under `[tool.uv.sources]` directly (see *uv pyproject.toml integration* below).
+
 ### Usage
 
 Run `mxdev` (for more options run `mxdev --help`).