The off market deal – the white whale of real estate.
Every real estate investor wants one (or 100), but how do you find these elusive deals? First, let’s review some off market deal categories:
- Delusional Off Market – “Sure, I’ll sell…if you offer me a ridiculous price”.
- Unmotivated Off Market – “I really like your offer, but I’d like to think about it for a year or two”.
- Bipolar Off Market – “You’re great, we have a deal…wait, I changed my mind, your offer is insulting and I dislike your face”.
- Pocket Listing “Off Market” – “Hi, I’m the selling broker, I’m here to help. Let’s get this deal done!
Can you tell which type of off market deal is my favorite?
I recently had a delightful experience with a #3 type off market deal. The owner and I shook hands on a price, then a day later he refused to sign the contract saying he needed more money. It was a great deal, with seller financing so (against my better judgment), I reluctantly caved and we “shook hands” again at the higher price. I had the contract amended, sent it to the seller. No communication for several days, then I received an email stating that he had a change of heart and no longer wanted to sell. Fantastic.
The above story is just one reason my favorite path to an off market deal is via a pocket listing. For those that don’t already know, a pocket listing is really just a lightly marketed, non-listed (you won’t find it on Loopnet.com) deal. While not completely off-market, pocket listings are superior to widely marketed deals as the buyer pool (competition) has decreased dramatically and most of the players are fairly rationale. In other words, because the broker is restricting the market to individuals / firms he knows and perhaps trusts, it’s rare that an unlikely to close, outlier offer from an inexperienced investor might derail the bidding process.
Most brokers secure their pocket listings by either
- approaching an owner with a proposition – “If I can get you X price, would you be willing to sell and pay my commission?” or
- working with an owner that prefers a quiet selling process.
Why wouldn’t a seller want to widely market their property? I’m often baffled by this same question. Perhaps they don’t want the property management team to know their selling, perhaps they don’t want a ton of investors / competitors touring their asset, perhaps they are prioritizing surety of closing over price, perhaps the seller is wacky and doesn’t know what he or she is doing.
Why I Love Pocket Listings
While I have a clear preference for pocket listings, I will certainly continue to make unsolicited offers to owners of properties I’d love to buy. However, I now refuse to spend a lot of time on such deals until the contract is signed. Consequently, I devote most of my off-market acquisition efforts to working with brokers via pocket listings over true, for sale by owner, off market deals. Here is my rationale:
- As discussed, it’s far less likely that I’ll waste my time working on pocket listing. When an owner starts sending due diligence files to a broker (to put together a small offering package) they get committed to the idea of selling.
- I don’t believe the price discount (pure off market vs. pocket listing) is dramatically different and justifies the added headache.
- The broker is usually a rationale 3rd party that can talk the (occasionally emotional) seller off the ledge if an issue – which might require a re-trade or contract extension – pops up during due diligence. Despite what you might think, most selling brokers I’ve worked with are just as much on your team once the contract is signed (they want the deal to close, which usually means keeping the buyer happy).
- Pocket listing valuations tend to be more reasonable and you are typically bidding against fewer competitors (sometimes no competitors), who are mostly professional investors.
How to Get Access to Pocket Listings?
If you are new to real estate investing and don’t own a professional investment firm, it’s going to be a bit more difficult to convince brokers to put you on their pocket listing email / phone call list. Here are your options:
- Charm the pants off some brokers. Attend an industry event (ideally specific to your target asset class), attend the cocktail hours, meet some brokers and tell them what you’re looking for. You can even make it easy for them by putting you acquisition criteria on your business card or by following up after the event with a detailed email.
- Hit the phones hard. Identify the top brokers in your target markets and start dialing for dollars. For some, this might sound intimidating / akin to water torture, but its really not too painful. Sure, it’s technically a cold call, but if you are a legit buyer and can articulate your investment goals, the broker will be happy to take your call and add you to their list.
- Ask questions about current listings. Find marketed deals that look interesting, but perhaps the asking price is too high, and call the broker with some specific questions on the listing. Thank him for his time and say something like, “I’ll think about it, but I’m having a hard time getting close to the seller’s number (price) so I’m not sure it’s worth making an offer. Do you happen to have any pocket listings similar to this deal”?
The bonus to this strategy is that the broker will likely tip his / her hand on the level of bidding competition (they might even indicate that a much, much lower number would get a deal done). If they do not have any pocket listings to share with you, they might give you a call the next time they do.
Now, if I was a part time real estate investor, I might exhibit more patient dealing directly with sellers; however, for now I’m focusing our firm’s off-market acquisition efforts on pocket listings, which I’ve found have a much lower bid / ask spread and a much higher “hit ratio” of agreeing to terms and executing a purchase agreement.