Unlocking Opportunities: Understanding "Subject-To" Real Estate Purchases

Sell your Property For Sale By Owner

We get the frustration most homeowners have with paying others to do the seemingly simple job of selling their property. This thought is normal in most homeowners’ minds. Many homeowners even attempt to sell the home themselves. After all, who knows the home better than themselves?

In the real estate world, this is call a “For Sale By Owner” listing, also known as a FSBO. Legally, property owners can sell their own home without an agent. In reality, it’s a bit more complicated due to regulations and liabilities but that doesn’t mean it can’t be done.

According to the National Association of Realtors (NAR), which has a vested interest in having home sales handled by professional Realtors, the number of FSBOs in the U.S. has fallen to an all-time low since NAR began surveying the tracking sales with an Agent or FSBO in 1981.

In 2015, the number of FSBO’s fell to just 8% of the 5.25 million real estate sales last year, down from 9% the past three years and the lowest since it began the survey. That’s a significant number who are taking the risk in deciding and acting on all of the factors involved in the real estate transaction. Before deciding whether to do it alone or partner with a professional you have to assess your needs.

Selling a home requires more disclosures and legal requirements than ever before. Managing the appraisal process, inspections and buyer qualifications has become more complicated. New laws that were passed have increased the hurdles in a tough credit market, adding to the already intricate transaction process.

The real question is why would you sell a property without a professional?

Consider a friend of mine; lets call him Jack for this conversation. Jack and I were close friends but hadn’t seen each other in a few months due to our hectic lives. One day we decided to meet up for happy hour to catch up. Over a few drinks jack began to tell me his story about the last few months of his life.

Jack told me that he sold his house a few months ago. He went on about his decision to sell his house without a broker.

He told me that he snapped a few pictures, posted them online and fielded a few of calls. Even though most of the calls were just other agents, he did find a buyer for his property. He received over $1.2 million from this buyer and it closed within 30 days. He bragged a bit about making nearly $200,000 for the deal after paying his mortgage off.

At first I was taken back and a bit confused on why he didn’t call me to sell the property. I let him know time and time again that hiring me would put more money in his pocket but the idea of “paying” a large commission didn’t sit well with him.

That’s fine; my advice in the past was never an obligation just honest advice. I went home after this discussion a bit upset and decided to look into the property. After looking into the property records, I noticed that the buyer that Jack had sold the home to had recently sold it again, just a few weeks after he bought it.

In fact, the new sales price was over $1.5 million.

This meant that the buyer that purchased it from Jack made nearly $300,000 within a few months. And since the condition of the property looked the same, it also meant that Jack left nearly $300,000 on the table, more than twice his initial profit.

Unfortunately, I run into these stories all the time. You’re probably wondering how a deal like that could happen. Didn’t he check the value of the property online and look at the comparable sales?

Yes, he said he did a large amount of research online before the sale and felt he was getting a good deal since no broker commissions where involved. The reality is that he didn’t have the experience and professional skills to maximize the value.

Below are a few questions you should ask yourself before selling FSBO:

Do you have a solid understanding of technology?

In today’s day and age buyers expect to be able to quickly communicate. This includes getting your property in front of the right people at the right time.

Luckily, technology makes this easier than ever before but many homeowners and agents don’t realize how to properly take advantage of these tools.

Friction kills sales and the younger, affluent consumers expect instant gratification. If you expect to complete your transaction using faxes and mail only, you are in for a hard time.

Can you identify and manage multiple personality types?

Selling a home is more than just price and condition; the sales aspect takes incredible skill that guides a buyer into taking action. In order to control a buyer’s perception, you need to understand how to interact and persuade with different personalities.

Do you have the time?

Selling a home takes time. Staging the property requires a full deep cleaning, decluttering and professional graphic design work. Include the editing of videos, management of advertising and then scheduling showings, the time adds up.

Do you understand the law?

Real Estate Law can be incredibly complex. It can also lead to extremely expensive litigations, failed transactions and in some cases trouble with the government. A licensed and insured real estate broker can prevent this in the majority of cases.

If you decided to sell your property without a broker, it would be best to hire a real estate attorney to review the documentation on your behalf. Keep in mind the fact that real estate attorney’s can help with the paperwork but most likely won’t be able to guide you on items like marketing or building compliance.

Read all contracts carefully. In the eyes of the law, when you sign a document, whether online or with a pen, it is assumed that you read and understood the document.

Considering doing your transaction without professional representation?

Then you must first understand what is involved with that decision.

• Do I know the value of my home in today's market?
• Am I ready to work with a buyer's agent?
• Will I take charge of sales and marketing responsibilities?
• Can I bear criticism of my home?
• Am I willing to screen potential buyers?
• Will I follow up with leads aggressively?

Negatives of Selling without an Agent

We think there are a few reasons why a homeowner should not consider selling a home without professional representation.

Be prepared to Negotiate with Multiple Parties

Here are just a few parties that you must be prepared to professionally negotiate with:

• Bargain buyers
• Real estate investors
• Buyer’s real estate broker
• The home inspector
• The bankers
• The appraisers
• The escrow officers
• The title officers
• General contractors
• City hall

We will learn more about negotiating in later parts of this book.

