Real Estate

Real Estate Matters: Behind the workings of off-market deals

How do these non-public real estate sales work?

This year, competition among buyers has been fierce, especially for homes under $3 million. Multiple offers have been a norm and the number of bids on a single property can go as high as 20. As a result, buyers have shown increasing interest in off-market properties based on the simple belief in getting a bargain.

Off-market homes are those not listed on the Multiple Listing Service, the official real-estate agents' resource, and are sold privately with or without help of real estate professionals. How do off-market transactions exactly work? Do they always ensure value for home buyers? What does that mean for sellers?

Just for some background, home prices in Palo Alto have continued to rise. For the first nine months of 2017, the median price of sold homes reached $2.61 million, which was a 9.5 percent increase from the same period last year. A typical home in this price range is about 60 years old, with 1,800 square feet of living area on a 6,500-square-foot lot.

Low inventory coupled with strong demand from both local and foreign buyers have contributed to ever-rising home prices. The number of active listings in the first nine months of this year was 427, a 17 percent decline compared to the same period last year. On average, listed homes stayed on market for about 20 days, 3.3 days shorter than last year.

Off-market purchases do not necessarily guarantee value for home buyers. A popular reason for buyers to favor off-market purchases is the perceived idea that they will get a better deal because of limited competition. However, it is often not true, especially if the seller has reasonably updated knowledge of the market, or is working with a real estate professional with such expertise.

Off-market transactions basically require the seller to give up the option of mass-market exposure, but there is a price for this: higher-than-on-market asking price. At the high end, the difference can be millions. In other words, there's a good chance that a buyer may end up paying a premium they would not have if they'd bought the same property through the open market.

In an efficient market, there should be rare deals for buyers at off-market purchases. There are certain benefits such as direct interactions with sellers. In a regular open-market sale with multiple competing offers, maybe only the top few buyers would receive the seller's attention to begin with. Another benefit of an off-market transaction is that it could provide buyers opportunities to negotiate non-traditional terms, such as long close of escrow, contingent upon selling buyer's existing home for example.

The benefit of selling a home off market for a seller needs to be carefully evaluated depending on market conditions.

An often cited reason for sellers to choose off market dealing is to avoid the hassle of home preparation, such as cleaning, repairs and cosmetic remodeling, which can be daunting tasks by themselves. However, this is part of the value add of a listing agent. More importantly, money spent on adequate home preparation can generate two to three times of return for sellers at the end of the selling process. Sellers need to be aware that forgoing these efforts simply means most likely leaving money on the table for buyers.

Another reason for sellers to choose an off-market sale is a quick close. But, homes in desirable Palo Alto neighborhoods routinely sell within a week anyway, diminishing this benefit. A high percentage of home sales in Palo Alto are also in all cash that close as quickly as three to five days once into contract.

In reality, the primary benefit of off-market dealing for sellers is to test the market at a reasonably high price without overexposure, and at the same time, preserving the option to go on the Multiple Listing Service later at a lower price to encourage competition among buyers. As the number of days on market a home sits can affect the balance of power during price negotiation, if a property is priced too high and ends up not selling within one to two weeks, it loses momentum and has little chance of attracting an offer higher than asking.

The hurdle here is to determine the so-called "reasonably high price." Comparable analysis based on benchmarking closed transactions in the same neighborhood during a certain period of time is backward looking. It may lag behind reality, especially when the market is moving, in either direction. Therefore, pricing off-market homes from seller's perspective is more of an art than a science. In order to lower the pricing risk, private sales should be backed up by comprehensive marketing plans to attract serious buyers. Off-market sales don't automatically mean that sellers can't receive multiple offers, and is by no means secretive.

Whether an off-market sale is a good choice for a seller or not also depends on price range. In today's Palo Alto market, it makes little sense for sellers to sell entry-level homes (under $3 million) off market, as multiple offers can drive the price up above the high end of sellers' expectations.

Off-market transactions can be effective. However, for both buyers and sellers, it is imperative to fully understand the pros and cons, or let buyer — and seller — beware.

Xin Jiang is a real estate agent for Alain Pinel Realtors in Palo Alto. She can be emailed at xjiang@apr.com.

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