With “FSBO” properties, or properties for sale by owner, you can often get a better price. You have to learn to negotiate and to deal with defensive owners, but the rewards may be worth it.
FSBOs, pronounced “fizboes” are properties that are for sale by owner. Most of the time it is a mistake for owners to try to sell on their own. For a variety of reasons these homes sell for an average discount from market value that exceeds what a broker’s commission would have cost.
If the home sells quickly, it was probably priced too low. The seller thinks he has saved the cost of a commission, but probably lost more than that on the low price. As an investor, if you want to profit from this, you have to be quick. Get the newspaper as soon as it comes out.
If a owner doesn’t know how to do a market analysis, he may also price his property too high. Then it sits for month after month while he pays for advertising, and perhaps pays on two loans if he has moved. This is an expensive way to save the cost of a commission as well. You may find some deals with these properties if you can educate the owner on how value is determined.
Even if priced right, FSBO properties are cut off from the biggest source of potential buyers - those who are looking through MLS listings with a real estate agent. When potential buyers do find their house, they often expect to pay less than market value. Add to that the fact that most sellers are not trained to sell, don’t know how to screen potential buyers, or how to fill out a purchase agreement, and you can see why the decision to go it alone is often a mistake.
The goal then starts to change for the FSBO seller. At some point, he realizes he’ll never get the money back that he has spent on advertising, nor the time back that he has spent showing the home. The whole thing starts to feel like a big mess, and he just wants to be done with it, This is where you enter the picture.
Investing In A FSBO Property - An Example
First, you look in the newspaper classified and call on the FSBO ads, to get a feel for which sellers are desperate. Then you go to the library to see the old newspapers. You call on two-month-old “For Sale By Owner” ads. If they haven’t sold, they may be ready to deal. Owners sometimes give up the effort, but still would love to sell. Help them out!
You find a house that is for sale by the owner. You estimate it is worth $110,000, and he is only asking $107,000. It probably would have sold long ago if he had listed it with a real estate agent. He is starting to understand that, but he doesn’t want his months of effort and $1,000 in advertising to all be for nothing. On top of that, he has already moved, and the house is costing him $1,000 per month to hold onto. Secretly, what he wants most of all is just to have the place sold now. He is tired.
After looking it over, you sit down with him at a nearby coffee shop. He tells you that the house is worth $107,000. You ask what he will do if he doesn’t sell it soon. He admits to being tired of trying, and confesses that he will probably list it for sale with a real estate agent soon. He’ll probably list it for $109,000 he tells you.
You explain that you are an investor, and that you really can only pay a price that makes sense as an investment. After hearing that he is expecting a really low offer from you. You point out that the house is empty now, and homes don’t show as well that way. He might get $106,000 for the house. “At this point that doesn’t sound so bad,” he confesses.
A commission of 6% will cost $6,400. You jot this down on a piece of paper in front of him. The house will cost him $1,000 per month to hold onto not just until he gets an offer, but until the deal actually closes. You guess that this will take two and a half months, and jot down “holding costs: $2,500.” Lately most buyers are making offers that have the seller pay up to $2,000 of their closing costs. You write that down.
You show him that under these circumstances, he would clear just $95,000 or so. You can give him $96,500 and close in a week. Make it $97,000 and you have a deal, he tells you. You agree, close in a week and he is happy just to be done with it.
Of course, you can’t make any money just buying property for 10% or so under market value and reselling it. The transaction costs would most likely eat up the whole 10%. Simply buying and selling really only works if you buy properties for 15% or more under their market value.
However, looking at FSBO properties that you plan to use for rentals is an excellent strategy. Even buying at 5% below market means a smaller mortgage, which means a little more cash flow. It also means more profit when you someday sell.
FSBO fixer-uppers are another opportunity. Suppose a property would have sold for $85,000 with the wider exposure of the MLS, and would have made an investor $15,000 profit when done. A desperate owner selling on his own might let it go for $80,000. That means $5,000 more profit, and a larger margin of safety. Searching for FSBO homes as a strategy works best when combined with other ways to make money with a property.