In real estate investing, conversations often center around “the market.” We often hear terms like market value, seller’s market, rental market, on the market, and more.
But what about the term “off-market”? With so much focus on the market, what does being off-market have to do with real estate investing?
By consulting national data, current policies, and market trends, we’ll take a comprehensive look at off-market properties and determine the best way to tap into these near-secret real estate investment deals.
What Is an “Off Market” Property?
“Off-market” usually refers to a property that is not publicly listed for sale. However, there’s a bit of nuance to the term depending upon the context, so it’s important to understand how different people and platforms describe off-market properties.
When You See “Off Market” Online
On front-facing property search websites like Zillow or Realtor, a home is categorized as off-market when there is no for-sale data available.
Home search websites pull their data from the Multiple Listing Service (MLS), from real estate agents, from public records, and from sellers themselves (for sale by owner), but those sources can present an incomplete picture of what’s possible for sale.
So Zillow’s “off-market” categorization doesn’t necessarily mean a home is unavailable for purchase.
When You Hear “Off Market” Used by Investors
Investors often find the best deals by actively searching for properties beyond those listed on the MLS. Closing on a home purchase transaction that was never listed on the MLS is called an “off-market” deal by investors.
The implementation of the National Association of Realtors (NAR) 8.0 Clear Cooperation Policy means that traditional sales are almost always listed on the MLS. But there are instances where real estate investment deals can happen without a real estate broker listing the property on the MLS. We’ll discuss how to find these off-market deals below.
When You See “Temporarily off Market” on a Listing
All active listings in the MLS must be available for showings by definition. If there’s a portion of time when the seller does not wish for their property to be shown, their real estate agent can change the status to “temporarily off-market”.
This status change does not mean that the property can be considered for an off-market sale, as far as investment buyers go. It usually just means that the seller is making some repairs, or perhaps they’re entertaining house guests on holiday. The seller is still in contract with their listing agent; they’re just taking a break from active showings.
When You Hear “Pocket Listing” Used by Real Estate Pros
Pocket listing is a term that’s sometimes used interchangeably with off-market, but the focus is a little different. Pocket listing usually refers to a property that’s marketed privately by a real estate agent. Rather than publicly listing the property on the MLS, the agent will try to sell it directly to clients within their brokerage.
The NAR 8.0 Clear Cooperation policy now prohibits agents from advertising pocket listings outside their brokerage, so with the right connections, these private offerings can present a great opportunity for select investors. (Hint: make connections with local agents so this can be you!)
Why Might a House Be Sold off Market?
With the scope and reach of the MLS, one may wonder why a homeowner would be motivated to sell off-market. Every situation is different, but here are a few of the more common reasons:
- Maintain privacy. Sellers may be wary of a public sale due to some kind of personal or financial hardship, such as a divorce or bankruptcy. Also, if the property is rented, they may want to keep the sale private from tenants. Or for some owners, the idea of all the open houses and showings that come along with a public sale may seem overwhelming.
- Test the market. Some sellers may be open to a public sale eventually, but they want to test the market to gain feedback on the condition or price before listing on the MLS. These sellers may do a “For Sale By Owner” posting first and then make adjustments before going public.
- Avoid increasing “Days on Market”. When houses sit on the market for too long, sellers lose leverage. To avoid an increasing number of days on the market, sometimes agents will first post a house as “coming soon” to generate interest. This strategy can be effective for luxury homes that typically take longer to sell.
The Pros and Cons of Purchasing an off Market Property
As with any investment decision, the advantages should be weighed against the disadvantages before jumping in.
Advantages of Purchasing off Market Properties
- Better sales price (maybe). The main reason to purchase off-market comes down to the numbers. Some off-market sellers value discretion over money, which can be a financial advantage to the buyer.
- Less competition. Without widespread advertising, the pool of buyers decreases, which can help you avoid a major bidding war.
- Increased options. Getting creative with off-market searches increases the available properties for your consideration. Having more options can be extremely valuable, especially in a seller’s market where inventory is slim.
Disadvantages of Purchasing off Market Properties
- Skewed market value. Just because a house is off-market, doesn’t automatically mean it’s a good deal. With less competition, market value can take on a more subjective quality. Therefore, buyers should take care to run independent analyses prior to purchase.
- Increased time commitment. Tracking down potential off-market properties can be extremely time-consuming. Often properties can only be found at the buyer’s initiative, and even then the deal may not work out.
- Upfront expenses. Off-market properties may have issues that require immediate capital expenditures. To locate potential properties, marketing, membership, and lead generation expenses must also be taken into account.
Do off Market Properties Make Good Investments?
Off-market properties can absolutely make good real estate investments, as long as a buyer does their due diligence. Investors need to be well-acquainted with determining fair market values, capitalization rates, rates of return, and after repair values prior to offering on an off-market property.
How Can I Find Good off Market Properties?
According to NAR data, 90% of homes are sold via the MLS, so finding good off-market properties isn’t easy.
Image source: National Association of Realtors, 2019
Given the scarcity of off-market properties, investors must utilize creative strategies to optimize their success. Often it’s best to employ a few different strategies at the same time in order to increase your chances of finding a viable off-market property.
- Networking. Form relationships with builders, contractors, and real estate agents in your local area. Often they are the first to get tips on properties that could become good off market sales. If you let them know what you’re looking for, they can keep you notified.
- Public records. State and local government websites sometimes contain information about pre-foreclosure or short sale properties, as well as expired listings. These scenarios may present an opportunity to contact the owners directly for a potential sale.
- Direct mailing. Sometimes homeowners don’t know they’re ready to sell until they’re presented with an opportunity. Pinpoint a target location and send out a postcard or letter that informs owners of your desire to purchase their property.
- Driving for dollars. This boots-on-the-ground strategy involves driving around looking for distressed or abandoned properties. Once identified, look up the owner and contact them for a possible sale.
- Wholesalers. Real estate wholesalers find properties to buy, put them under contract, then assign the sale to a new buyer for a premium. Wholesalers can be an investor’s easiest avenue to off-market deals. Yes, wholesalers take a cut as a middle man, but they also do all of the legwork to find, negotiate, and close deals –– a decent tradeoff.
- Auctions. Real estate auctions can be great opportunities to purchase bank-owned properties. (But be sure to do your research first!)
- New Western. We’d be remiss if we didn’t showcase our services just a little bit! Our New Western team would be happy to connect you with investment properties (including off market possibilities) in your target area.
When balanced with other investment strategies, off market properties can be an effective way to grow a real estate portfolio, especially in a hot seller’s market when traditional purchases can become more frustrating. Off market properties are not without headaches, but some additional work up front can pay off in big discounts at the closing table.