Using Off Market Sales in Pricing Your Bay Area Home

Whether you’re buying or selling your home, few things matter more than the numbers. Obviously, within the real estate industry, numbers are at the heart of everything that we do. However, in most cases, buyers and sellers have done some market research before they ever contact a REALTOR. Obviously, REALTORs run comps on properties that are similar to the one they’re about to list so they can give their clients a good idea about the appropriate listing price, but agents also routinely run comps for buyers who are contemplating making an offer on a home. This allows the real estate agent to let the buyer know how much they can expect to pay for a property that they’re interested in buying.

I was recently running comps on a property for a buyer because we were trying to figure out what amount to offer on a home. The property was very unique and was absolutely spectacular when visiting it in person. It was a three-bedroom, two-bathroom home, and after finding some properties that were ostensibly fairly similar, I realized that the three best comps I could find had been marked as being on the market for zero days.

How can a home sale be on the MLS yet be on the market for zero days? It means that those homes were sold without actually being listed for sale on the open market. Sometimes this refers to a private deal where the person selling the home has a previous relationship with the buyer. People routinely sell their homes to friends, family members, neighbors, or someone else they know, so the home is considered to have been on the market for zero days.  The sale is reported on the MLS principally so the listing agent can claim public credit for making the sale happen.

This is the definition to the term “off market.” However, I work on the open market. The numbers that I run for clients are based on the prices that are paid for homes on the open market – which means they sold for fair market value. Appraisers, mortgage brokers, and other industry professionals also rely on the information that is generated by real estate transactions that are completed on the open market. 

Obviously, there is nothing illegal or immoral about buying or selling a home off market. There is no law that says that you have to list your home with a REALTOR and allow the property to get exposed to the market. However, many people often wonder about the impact that these off market sales have on market prices. Even more importantly, clients on both sides of the transaction frequently ask how useful off market sales are when they’re creating their own plan for buying or selling a property in the Bay Area.

How Useful Are Off Market Comps?

Ultimately, these deals that take place off market aren’t very useful to establish an estimate of fair market value for a home. There is a number of reasons for this, but the most important one is that they simply don’t provide the kind of information that REALTORs and their clients need in order to make an informed decision. People who decide to sell a home to someone they have some kind of relationship with often give them a good deal on the property. While it may cost them some money on the sale, they usually point to the fact that they didn’t have to pay a commission to a listing agent, do a lot of prep work on the house, or wait for the home to sell on the open market. 

One of the most important pieces of data that REALTORs use when determining what the market is doing is the sale price-to-list price ratio. Additionally, we spend a lot of time looking at the number of days that a home sits on the market. In these off-market comps, neither of those data points are available. There is no true list price, so there is no ratio, and since the home was on the market for zero days, there is no time on market factor.

Finally, you cannot gain information about the open market when a home is sold off-market because there is no competition, and there is no market exposure. Somewhere between 60% and 80% of homes in the Bay Area that are listed with a real estate agent receive multiple offers when they are listed, which typically serves to drive the price up.

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The Risks of an Off-Market Sale

People often ask about the benefits of selling their home off market, and ultimately, the pros simply don’t outweigh the cons. Now, it’s not uncommon for a buyer to make a preemptive offer to a seller before the home is listed in order to keep them from putting the home on the open market. In some cases, these offers may seem very competitive – it may be the price you thought to list it for and expected to get for it once sold.

But it’s important to consider that if there is one full-price buyer out there for the home before the home even comes on the market, what are the odds that there might be at least one other full-price buyer out there once the listing goes public?  Or two, three, or ten more buyers?  Those buyers would then compete for the property, in all likelihood driving the sale price higher – often, quite a bit higher.  Selling a home off-market means that you can never know how high it might have sold for, and the chances are the off-market price is a fair bit below what it would have sold for on the open market.

The Final Word on Off Market Comps

The final verdict on off market comps is that you simply shouldn’t use them when trying to estimate fair market value for another property. When REALTORs, appraisers, mortgage brokers, and other industry professionals are looking at comps, they do so under the principle that the transactions were completed at arms’ length. That means the buyers and sellers didn’t have a preexisting relationship, the transaction was effected in public where other buyers had the opportunity to purchase, and that neither buyer nor seller were under pressure to transact, and that neither party knew material facts about the property the other did not. An off-market sale is very far from the criteria that allows a property sale price to technically be considered fair market value.

Another thing to note is that these off market deals may not include an agent’s commission, which can have an impact on the overall price of a home. It’s also not uncommon for homes that are sold off market to be in worse condition than homes sold on the open market, which often have thousands or tens of thousands of dollars worth of work preparing them for sale. Ultimately, the amount of unknown information in these off market deals simply render the little information that they do provide unreliable.

Your real estate agent will be thrilled that you’ve been looking at some market information so you’re more informed about your upcoming transaction. However, it’s important that you look for the right kind of information. There simply isn’t enough information found in off market comps to make those prices of much use when calculating an appropriate offer or likely sale price of homes sold on the open market.

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