FSBO Archives

Selling a home is an emotional ride in normal circumstances, but when the home you’re selling is one inherited from a recently-deceased loved one, trying to figure out how to handle an inherited lake property can be even more trying.

If that property happens to be a lake home, the process can quickly become overwhelming.

Having a fundamental knowledge of the taxes, costs and challenges associated with selling inherited real estate can help prevent adding unnecessary stress on your family.

Taxes

If you’ve lived in a home for at least two years in the last five, it’s likely your property qualifies for a tax exclusion, which allows sellers to keep up to $500,000 of sale proceeds.

Most lake properties, however, serve as vacation or second homes rather than primary residences, which disqualifies owners from benefiting from this exclusion.

Consequently, inheritance beneficiaries are ineligible for this exclusion as well, but the IRS has put into place certain other tax advantages to help prevent inheritors from paying exorbitant capital gains taxes on lake homes that have appreciated significantly.

Based on the seller’s taxable income, capital gains taxes are collected on the difference between a property’s original purchase price and its final sales price.

Fortunately, step-taxes are applied to inherited properties, which determines a lake home’s value based on its fair market value at the time of its most recent owner’s death.

What this means is that rather than paying taxes on a home that was purchased for $100,000 but has appreciated to $250,000, sellers only have to pay capital gains taxes on however much the home appreciates from $250,000 at the time of inheritance to what it eventually sells for.

Because of step-up taxes, most inheritance sellers avoid paying much on capital gains, unless the property stays on the market for a considerable time between the date inherited and the date sold. An additional transfer tax is applied once the title of ownership is finalized.

Once sold, sellers are required to report any profits of the transaction to the IRS as taxable income.

Costs

When a homeowner dies, their bills do not suddenly disappear.

During probate — the judicial process during which the deceased’s will is proven valid or the presiding court determines the rightful heir(s) to the deceased’s estate — next of kin, like spouses and children, must maintain payment on ongoing home expenses.

These are often referred to as administrative expenses and include mortgage payments, if applicable as more than half of lake homes are cash transactions, HOA dues, condo fees, property taxes and homeowner’s insurance.

In lake real estate, additional costs may apply such as marina rental fees, additional flood and weather insurance and home security services.

Lake properties also require more maintenance than most primary residences because of their proximity to water and prolonged exposure to moisture-rich air.

Experts recommend weatherproofing a property’s wooden structures, like boat docks and decks, at least once a year. In areas where there is frequent rain or high humidity, homeowners may be looking at repeating this process multiple times a year.

Inherited properties that are not regularly occupied may also require vacant or unoccupied home insurance as well as routine grounds maintenance.

After beneficiaries have been determined, real estate-specific financial responsibilities then fall to the person who inherited the property or is divided evenly among multiple beneficiaries if more than one is named.

Challenges

Lake homes are priced much differently than off-lake properties because their values are based on location in addition to structural features. This is why a 3 bed, 2 bath home on the lake may be $100,000 more expensive than a similar home in an off-water neighborhood.

In general, lake real estate tends to stay on the market longer than other types of real estate because listings are mostly discretionary properties. An improperly priced home can significantly impact how long a property stays on the market, therefore affecting how much will be owed in capital gains taxes.

The likelihood that your inherited lake home will stagnate on the market increases when you list as for-sale-by-owner.

According to Zillow’s 2017 Consumer Housing Trends Report, only 11 percent of for-sale-by-owner properties sold without any real estate agent interaction. Because of the taxes and nuances that come with selling an inherited lake property, it’s in the sellers’ best interest to hire a real estate professional.

Lake real estate agents know the ins and outs of the area’s real estate market and will be able to price your newly acquired property objectively and appropriately.

Additionally, many lake real estate buyers come from out-of-state, which means your inherited property will need national exposure to niche-specific consumers, which most non-real estate professionals do not have the resources for.

Real estate agents will be able to help you navigate through these challenges as well as handle all the paperwork and negotiating for you, allowing you and your family to grieve properly.

Real estate has many ways it can be sold, and each approach has secrets. You can dig around online or talk with industry professionals and learn many of these secrets.

However, that does not mean you will be aware of every obstacle.

This is the case of one big unspoken problem for For-Sale-By-Owner (“FSBO”) transactions that frequently impedes the sale of homes by their owners.

For-Sale-By-Owner

First, let me give a quick background, then I’ll discuss the problem and its impact.

As most know, For-Sale-By-Owner is popular for some homeowners for a variety of reasons. For some, it is the avoidance of real estate commissions, while others in super-hot markets can find this approach easy enough for the owner.

There are also a few people who choose this approach as a matter of financial principles (regardless of the money). These are the anti-Realtor people, and some may even take less money for their home just so they don’t participate in the traditional real estate brokerage model.

Conversely, some owners avoid FSBO due to various challenges (which, whether you agree or not, are often cited by real estate agents).

These oft-spoken challenges to For-Sale-By-Owner include establishing a viable, market-correct listing price and access to marketing for the home on the Multiple Listing Service (MLS). Then add in the hesitancy of some agents to bring buyers to FSBOs, and the paperwork and process challenges of moving a home from “For Sale” to sold.

