Question: What do you get when you combine a crazy Seller’s Market and homeowners talking about potentially selling their home (or taking actions which make it look like they might)?
Answer: Possible Off Market Offers!
You’ve likely seen the letters in your mailbox where they will “buy your home as is” hand written in strange script, or heard stories from friends. Buyers & their brokers are highly motivated (some might say a smidge desperate) for homes & they are getting creative. Sometimes this is in completely positive ways and other times disturbingly unethical.
In the past 3 years, we’ve participated directly or indirectly in more than 10 off-market sales with both seller and buyers, so we’ve seen the pros and cons upclose and personal. While perceived advantages (less prep, lower costs and less stress) are well known, the less sexy realities aren’t as talked about:
More Difficult Than It Sounds
The biggest surprise for off market sellers is they often aren’t as ‘easy’ or ‘profitable’ as promised. In most instances, the process starts with hope and big promises of great pricing, wonderful terms & simplicity. Though things can quickly unravel as the discussion evolves.
Sometimes this is totally innocent - life happens, schedules change, opportunities arise & new questions come to mind. Other times the evolution is more tactical…feeling more like a ‘bait and switch’ opportunism. Sellers agree to a ‘handshake’ price, though keep shopping other buyers & an off market bidding war erupts. Likewise, Buyers use the very buyer biased contract to extract lower prices & repairs with threats of not closing, injecting significantly more stress than would have been realized in coming to market.
At best, these challenges are simple life lessons about importance of being tactical in communications & documenting financial promises in writing and at worst these challenges affect friendships or bank accounts in big ways.
True Life Experience:
Last year, we helped a client sell their rental property to their tenant. After we explained the benefits & risks, the seller elected to move forward with the direct sale to tenant due to the tenant’s enthusiasm & appreciation of the unique opportunity to save money & not move. We worked out a service agreement for us to help the Seller through the process of valuation, negotiation & closing and began negotiating with the tenant. Once conversations turned toward agreements, the tenant’s tone changed… they wanted their broker involved (they had not mentioned working with one before) which increased costs and then they played hardball on the inspection & appraisal process, leveraging their possession of the property & potential harm they could do to the property if they moved out. The Seller ended up giving concessions & dealing with stress they would not have needed to if they had simply had the tenant move out & listed the home. While we knew these risks going into the process, the Seller figured the excellent relationship with tenant would prevail & the appreciation of the opportunity would create a win-win. Instead it became something of a lose-lose with both parties leaving the transaction feeling less than ideal.
Our Lesson: it is safer for landlords to vacate properties and sell without the influence of tenants on the sale whether selling the tenant or otherwise (but that’s another blog post).
What’s the Goal: Highest Profit? Highest Sales Price? Lowest Cost?
Highest price or lowest cost are the easy answers… and sometimes they feel the best - the most warm & fuzzy. Highest profit, however, is the answer which serves your financial needs the most.
In nearly all off market sales we see substantial profits sacrificed in pursuit of lowest costs. Sellers may save 3-6% of the costs of sale (aka real estate commissions), while giving up 5-10% of the value of their home by not exposing their property all available buyers. This means leaving $20,000-100,000+ on the table!
A quick note on Buyer irrational exuberance: Over the past 6 months, we’ve seen more than 6 our listings sell for 5% more than our highest forecast value… and we’re experts at valuation! Sometimes in this market, we see homes selling for prices that have very little basis in reality and that frankly, we can’t predict even though we do this for a living.
There are two key factors, we see contributing to these circumstances:
Inexperienced buyer brokers ineffectively analyzing the market for their clients.
Buyers so motivated & frustrated they’ll pay tomorrow’s price to get the home today.
This means that if you sell off market, you won’t see these possible gains from irrational exuberance. If there are gains to be had, we want you to have them!
True Life Experience:
We recently helped a client with a property is very significant level of disrepair evaluate the various options - sell as is, moderate rehab, full rehab & tear down and rebuild. Working through the various options we discussed the time, energy and money it would take it realize the best outcome to each scenario, and after much thought the ‘As Is’ scenario was chosen. We knew demand would be high for “fix & flip” properties in their neighborhood and we determined due to condition market value was about $300k ( the home needed more than $100-150k in rehab to comparable to properties selling in the $450k range). We were pleasantly surprised with more than 150 showings in 7 days on the property and more than 40 offers on the property with sales price exceeding $350,000! At this price we knew it would be difficult for flippers to make a profit, though what we found is they were so desperate for inventory… they paid the high price just to keep their people working.
This price vastly exceeded the gains the client could expect if they did the fix and flip themselves as a ‘one off’ project, especially when we factored in the time and risks of cost overruns and complications.
Our Lesson: the seller’s market is incredibly powerful right now, if you know how to use it effectively.
Paper Value (abstract) vs. Cash (the real deal)
Personal finance experts tell us one of the best ways to save money is to pay cash for purchases rather than using credit cards, moving the purchase out of the abstract and into the tangible present. We see a strong tendency to give up value too easily early in the process in off market sales because it’s ‘paper’ money and not perceived as earned cash. We consider it part of our duty to clients to at least make them aware of this hidden habit so they don’t experience regret after agreements are signed or closed:
True Life Experiences:
More than a decade ago, we represented a client reviewing more than 10 offers on a home. A buyer's broker did a phenomenal job of presenting their offer and despite it being $25,000 lower with weaker underlying terms, the Seller was seriously thinking about signing. “They are such a nice family… they love this home… we like them.”
In reply to their thoughts, I asked one simple question which shed a different light for them… “If you had the proceeds of this sale already, and you’d heard their story, would you write them a check for $25,000 from your bank account? "
We believed the buyers were nice people with a great broker and would be wonderful owners. We also knew they were given a fair opportunity to prepare financially and make their offer, and unfortunately they came up short. It wasn’t personal judgement, it was professional decision and buyers would choose the same path if the roles were reversed. The highest best offer won the day, and our clients took the dream vacation they never thought they could afford and gave money to help a family member with college.
Is On Market or With a Broker The Only Good Way?
Short answer - nope. As much as we believe in our service to clients, it’s not a universal solution. Each circumstance is unique and therefore the solutions must be customized.
Sometimes this involves us or other brokers, and at times it doesn’t… but every great solution involves asking lots of questions to uncover right answer for the situation.
If we have one take away from this post it is this: TALK TO US BECAUSE EVERY SITUATION IS UNIQUE! We are here to guide you the best way we know how, even when that means we may not be involved in the transaction. We are YOUR advocates and we have long ago committed to always putting your needs first and foremost in all situations. With that in mind, if you are thinking of selling or buying off market, give us a call, lay out the scenario & let's see how we can help you achieve your goals!
This is a big topic to try to cover in blog form, so we have broken it up. Next week, we’ll discuss the key questions and strategies for successfully selling your home off market.