Deals: ON Market vs OFF Market

[Brandon Chaney]

I've been having conversations with clients who absolutely despise "On Market (MLS) Deals" even when they're priced under listing price. I've gotten some explanations that I've taken into consideration but I wanted to open the floor to get some better insight. I'm a REALTOR in Los Angeles who focuses exclusively on distressed assets. I wholesale my deals (ethically, by the book(is there a book?)) and....well...some of them are "On-Market" MLS deals. I'm the direct contract holder every time. Doesn't matter if i'm 200k under list price and a 65% deal...which is rare in this market., some of these people won't even look at it. 

Can you explain this mentality? Is it pure lunacy or is there some real truth behind it?

What are your thoughts?

[Kaustubh Johri]

Great analysis. Appreciate your POV.

Firstly, I will not be paying 6% commisssion when I sell it. I am planning to put it back on market the day I close it. In case I don't sell it within 15-30 days from closing and make a minimum 10K (without having to do anything to the property), it will be a house for my flip pipeline. I agree the rent ratio is not great but that is how it is closer to downtown ATL. I could have increased a couple hundred of dollars more but did not want to freak out the tenants.
I am not really into rentals, however, I buy homes that are half decent and rent them out if I am not ready to flip right away. I can easily make 30-40K with a "lipstick" job on it. If I "pop the top", I can make 50-70K minimum.
The house is in Decatur GA and that place is on fire.
I will update by end of January.


Originally posted by@Kyle McCorkel:

First of all, Merry Christmas!

Second of all, this thread is driving me crazy and now I feel compelled to respond.  I apologize preemptively for being a buzz kill.

Let's get this out of the way, of course you can find deals on the MLS. People have at least a little motivation to sell or else they wouldn't have listed their property. Of course.

But you need to get ridiculously lucky, or be willing to take on a property with so many issues that everybody else (can be literally hundreds or thousands of other buyers) aren't willing to do it.  If it's that bad, then you will be taking on either a HUGE headache and/or a HUGE risk.

Let's talk about the example that was praised above.  Property listed for $240k, buyer negotiated down to $215k and got a "deal".  Is this really a deal???? NO

Option 1 was to sell for market value of "230k-235k".  Let's run the numbers, and I'll even give the benefit of the doubt that you don't have interest/loan costs since you claim you're purchasing with cash.

Buy for $215k plus $3k closing costs.  Assume hold for 3 months until it sells.  Utilities $500, taxes $1000(?) insurance $300.  You collect $1200X3 = $3600 in rent. Sell for (best case) $235k.  Commissions at 6% would be $14,100.  You'll have another $1000 or so in closing costs on the sale.

Total credits = $235k + $3600 = $238,600

Total debits = $215k + $3k +$1800 + $14,100 + $1,000 = $234,900

If you used hard money then you lost money, for sure, but let's assume you didn't. You just tied up over $220k for 3 months to make $3,700, best case. This assumes there's no maintenance issues, the renter pays you all the rent, and you get the max asking price. If that's a return that excites you, cool (and maybe you plan to do FSBO and save commissions?), but chances are not everything will go perfectly and you'll end up losing money. You have to factor in your risks as well as the potential reward.

Here's the other thing, you buy it for $215k cash and do nothing, then expect to get $235k.  First of all, what are buyers going to think? Hmmm, this sold for $215k a month ago, the pictures look the same, it must be worth $215k! Even worse, appraisers will (correctly) think the same thing.  The property was presented on the open market to hundreds of potential buyers, and the seller took the best offer presented to him which was $215k.  Nothing was done to the property, and how much did the market change in 1 month? (probably not much) Most appraisers will say it's worth $215k and use you're last purchase to justify that price. 

This is all not to mention who is going to want to buy a house for $235k with a renter in it paying $1200? Rent to value is abysmal, less than .5%, so most investors won't accept that.  If it's a primary home buyer, they won't like that there's a renter in there.

Sorry for the diatribe, I really am.  I feel like a Grinch.  I just could help myself.

Let's bring this back to the original post, regarding why people want off market deals. If it's truly off market, and I mean that you've contacted the seller directly and are the only buyer who knows about the deal (not a "wholesale" deal that's listed on the MLS), you have a MUCH higher chance of getting a real deal. The definition of going under contract with a seller is that you have the highest/most acceptable terms that a seller is willing to accept. If you're the only buyer, there's zero competition. If the property is "on market", then literally thousands of buyers could have looked at the property, and dozens could offer on it. If you win the contract it literally means you were the highest bidder. By definition, in a liquid market with plenty of buyers and sellers (on-market), whatever the property sells for is market value. It's only in an illiquid market (limited buyers and sellers, i.e. off market) where a deal can be made below market value.

[Kaustubh Johri]

1% rule in Atlanta is almost impossible unless it is a war zone... However, the area is a 500K-600K area if you do a good job renovating and adding SF .

Originally posted by @Dave Chow:

Originally posted by @Kaustubh Johri:

Those who say there is nothing on MLS, here you go..

I log on to Zillow after dinner (I am currently in India). I see a 30 min old listing that was in our target area in Atlanta (hot market!!) . 

It was listed for 240K. Fair price was more like 230K. I call up my brother right away and he speaks to the seller. He was an out of state FSBO and was fairly motivated. We were able to negotiate it down to 215K - all cash and no contingencies.

House is in good shape and tenants are paying $1100/month. 

We are looking at couple of exit strategies : 

1- Sell as is at 230-235K 

2- Build a pipeline for our next flip. Keep the rent coming in until we are ready. (We were able to bump up the rent from 1100 to 1200 as well in the new lease since the market rate is about 1300)

So deals are there, you just have to look for it. And when it comes, it gets picked up fast, so keep looking. 

$215 k has only $1100 /month rent? It reminds me of the 1% rule.

[Kyle McCorkel]

@Kaustubh Johri

Are you paying cash or using hard money?

Do you pay for a property manager?

Are you licensed yourself, or do you plan on listing FSBO? Either way you'll need to pay the buyers agent in most cases, right?

[Joe Hammel]

Just after the "myth" that "off market" properties are "good deals"....when it's more likely they're an over priced, issue infested, lien ridden, liability. Find a good market, and lots of MLS deals have high ROI and you're protected by MLS code of ethics. Well...protected is a bit of an overstatement, but at least is something.