Whether you’re buying or selling your home, nothing matters 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 their listing price, but agents also routinely run comps for buyers. This allows the real estate agent to let the buyer know how much they can expect to pay for a property that meets their current wants and needs.
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 to see. It was a three-bedroom, two-bathroom home, and after finding some properties that met my buyer’s requirements, I realized that the only three comps I could find had been marked as being on the market for zero days.
How can a home sell and be on the market for zero days? It means that those homes were sold without actually being listed. 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.
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 on the open market. 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 see the market. However, many people often wonder about the impact that these off market sells have on the real estate market. Even more importantly, clients on both sides of the transaction frequently ask how useful off market data is 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. 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 a good relationship with often give them a good deal on the property. While it may cost them some money on the deal, they usually point to the fact that they didn’t have to pay a commission to a listing agent or wait for the home to get sold.
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 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 75% and 80% of homes in the Bay Area that are listed with a real estate agent receive multiple offers.
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. No, it’s not uncommon for a buyer to make an 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. What if someone offers you $3 million for your home if you’ll sell it to them off market? Obviously, that number is a great one, but what if your home was worth $3,250,000 on the open market? By allowing someone to buy your home off market, you may have cost yourself $250,000.
The Final Word on Off Market Comps
The final verdict on off market comps is that you simply shouldn’t use them. 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, and the transaction took place at arms’ length.
These off market deals also don’t include an agent’s commission, which can have an impact on the overall price of a home. It’s also not in common for homes that are sold off market to be in bad condition. Ultimately, the amount of unknown information in these off market deals simply render the little information that they do provide unusable.
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 any value to you or your REALTOR.