What's the deal with off-market deals?

Question

I recently contacted my property management company about picking up more properties, and they hooked me up with one of their agents. After we talked for a bit about my goals, he sent me an off-market property that he would sell me for roughly 80% of its market value. It is rehabbed, tenant-occupied, good neighborhood and otherwise looks perfect.

That being said, my internal alarm bells are ringing. Why they would send this deal to me, if they could throw it on the open market for a higher price? I've heard that off-market deals are the way to go, but why would a seller do this?

If it is truly a deal, why wouldn't the agent (who is also an investor) take the deal for himself? I think that because this is an agent that works with my management company, he would have a vested interest in sending me good deals, but I want to make sure I'm not buying a lipsticked pig, or otherwise being scammed.

Steve Maginnis · Answer

Hello @Tyler D'Alessandro I understand your hesitation. However, if you do all your due diligence, then there should be no issue. Make sure to get a comprehensive inspection of the property. If you can view the property while the tenant is there, ask them about the property. If they have had a lot of issues, etc. Get a tenant ledger for the last year to make sure tenant has paid on time. Ask manager for a report showing all work order requests for the last year or so. If every effort is made to ensure you are getting what you pay for, then why worry about why they are giving you a good deal? Jut take advantage of it if everything looks good. Best of luck.

Will Pritchett · Answer

@Tyler D'Alessandro the previous replies give an interesting perspective from the seller’s perspective. I would be curious why agent and seller are taking less than market price for a property in this hot seller’s market. There could be a reasonable explanation. Your agent may not be buying now for personal reasons. Your agent may also buy only at bigger discounts than this. The agent may have an intermediary structure where he or she benefits by representing both sides of the transaction making it an easy, fast, above average commission for them. I would just ask outright what the motivation is to sell at a discount. It is a very reasonable question. Also, on or off-market deals can work. Don’t let the term “off-market” distract you from underwriting the deal yourself. In the last few years we’ve bought a lot of off-market properties and only one on-market so I don’t mean to minimize the value off-market deals potentially. You are wise to ask the question. Best of luck to you. -Will

Laurie Williamson · Answer

Ooh, I've had this question before! Maybe I can provide some useful information, and also learn something from others who post here. Six years ago, I bought a single family home, my first and only rental property, from an off-market listing. I was really interested in real estate investing, and had made three offers on other properties that were listed the MLS. I even put down earnest money, but those deals fell through during the inspection and due diligence phase. (One had a slab leak that would take months to repair, the others had plumbing-related issues, I think.) So I reached out to a friend whose mom owned rental properties, and she sent me a 3/2 property that was going to be $122,000. I could not find anything obviously wrong with it, and was also a bit skeptical, as you are. Why were they selling? Why not put it on the MLS? Also, even though that sounds really low now, at the time, it was just about market, or maybe only slightly below. It appraised for $126,000. There was already a tenant in it. I felt like a sucker for paying market prices, but I had a two-year-old and I was 8 months pregnant with my second baby, and I work full time, so I and didn't want to do a lot of work; I just wanted to buy my first property.So, what happened? Well, I bought it. I kept the tenant and the property management company. I did not even make any improvements. The first tenant was OK at first, but then stopped paying rent. My property manager had to evict them, and they stole the refrigerator when they left. I also had to pay for an expensive make-ready, but she was able to get another tenant in quickly.The next two-three years were a dream. Rent was paid on time every month, no problems, and I was making great money on the place. I had to fix the A/C or heating from time to time, but overall, it was gravy. I was wishing I had three properties just like it!Then--everything broke at once! Or, rather, I got called out for one problem and found many more problems than I knew about. There were plumbing problems, lots of plumbing problems. The garage door was broken and I had to replace it. I repainted the exterior, replaced a broken dishwasher, spent about $9,000 total that year. That was last year.THIS year, everything seemed fine and I was going to upgrade the flooring, but discovered the subfloor was wet, and I don't want to get into it, but let me just say I'm about $8,000 in and ready to sell. I will probably sell it off-market, to the same agent I bought it from. Why off market?1. Biggest reason - there is a tenant in it, and she is only a month into her lease. I don't want to send a bunch of people out to look at the property, with the tenant in it. She would be inconvenienced and probably not compelled to accommodate the showings. Listing off market lets me offer it to investors, and whoever makes the best offer gets to come out and inspect, and buy if they want, with less hassle to the tenant. 2. Next biggest reason, since there is a tenant in it, if I were to put it on the MLS, anyone could buy it, not just investors. However, a homebuyer is not going to be too compelled to buy a property with a tenant in it. I don't think she wants to move, and I would like to give her the option to stay if she wants.3. Last reason, also about the tenant, is that even though I do have an early termination due to sale clause in the lease, I don't want the hassle of asking her to move and dealing with the frustration, emotions, etc. I just want out of the situation.Reason I am selling -- it is getting too expensive. There will not be not anything major wrong with the house when I sell it because I will have already paid for the bill to fix all this stuff. I'm just "out of money" as far as I don't want to spend any more of my money on this house, and I am out of patience with dealing with repairs, contractors and being a landlord. But nothing tricky or alarming to the buyer. The tenant pays the rent, and the place is fine; I am just over it, and don't want the hassle. I hope this helps. I did not understand why the previous buyer listed off market either, when I bought, and now I do.

Christopher Duron · Answer

Great info from different perspectives. Thanks.

Laurie Williamson · Answer

P.S. I haven't received the comps from my agent yet, but I am anticipating a substantial increase in value over the six years I have owned the property. The proceeds from the sale should pay for the repairs, and also be a sizable return on my investment, to alleviate my pain and suffering! ;)