Legalities and Regulations

The United States has more lawsuits than any country in the world.

Selling a property without an expert to help guide you is a complicated and potentially risky process due to the ever-increasing regulatory mechanisms of Local, State and Federal government consumer protection laws.

The rate of filed litigations in the United States are the highest in the world while the main stream media features stories like the $2.86 million McDonald’s coffee spill, Pokémon class action suits and $246 billion tobacco settlements. The constant exposure to unusual cases helps to skew the public’s perception of the legal system, which adds to amount of litigations filed.

Yet, most litigation involves nothing like the disputes above. Besides a small percentage of exceptionally bizarre cases, most lawsuits filed include ordinary disputes from broken contracts.

10 Most Common Real Estate Litigation Claims

1. Failing to disclose a property defect
2. Breach of duty
3. Representing clients in unfamiliar territory
4. Giving legal advice
5. Misleading clients
6. Breach of contract
7. Failing to keep your client’s data safe
8. Failing to recommend inspections
9. Negligence
10. Bodily injury

Errors and omission insurance covers liabilities for errors, mistakes or negligence in the usual listing and selling activities of a real estate brokerage. In the United States, state and local laws generally require having liability insurance for licensed real estate brokers but the laws do vary state by state.

Four Phases of the Real Estate Cycle

A once-famous economist by the name of Henry George wrote a theory of economic booms and crashes in his work, Progress and Poverty. The theory is now taught in the world’s best real estate schools, including Harvard, Stanford and Princeton.

Henry George identified the root cause of the speculative rise in real estate prices, which cuts into the earnings of labor and capital.

He began to notice that real estate values rise at a faster rate than general economic growth because of two unavoidable facts:

1. Land is not produced. Its supply is fixed.
2. Land is needed for all production and lifestyles.

As we have seen, this creates a tendency for real estate rents and mortgage payments to take an ever-greater share of a family’s budget.

The power of land to destabilize the economy gets much easier to understand when we realize that land value forms a majority of the collateral security for large bank loans.

In the run-up to the "Crash of 2008," a huge portion of the overall debt was secured by owner-occupied real estate. In many cases, a family's home was their only form of savings and they expected the real estate's appreciated value to ultimately provide for their retirement. Real estate values were steadily increasing and land seemed like a very sound investment.

Buyers borrowed extra money to build large, expensive homes and many homeowners borrowed still more money against their home equity, hoping to enjoy their appreciating land values now and later.

The problem is that real estate, like all assets, has a cycle of appreciation and depreciation. The key is understanding the cycle and how to buy low and sell high.

The Phases of the Real Estate Cycle:

• Phase 1 – Recovery
• Phase 2 – Expansion
• Phase 3 – Excess
• Phase 4 – Recession

The four phases of the Real Estate Cycle have played out for at least the last 100 years in the United States. Although the timing for each phase is slightly different, the overall growing and retracting pattern play out again and again.

Phase 1 – Recovery

The first phase of the real estate cycle generally occurs after a decline in the market. This is when the price of land and real estate is at its lowest point in the cycle but is steadily increasing.

As the downtrend of the market begins to stabilize, recovery invites investors into the marketplace at considerably lower prices. Vacancy rates across all real estate asset classes, such as office buildings, retail malls and single-family homes begin to decrease. Companies start to expand and families move into previously vacant homes.

This phase of the cycle is the best time to purchase real estate assets with a more favorable rent-to-buy ratio and an expected increase in equity value in the coming years.

Phase 2 – Expansion

The second phase of the real estate market cycle is based on expansion. This is the period that sees rapidly increasing prices as demand begins to outpace supply.

The transition from recovery to expansion occurs when real estate buyers and investors have absorbed the excess inventory. As the supply continues to shrink, prices begin to climb rapidly as the market starts to favor sellers instead of buyers.

In recent years, this phase is generally associated with lower interest rates, allowing more money to flow into the real estate markets. For the investors that got into the market during phase one, this is where their profits begin to show.

Since many real estate expenses are fixed (except taxes in most states), this leads to a dramatic increase in revenues and profits. Increased profits attract more investors, which in turn allow new developments of vacant land and redevelopment of existing properties to begin.

Although this new demand triggers construction in hopes of increasing the supply, the lengthy process generally takes months or years to add new homes to the market. By the time meaningful amounts of new housing inventory have hit the market, the overall market expansion has been steadily rising without the benefit of new supply.

During this time occupancy rates, rents and asset prices have been increasing. The cycle begins to reach a point in which rent and price growth is accelerating. This causes many investors and buyers to adjust their forecast to reflect the accelerated growth rate.

Buyers, believing the price is justified by predicting continued growth, begin to overpay for real estate assets in contrast to current market conditions. This part of the cycle is generally referred to as a housing bubble.

Phase 3 – Excess Supply

During the second phase we noted a shortage of supply in real estate inventory in relation to buyer demand. This caused an increase in prices of real estate assets and related rents.

