The state of Florida appears, at least on the surface, to be experiencing a real estate collapse. 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 under water and facing the possibility of foreclosure. With many Adjustable Rate Mortgages (ARMs) due to reset to higher rates, the fallout may not be over. Another manifestation of the situation is 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 across 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 look for any advantage they can get when looking to get out of a high equity or negative equity mortgage. 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 real estate commission savings associated with a Sale by Owner. This can represent substantial savings for the buyer and certainly make his property more attractive when he considers the real estate commission savings on a $280,000 property to be $16,000! The listing owner also has more freedom when it comes to making their home “seem” 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 can appear more attractive. I have 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; $2,000 always has a “value” of $2,000 regardless of the buyer, while a “timeshare in Puerto Rico” will have different values for different people.
The second by-product, unfortunately, is “foreclosures,” which have risen rapidly in Florida since 2006. Industry experts blame this rise on “subprime mortgages.” Subprime mortgages are riskier because they are made to borrowers who generally do not qualify under more stringent 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 cannot make ends meet. The end result is more foreclosures and an increase in homes for sale – being “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 drop. For Sale by Owner can allow the owner to save that drop in value and allow them to avoid foreclosure.