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Off-Market Deals: Are you the Sucker?

There is much to debate about off-market deals in present day residential real estate. Over the past 10 years, I have seen the good, the bad, and the ugly. In today’s blog post, I will illustrate my opinions on off-market deals and hopefully give you some good insight.

 

One: Leave the off-market deals to the professionals

“Listen, here’s the thing. If you can’t spot the sucker in your first half hour at the table, then you ARE the sucker.”

This famous quote by Mike McDermott (Matt Damon) in the 1988 poker cult-classic, “Rounders,” helps to personify residential off-market deals. The reference is made to describe a newbie poker player (a.k.a. a “fish”) trying to play with professionals and losing his money. That is exactly how the average buyer should treat off-market deals.

If you are not working in real estate or investing in real estate full-time, then you will have trouble competing on any level due to the experience and core competencies of these professionals. Non-professionals (a.k.a. “fish”) tend to get taken advantage of on these transactions. This leads me right into my next point…

 

Two: You may be getting screwed on your deal

“In off-market deals, almost always, there is one side getting screwed.”

This quote is from our general real estate counsel, Steven Spierer, Partner at Spierer, Woodward, Corbalis and Goldberg. I love this quote because, unfortunately, this is the case all too often.

I can’t tell you how often an elderly grandparent sells their home for hundreds of thousand of dollars below market to less than forthright agents and developers. Or, how a “savvy” buyer will contact every developer or agent in the city, only to overpay on new construction.

There are very few sales that should warrant off-market status due to privacy issues, etc. (i.e. a celebrity…and those are even questionable). In the short, off-market property is not exposed to the entire market which, in turn, can hamper finding the market price.

If you’re a seller, ask yourself why is the buyer purchasing off-market? You should know the market well enough to know the price is right or have someone represent you that you can trust fully.

And vice versa, if you are the buyer, why the heck is the seller selling without full exposure? Again, you better be experienced in the local market or have someone you trust advising you.

Personally, I have completed three off-market deals this year and am currently working on a fourth. Here is what went down…

Example #1: I represented sellers where both husband and wife worked, had a young child, and had no time to prepare the house for listing, let alone having time for open houses, etc. They also wanted to sell contingent on finding their next home.

I told them to leave it in the present condition, obtain all of their requests off-market, and that they would take a discount of $25,000 or more to land a buyer. They ended up selling $50,000 less and decided for themselves that the sacrifice was worth the convenience.

Even though it was their decision, they sold for less.

Example #2: I represented buyers eager to land a home in a specific area. When they located a rare home coming to market by door knocking, their enthusiasm gave the seller all leverage. I advised them that they were over-paying by a mile. The appraisal came in $125,000 below our contract price. At closing, pricing worked out better than that, but there was an emotional premium paid to land the deal.

Again, even though it was their decision, they bought for more.

Example #3: Two highly sophisticated and experienced parties negotiated a probate sale on a tear-down lot in a premier beach area in excess of $2 million. New construction sales were aplenty to find value, both parties had investment and construction experience, and both were very reasonable making a deal right in the range it should have sold. The seller was making more than selling to a developer (along with any easy transaction) and the buyers were set to have at least half a million of equity at the completion of their project (not a developer margin, but a great margin for direct buyers).

This time, more rarely, two parties came together and made a market deal that served both the seller and buyer’s needs equally and fairly.

What I want you to see from these examples is that majority of the time, one side is taking a hit to get a deal done. In high-end areas, there is less emotion and a business-like principal-to-principal approach…but of course little old grandmas get screwed in these areas. I have seen it too many times.

In short, don’t get fooled by the intrigue of an off-market deal. You could very well be on the wrong side if you do not know what you are doing.

 

Three: Brokers are desperate for business and clients’ valuable time is often wasted

“For Brokers, off-market deals are like the first lady to wear makeup. It was a huge competitive advantage at first, but quickly, other ladies caught on and applied makeup. The playing field was leveled swiftly. Now, women spend time everyday putting on makeup that really offers no benefits to them or the partner they seek.”

This metaphor is by yours truly. Few of my investor clients can find a cheap laugh, but there is really some truth to it.

In this hyper-competitive world of real estate sales, inexperienced and experienced agents are desperate to make a deal and offer “off-market deals” to pick-up clients. These off-market deals are crap 99 times out of 100. They have already been shopped to an agent’s entire brokerage and networking groups with other brokerages. Smart sellers will normally ask a premium before giving a true asking price when going to the Multiple Listing Service (MLS) to see if they can snare an unsophisticated buyer without good representation, or a desperate agent to sell it to an unsophisticated buyer.

And their equally inexperienced clients (with 20% down, a good credit score, and knows excel) think they are smart enough to will a house lower than market price. Sorry to say, but the good deals only go to all-cash paying developers who can promise even better listings on the back-end to agents. Poor grandma and grandpa and their charming beach bungalow.

There are always exceptions to the rule and I am getting a bit snarky.

However, today’s typical buyer is likely wasting their time with off-market deals. They will pay market-price, above market price, or search and search and search to no avail.

Equally, agents end up spending more time trying to dig up off-market deals rather than studying the market and truly understanding what their client wants. There are plenty of deals on the MLS for those willing to wait. (Fact: My last three developments were all purchased on the MLS and all were profitable)

If agents agreed to stop working off-market deals and took everything to the MLS, then everyone would end up saving a lot of time and grandma would come out OK!

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