The third phase begins to take effect once we see an increase in real estate absorption rates. In plain English, this means that houses begin to sit on the market longer. This is considered to be an increase in unsold inventory in the market due to peak prices and new supplies.

This can begin to occur for many reasons including peak prices, increases in mortgage interest rates and new supplies of real estate inventory. The increase in inventory may be due to age demographics as well as older generations tend to downsize to prolong their retirement savings and cash-out of their real estate investments while prices are high.

These factors combine to form a point where home prices no longer rise and begin to decrease as market demand flattens and supply increases.

Phase 4 – Recession

The final phase of the long-term Real Estate Cycle is a transition from excessive supply to a downturn in prices. The major indicators for this phase are declining occupancy rates, increased mortgage delinquencies and lowering absorption rates.

During this phase of the cycle, new construction comes to a halt in fear of declining prices, but projects that started during phase three will begin to hit the market, adding to the supply and worsening the decline.

In general, rising interest rates are a macroeconomic trend that causes issues during the recession phase. This occurs due to the rapid increase in prices throughout the economy that accompanied the expansion in the earlier phases.

The rapid growth in prices, also known as inflation, will sooner or later cause the private central bank known as the Federal Reserve to fight inflation by incrementally increasing interest rates.

The increase in interest rates has a direct effect on owner-occupied homebuyers and investors alike. This is due to the purchasing power of mortgage-backed financing. On average, a one percent increase in a 30-year fixed mortgage will equal around a 10 percent decline in purchasing power. This means homeowners will only be able to afford homes of lesser value, adding to the lowering prices due to excessive supply.

Lower occupancy, a higher market supply and plummeting prices; all of these factors combine to feed a downward spiral that leaves poorly-timed investors and over-leveraged homeowners in the dust.

The downturn in the real estate market has an enormous impact on the economy as a whole, which, in turn, pushes the housing market down further.

The most interesting aspect of the Real Estate Cycle is the consistency of the trends. Economist Homer Hoyt studied the broader US housing market going back to the year 1800 and discovered that the Real Estate Cycle has a fairly reliable 18-year rhythm.

Hoyt’s findings included just two exceptions: World War II, and the mid-cycle peak created by the Federal Reserve’s doubling of interest rates in 1979.

Do I have to use a Real Estate Agent

Navigating a real estate purchase is serious business. It requires knowledge of legal agreements, the escrow process, negotiations and government requirements.

It makes sense to want to forgo hiring a realtor. After all, we live in a world of technology. Why can’t you just post your property on Craigslist for free and sell it?

The truth is, even in the most competitive markets in the world it takes a lot to get a property sold for the highest possible value.

Sites like Zillow and Realtor.com have made it possible to do a lot of the legwork yourself but there’s no substitute for an experienced professional.

The short answer is no. Technically, there is no legal requirement to use a real estate broker to sell your property in most areas.

Regulations change for each market. Requirements for City, State and Federal authorities may effect a transaction. A missed clause in a purchase contract might cost you thousands or you might get locked into an inspection period of time that makes you miss a better offer.

Using an excellent real estate broker will help navigate the process and avoid mistakes.

Yet, it’s within an owner's rights to sell a property without a broker.

Even though many people have the impression that they are required to use a real estate agent to sell their home, there is no universal law or regulation that mandates it.

However, some states require a real estate broker to facilitate the transaction and handle the documents and disclosures. If you do not know the laws that apply in your area, check with your states Bureau of Real Estate or the similar agency that regulates real estate transactions in your area.

Many homeowners dream of having a buyer call them up and agree to pay top-dollar for their home – that all they need to do is post a for sale sign in the yard and a wave of interested cash buyers will come flooding in.

However, reality dictates that it’s far more involved. Throwing some images on the Internet and then waiting for the offers to roll through is not a solid strategy. Not taking a transaction seriously can cost you tens of thousands and in some cases millions.

Before selecting which broker will be the perfect fit for you. Do your homework with the tools available. Many important aspects can be found within this book, we also offer useful links and tools to help you get a clear understand of what your home could be worth.

Take the time to talk to a real estate professional and have them do a market analysis for your property. This will give you the data of the recent sales in your neighborhood. Look for trends in the house prices and inventory.

Ask questions like:

• How many properties are on the market?
• What is the average price per square foot?
• What can be done to maximize my value?

These are great starting points on the journey to selling a property. Some owners decide to go down this path alone, opting to sell the home by owner only.

This is generally caused be a misconception of the owner. Many will claim that their reasoning is to save the broker commission percent generally paid on the sale. If that is their reasoning, it’s based on an opinion and not the facts.

According to the National Association of Realtors, over 92% of homes were sold with the help of a professional broker. Those homes saw a general increase of 13% in the sales price compared to the homes sold by owner. Even if the broker charges five or six percent, you would walk away with more money in your pocket. This is why you should considering hiring the best real estate broker you can find. It will save you time, headaches and will get you more money at the end of the day.