Flipping For Sale By Owner (FSBO) Homes
What are FSBO homes, and can you really make money flipping them? First some definitions. “Flipping” refers to buying and selling real estate for a profit over a short period of time. Some “flippers” are looking only to make money from buying low and reselling quickly, while others repair and improve or otherwise add value to the property before selling it – an important distinction we’ll get back to in a moment.
FSBO, pronounced “fizbo” means “for sale by owner.” Owners try to sell on their own primarily to save the cost of a real estate broker’s commission. This is often a mistake, for many reasons we won’t get into. The bottom line is that these houses statistically sell for less on average than those sold through an agent, negating any savings.
One reason this is true is that buyers know the seller is saving the commission, and are inclined to offer less as a result. Sellers are open to this because they think something like, “If the commission would have been $8,000 and I sell for $4,000 less, I still save $4,000.” For this reason, and because owners often don’t know how to properly price a house, many new real estate investors think that they are going to get some great deals with FSBOs.
The opportunities to simply buy cheap FSBOs and resell them for profit are just plain rare. It’s true that FSBO homes often do sell for less, especially after sellers get frustrated with their poor marketing skills and tired of waiting month after month for a buyer. But even if you buy a house for 15% under market value, the transaction costs of buying and selling it can run 10% of the final sale’s price, and holding onto the property while waiting to sell can eat up the other 5%.
So where is the potential for flipping FSBO homes? It is in fixer-uppers. A 10% discount from market value may leave you breaking even on a straight flip, but with a fixer-upper it just means that much more profit. Let’s look at an example.
Flipping Fixer-Upper FSBO Homes
Suppose you are looking at a fixer-upper. The ARV, or “after repair value” will be around $180,000, after about $25,000 in expenses for buying it, repairing it, holding it and selling it. Of course no one deals with a problem house for fun, so the market for such a house is mostly investors, who expect to make $20,000 for the risk and work involved. That puts the market value at about $135,000 ($180,000 minus the costs and profit expected).
This might be a typical fixer-upper in your area. But if the house happens to be for sale by the owner, you might do even better. Let’s start with the assumption that the home is ugly, is already priced at $135,000, and due to the owners poor sale’s skills (common), it has been on the market for six months. The seller is frustrated, and when you talk to him, he mentions that he is considering listing the property with a real estate agent.
You point out that if he gets $133,000 – close to his asking price – a 6% commission will cost him about $8,000. Furthermore, buyers might ask that he pay $2,000 of their closing costs, and in three months he’ll spend another $2,000 holding onto the property. He’ll clear $121,000 – or he can sell to you now for $122,000, close in a week, and avoid the trouble.
Suppose he eventually agrees to $125,000. The other numbers didn’t change. The house will still sell for $180,000 when ready. In other words, you just made yourself an extra $10,000 on what was already a potentially profitable fixer upper. This is how flipping FSBO homes can be made to work.