Cashing in on FSBOs

Three reasons why this demographic is worth targeting

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In today’s market, expired listings and distressed properties seem to dominate the scene. Nevertheless, there’s another source of right-now business that you can’t afford to miss: for-sale-by-owners (FSBOs).

I was chatting with Curtis Fenn of RedX about what is working with their customers in today’s market. Fenn’s company provides lists of both expired and for-sale-by-owner listings scrubbed against the "Do Not Call List." In addition to providing the owners’ contact information, they also offer a suite of products to assist agents in marketing to these potential clients.

Fenn explained that working with FSBOs is an important source of business that most agents overlook. According to the NAR 2008 Profile of Buyers and Sellers, approximately 88 percent of all FSBOs ultimately listed with an agent. Of those who did not, a large proportion of these sales were actually intrafamily transfers tied to a marriage, death or divorce.

Even in a good market, many agents feel FSBOs are not worth the trouble. In today’s market, they represent an even bigger challenge. Nevertheless, a number of Fenn’s clients are having great success converting FSBOs into closed transactions. Here are the three strategies that Fenn sees working with his clients.

1. Investors actively seek out distressed properties
Many FSBOs are facing foreclosure and have zero or negative equity. Selling their house without an agent is a last-ditch effort to avoid foreclosure. Fenn recommends that agents actively search for FSBOs and expired listings to determine which owners are facing foreclosure. Approximately 25 to 30 percent of the time, the owner’s contact information will be online. (If you don’t subscribe to a service, you can check with a title company or sites such as Zabasearch.com or 123people.com for owner contact information.)

Next, contact the owners and explain the various options available to them. For example, if they can locate a buyer, they may be able to do a short sale. Another alternative is to work with a loss mitigation company or HopeNow.com to see if the foreclosure can be stalled and/or the loan worked out. They could also hire a consumer attorney from NACA.net (not a real estate attorney) to determine if the foreclosure proceeding can be stopped completely. The agent’s role is to help the owner provide the best possible solution to the challenges they are facing. …CONTINUED

2. A different option
For sellers who still have equity, a lease-option can be an excellent choice, especially for properties requiring a jumbo loan. Lease-options require three separate agreements. The first agreement is for a standard lease. You will be paid on the lease agreement as part of that transaction. Be sure you handle the security deposits and other aspects of the lease as if it were a stand-alone transaction.

You will also need a separate contract for the option to purchase. Unless your state or local board provides you with lease-option forms, you will need an attorney to draft the option agreement. Options are different from a "first right of refusal" where no money changes hands. In the case where you have an option, the buyer pays the seller a non-refundable amount of money to purchase the property at a later date and a predetermined price. This could be a good or bad situation depending on which way the market moves. In the case where the market values increase, it’s a great opportunity for the buyer. On the other hand, if property values decline, both the buyer and the seller lose. The buyer is out the option money and the seller now has an asset that is worth less than it was initially.

You will also need a purchase contract. In addition to collecting a security deposit as per the lease agreement, it’s also smart to collect the earnest money deposit and place it in an escrow or trust fund account. The cleanest way to do a lease-option is to treat the lease and the purchase as two separate transactions. It’s also smart to put a home warranty on the property to protect all parties involved.

3. Provide a free seminar that shows FSBOs how to sell their home on their own
Initially, this may not seem like a smart idea. Fenn, however, shared how to turn this approach into a moneymaker. The first step is to invite FSBOs to a seminar where you explain all the steps that you take to market a property. Provide your FSBOs with a list of all the different places where they can post their listing at no charge. Next, have a mortgage officer explain the various loan programs available. It’s also smart to provide a worksheet that shows what it will take for a buyer to qualify for a loan on the FSBO’s property. Next, have an attorney explain the local, state and federal required disclosures, as well as pitfalls to avoid.

Does this strategy work? According to Fenn, agents who are using the free-seminar approach are getting approximately a 20 percent conversion rate.

If you’re looking for more business in these tough times, FSBOs can be an important addition to your marketing plan for 2009.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com.

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