The state of Florida appears, at least on the surface, to be experiencing a real estate bust. Rampant real estate speculation, development and the subprime debacle are blamed for the glut of homes for sale that has left the market upside down and many homeowners underwater and facing the possibility of foreclosure. With many Adjustable Rate Mortgages (ARMs) due to reset to higher rates, the consequences may not be over. Another manifestation of the situation is the looming insurance premium increases to cover the devastation and property losses/claims associated with recent hurricane seasons.
The problem is compounded by expected increases in condo fees to cover property losses not covered by insurers. The fallout has created a unique opportunity to revisit real estate opportunities throughout the state. There are a couple of by-products of this type of market. One is an increase in properties for sale by owner. Homeowners are looking for whatever advantage they can get when looking to get out of high-equity or negative-equity mortgages. An owner for sale allows the owner more options when it comes to pricing. They can expedite the sale of the property by passing on the real estate commission savings associated with a Sale by Owner. This can represent a substantial savings for the buyer and certainly make his property more attractive when he considers that the real estate commission savings on a $280,000 property is $16,000! The homeowner for sale also has more freedom when it comes to making their house “look” more attractive.
They may offer creative seller concessions like “no condo fees for one year” or “0% financing for 3 years.” Basically, instead of passing the savings directly to the buyer, they create a “bundle” that may seem more attractive. I’ve personally seen everything from “Free Plasma TV” to “Puerto Rico Timeshares.” Creativity can certainly pique someone’s interest, but I tend to prefer a direct “cash” discount or rebate. This allows the prospective homebuyer the opportunity to decide how he wants to best use the money. Cash has a fixed face value; $2000 always has a “value” of $2000 regardless of the buyer, while a “Puerto Rico timeshare” will have different values for different people.
The second byproduct, unfortunately, is “foreclosures,” which have been rising rapidly in Florida since 2006. Industry insiders blame the rise on “subprime mortgages.” Subprime mortgages are higher risk because they are given to borrowers who generally do not qualify under the more rigorous traditional criteria due to limited or poor credit history. Subprime mortgage loans have a significantly higher failure rate than subprime mortgages. Subprime mortgages typically have a higher debt service-to-income ratio and the homeowner simply can’t make ends meet. The end result is more foreclosures and an increase in homes for sale: the fact that they are “distressed” and vacant further erodes the overall values of all homes. As the inventory of unsold properties continues to grow, residential real estate prices decline.
The bottom line is that there is an abnormally high number of existing homes currently for sale in Florida. As supply exceeds demand, property values fall. For Sale by Owner can allow the owner to bridge that drop in value and allow them to avoid foreclosure.
