Real Estate For Sale By Owner: An Opportunity?

Real estate for sale by owner! For some investors, seeing that sign is like finding treasure. Partly this is just because these properties are not in the MLS (Multiple Listing Service) listings that make up the usual inventory of properties found online or through real estate agents. In fact, if the seller isn't advertising in the newspaper at the moment (common) you may only learn about "FSBO" houses by driving by.

Of course, the other reason you might get excited when real estate is for sale by owner, is that you might be able to get a lower price than if the property was listed with a broker. Partly this is because the seller is saving the cost of the commission, and so may pass some of those savings on to you. There are other reasons that the price may be lower as well.

Houses that are for sale by owner are often referred to as FSBOs, pronounced "fizboes." It is usually a mistake for owners to try to sell on their own. They think they are going to better by not paying a real estate sales commission. However, for a variety of reasons these homes typically sell for an average discount from market value that exceeds what a broker's commission would have cost.

First, a FSBO home may be priced too low, since sellers rarely have experience appraising real estate. To profit from this, you have to be quick of course. Look at new advertisements in the classified section of the newspaper as soon as it comes out, and call right away if there is a deal.

Not knowing how to do a market analysis, a seller may also ask too high of a price for his house. You may not think that this provides an opportunity for you as an investor, but wait a while. An overpriced house typically sits for month after month while the owner pays for advertising and other costs, or even pays on two loans if he has moved already. Eventually he may be ready to just get rid of his "problem."

At some point, an owner realizes he'll never get the money back that he has spent on advertising, nor the time back that he has spent showing the house. The whole thing begins to feel like a big mess, and he just wants to be done with it. Whether due to overpricing or poor marketing, there will always be real estate for sale by owners who are desperate to sell.

This is where you enter the picture. Look in the newspaper classified and call on the FSBO ads, to get a feel for which sellers are highly motivated. Go to the library to see old newspapers, so you call on two-month-old "For Sale By Owner" ads. Sellers who have given up advertising may be ready to do whatever they can to sell. Help them out!

Real Estate For Sale By Owner - An Example

Suppose you find a house that is for sale by the owner, which you estimate it is worth $140,000. The asking price is $135,000, and it probably would have sold long ago if it had been listed it with a real estate agent. The owner is starting to understand that, but he doesn't want his months of effort and $1,500 in advertising to all be for nothing. He has already moved, and holding onto the house is costing him $1,000 per month. He wanted a decent price and to save the real estate commission. Now what he wants most of all is just to have the place sold, because he is tired of waiting.

You look at the house, then sit down with the owner at a nearby coffee shop. The house is worth $135,000 he insists, and you don't disagree or say what you think it's worth. Instead, you ask him what he'll do if he doesn't sell it soon. He's tired of trying, and confesses that he'll probably list it for sale with a real estate agent before long. He'll probably list it for $140,000 he tells you.

You tell him that as an investor, you can really only pay a price that makes sense as an investment. This makes him expect a really low offer from you a really low offer from you. The house is vacant, and you point out that homes don't show as well when empty. It is likely that he'll get offers around $132,000 to $134,000. "At this point $134,000 doesn't sound so bad," he says.

You get out paper, a pen, and a calculator. "If you accepted an offer of $134,000, the commission would be $8,040," you tell him, and you jot this down on the paper in front of him. It will cost him $1,000 per month to hold onto the house not just until he gets an offer, but until the deal closes. This will likely take a little over three months, you point out, and jot down "holding costs: $3,500." Many buyers are making offers that have the seller paying up to $2,500 of their closing costs. You add that to the list on the paper.

After totaling up everything, you tell him, "If all goes well, you'll clear about $120,000 after all these costs," you tell him, showing him the paper. Then you tell him that if he wants to save the trouble and uncertainty, you can give him $121,000 and close within a week. He tells you that if you make it $123,000 you have a deal. You agree and he is happy to have it sold.

Of course, with only $17,000 between the price you pay and your estimate of the current value, you can't just flip the house and make a profit. You will have many of the same costs as the seller had, after all. After holding buying costs, holding costs, a real estate sales commission and closing costs, you would be lucky to squeeze $3,000 out of the deal.

Quick flipping without adding value really only works if you buy properties for 15% or more under their market value. In this case you bought for about 12% under market. That makes this a good strategy for getting a rental property cheaper, but to flip such a property you have to have a plan for selling it for more than the current value of $140,000.

What if you don't have that kind of cash to invest? Try this with fixer-uppers. In the example, (current value $140,000), if the house would be worth $170,000 after $10,000 in repairs, you might make $20,000 on a quick fix and flip. You can see that searching for FSBOs, or real estate for sale by owner, is a strategy that works best when combined with ways to add value to the property.

Tips For Flipping A House | Real Estate For Sale By Owner