The Best Solution is The Best Solution

I want to be very clear that while I am in the real estate brokerage business, I am not anti-FSBO.

If my team is doing their job right, and other agents are doing their job right, we should provide a better outcome than alternatives. If we fail in our duties, then that failure is on us, not the consumer who finds a better solution.

I believe that the best solution for the customer is the best solution.

The real estate market is huge, and there will never be one singular market approach. I believe there is room for both For-Sale-By-Owner and the brokerage models in their many versions.

Why Has FSBO Not Gained More Market Traction?

When we decided to take leadership roles at Lake Homes Realty, we first spent fifteen months evaluating all types of real estate business models.

During this evaluation, one of the questions I found particularly interesting was this:

chalk drawing of for-sale-by-owner-house with key in doorway next to $100 bill

In this day of easy access to information, including “how to sell a home,” why have For-Sale-By-Owner transactions not made a bigger dent in market share of real estate across the country?

There was a time where real estate brokers were the almost sole keepers of “how to sell a home and complete the transaction.” But that day is long gone.

So if the “how to” is now easily available to anyone online, and many MLSs now allow listing FSBO properties, what’s keeping FSBO from dominating real estate?

The Secret Problem No One Discusses

The answer to my question includes the challenges I noted above. This includes how to obtain market exposure and concerns about properly executing the paperwork.

There is also one other problem confronting FSBO sellers, the unspoken challenge: Greater than normal “price separation.”

Put another way, the sellers AND buyers both believe THEY should get the money that would have gone to agent commission.

And that is a monster obstacle in negotiations.

For Example

Let me explain it like this: Bob is selling his home using a For-Sale-By-Owner approach. He has done a number of real estate transactions before and has the home listed on the local MLS. Bob has embraced FSBO to save the cost of agent commission.

Bob is comfortable with the process, knows what he is doing, and sees no reason to pay an agent for work he is very capable of doing himself. This is reasonable and practical.

Here’s the hitch. Sally, the potential buyer for Bob’s home, knows Bob won’t be paying a commission. So Sally believes that without a commission to be paid, the price should be discounted.

FSBO Buyers are “Looking for a Deal!”

In other words, buyers often look at FSBOs when they are looking “for a deal.”

In exchange for “a deal,” buyers will accept some additional discomfort with risks (perceived or real) of buying a home without an agent’s assistance. But there better be a price advantage!

The buyers may not even be able to verbalize this feeling. However, their logic has some method to it.

The voice in their head tells them that if comparable homes sell for some consistent price, which includes the agent commission, then by logical deduction those homes’ actual value must be less.

Since this seems logical, the buyer believes they deserve that amount as a price discount. And any owner who wants to keep that amount is often seen as greedy and unreasonable.

This leads to the buyer and seller having a much larger than normal gap between them about price expectations. And this occurs with no third-party in the middle to explain or negotiate this gap.

Each party genuinely believes they are right and cannot understand why negotiations struggle (if there is even an offer to begin with).

The Odd Agent Impact on Price Separation

This price separation is a reason I believe many former-FSBO homes sell faster once represented by an agent. Why? Once buyers see an agent is involved they tend to lose some of the FSBO-anchored expectation of getting “a deal.”

Are there homes where the owner really will drop the price and the home sells? Of course.

However, this action actually perpetuates the expectation for other buyers that FSBO is where you find the lowest prices. That is, it reinforces the believe that FSBO is where you go to find low price “deals.”

Stacking pennies for for-sale-by-owner home purchase

And yes, there are many transactions where the FSBO owner and buyer negotiated a price they both found acceptable.

These can occur anywhere but is most common in very active “hot” markets, where marketing is not as critical and buyers know homes will sell in only a couple of days. This is a feeding frenzy that negates the buyers thoughts of finding a low price. They just want to get a house before they are gone.

Outside of these transactions, many FSBO owners finally give up the approach and engage a real estate agent. What they don’t realize is that in addition to whatever skills and tools the agent brings, this action alone changed buyer expectations to some degree (regardless of the capabilities and skills of their new agent).

Is There a Solution?

Is there a solution for For-Sale-By-Owner sellers to this issue (beyond engaging a real estate agent to represent them)?

I can’t say. And not because I need to defend the brokerage model. (Heck, if I could solve this challenge, there is a big business opportunity in having that answer!)

This problem of an exaggerated price separation is not limited to FSBO, it is just greatly enhanced. It remains true that buyers and sellers the world over often disagree on an acceptable price.

What I can say is that FSBO sellers and buyers have to work through more issues than each may realize.

It can be done, but it is always best to plan your financial transactions by understanding as much as possible about the property, the transaction process, the market, and, of course, the target customer (the buyer).

While it may not always work, my suggestion for the FSBO seller is to address this unspoken challenge head-on.

Talk with potential buyers about the FSBO approach and have very good data to support the current market value of the home.

Sellers will either get better engagement from buyers or they will learn more about the market behavior of these buyers.

Tag: FSBO

What to Know When Selling an Inherited Lake Property