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Bank Foreclosures versus FSBOs

It's no secret that the real estate market is in the midst of a wide spread correction. Lenders have tightened restrictions on sub-prime loans as well as on prime loans. Owners are finding themselves in seemingly inescapable circumstances. It's like the Hydra from Greek mythology, the one that had several heads and spit poisonous fumes; not a very likable creature. The effects of these events are having sweeping effects on the current housing market.

Then there are the small investors and For Sale By Owners (FSBOs) who for all intents and purposes are usually individuals who have invested a significant amount of their time and money to obtain one or more properties with the intent of making some level of profit in the near future. Many of these FSBOs may have been involved in flipping or rehabs a couple of years ago, but have since become a little gun shy in the current market.

Now the banks and the FSBOs find themselves at odds because they are vying for the same qualified buyers in a buyers' market. Previously this wasn't an issue since the foreclosure rate was relatively low and the banks were seemingly loaning money to anyone with a pulse. The problem with this match up is that the banks have the luxury of both time and resources to do what it takes to get these homes sold. So how is a small private investor supposed to compete with the a bank who has the ability to wait as long as necessary, undercut prices and limit the number of buyers that get financed?

On the other hand the FSBO group is finding themselves caught up in the wash fighting against a flood of under priced homes retained by the banks hitting the market and the normal flow of homeowners putting their primary dwellings on the market. FSBOs are left paying a mortgage on a home that just isn't selling. In Metro Atlanta both the Georgia MLS and First MLS systems report single-family home inventory numbers in the middle-teens in October, up 5-6 points from the three previous months. Some private investors have caught the hint and employed one of the many discount brokers with similar results to just trying to sell the property themselves. If you are a FSBO you should be very concerned.

Ride out the Storm

FSBOs need to act swiftly to take advantage of the current shift in the market. Instead of sitting on the property and shelling out the monthly mortgage payment on an empty home they have several options:

Option 1: Change your Tactics

In a buyer's market the tendency is to just lower prices in the hopes of attracting a buyer, but what I'm beginning to see is that all it seems to attract are people who are "just looking". This often translates into people who are doing just that, "looking" or those that aren't able to obtain financing anyway. My suggestion is to adopt a "Buy and Hold" position if you financial situation permits. The property you have purchased still has value as a rental unit and if lease is structured properly, you could position yourself to sell the property to another investor who is looking for an occupied property for some additional cash flow. In the meantime you get to enjoy the extra money coming in until a suitable buyer is obtained (or at a minimum mitigate your monthly obligation). If you have a busy schedule, you can also employ a broker to screen tenants, show the home and perform property management duties on your behalf.

Option 2: Get Professional Help

Two or three years ago this may have been thought of as a waste of money to most FSBOs, because after all real estate agents just push paper around and collect a check right? Nothing could be further from the truth, especially in a buyers market it is important for a FSBO to use all of the resources available to them to sell the property at the right price as well as negotiate favorable terms for on your behalf.

Option 3: Continue to Buck the System

There are just some people that attempt to defy the odds in just about every situation, and some of these people are pretty successful at it. But for those of us without that cavalier approach, swimming upstream against a strong current of double digit home inventory numbers, seeking additional help may be more appropriate.

A 1031 Exchange may also be a possibility if the deal is structured correctly and you can find another project that may be more suited to the market conditions. If you have never done a 1031 Exchange it's a good idea to contact a Realtor or a lawyer who can fill you in on the details of how to make the transaction a success.

A buyers market isn't the end of the world for FSBOs and investors, but it certainly makes the business of buying and selling your properties more involved. I advise all of the FSBOs that I come in contact with to consider the services of a Realtor when looking to sell their properties. Sure it may subtract from the bottom line, but in the grand scheme that money ends up lost in the additional mortgage payments and repair allowances that are made due to an improperly marketed or prepared property.

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  • Last edited November 24 2008
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