Pros and Cons of Off-Market Transactions from the Perspective of the Residential Real Estate Seller

Pros and Cons of Off-Market Transactions from the Perspective of the Residential Real Estate Seller

Ken DeLeon and Michael RepkaJanuary 3, 2014
Palo Alto Daily Post

 

The red-hot Silicon Valley real estate market has brought back the days of multiple offers, bidding wars and rapidly rising prices.  It has also brought out the creativity of buyers and their real estate agents.  As many buyers search for the “right” property when selection is low and demand is high, they often look for nonconventional approaches that may increase selection or avoid competition.  Not surprisingly, there has been a surge sales “off-market” sales, or sales not listed on the Multiple Listing Service. 

While it is easy to understand why buyers are attracted to the increased selection and lower competition often associated with off-market sales, this article will look at the advantages and disadvantages from the seller’s prospective.  

Seller’s Benefits

The most common reasons that sellers cite for seeing a property off-market are (1) Privacy, (2) convenience, and (3) reduced costs.

Privacy

When a home is listed, sellers sometimes feel a profound lack of privacy.  Strangers know that they want or need to sell their home, how much it is worth and they have the opportunity to come through and check it out.  The listing process requires the sellers to keep the home clean and tidy all the time and vacate the property when a potential buyer wants to come by.  Some sellers are willing to give up a potentially higher sales price to avoid this inconvenience, especially if the “net” amount is higher due to eliminated preparation and commission expenses.

Convenience

The lack of time pressure in an off market transaction enables both parties to craft an agreement that is consistent with their personal needs.  For example, a buyer may enter into a binding agreement to purchase a home, but give the seller a very flexible time table to complete the purchase of a replacement home.  Sellers are often willing to give potential buyers opportunity to conduct inspections or get estimates for contemplated work because there will be no stigma if the buyer decides not to move forward with the transaction.  Of course, any material defects uncovered by the potential buyer must be disclosed to subsequent purchasers.

Reduced preparation costs

Silicon Valley is different from many parts of the country in that sellers often incur significant expense to get a home ready for sale.  In and around Palo Alto, these expenses usually include property inspections, pest inspections, environmental hazards reports and often include substantial investments in home repairs or improvements, such as painting, carpeting, cleaning and landscaping.  When selling off-market, these costs are often significantly reduced or materially eliminated. 

Lower or no commission

When the buyer and seller know each other, they may be able to handle the sale without the need for real estate agents at all.  Needless to say, a real estate transaction is complicated and involves significant risk, so professional advice is necessary.  If the buyer and seller are both comfortable with the agreed upon price, then they may elect to each use a real estate attorney rather than an agent. 

A wrinkle comes up when the buyer and seller do not know each other.  Someone has to bring the parties together, and a very good local real estate agent is often the best suited to uncover opportunities like these.  In this case, the buyer may hire a real estate agent to represent them at a rate that is significantly lower than the aggregate rate that would be charged by a listing agent and a buyer’s agent, keeping costs down.   

  Seller’s Side Detriments

Without a doubt, one of the biggest risks that a seller takes when they enter into an off-market transaction is that they may receive less because of the reduced competition.  When people compete the price may be pushed higher than expected or even than is reasonable.   This opportunity for a “homerun” may be lost in an off-market transaction.  Thus, a seller must thoroughly investigate and understand the market before agreeing the contract.

The second risk is that the seller may decide to move forward without engaging a real estate agent.  Although, a real estate attorney can handle the sale, explain the risks and responsibilities of the parties and provide a significant level of protection and advice that goes beyond the capacity of a real estate agent, real estate attorneys are generally not as knowledgeable about the market, the ways to property prepare a home to maximize value or which agents have clients that may be interested in such a property. 

Buying or selling a home off-market may be advantageous for some clients, in the right circumstances.  Off-market transactions can be more convenient in many ways, but the amount of risk involved still makes it imperative that either client get competent legal advice before proceeding.  

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