Buying off-market properties: Is it a good or bad idea?

Australia’s property market is now firmly in the recovery phase, with strong demand and weak supply continually pushing prices northwards.

It makes sense that in a market like this, where competition is fierce, off-market properties seem like an attractive option.

But what are off-market properties, and why would anyone sell them this way?

And the question everyone wants the answer to: Is it a good or bad idea to buy off-market?

What is an off-market property?

The buyer's agents at Metropole Property Strategists come across two types of what I would call “off-market” transactions.

Most are really “pre-market” opportunities.

We get the opportunity to inspect and make an offer on a property before it hits the internet and the general market.

And then there are the true “off-market” opportunities where, for various reasons, the vendor doesn't want to make the sale of their property public knowledge.

And yes, they do occur!

In fact, recently the team at Metropole bought six separate properties off-market (no one else knew about them) and currently, in let's call it an "interesting" property market, a significant portion of the properties we buy for clients are bought this way.

So let's look into this in a little bit more detail…

Why do pre-market opportunities occur?

It works a bit this way…

When a selling agent lists a new property it takes about two weeks before it hits the Internet.

During this time photographs are taken, floor plans are drawn, the seller must approve the marketing and all this must be loaded on the Internet.

If you think about it...most selling agents would prefer to keep the whole selling commission for themselves, rather than sharing it with other agents in the office.

So what do they do?

Well…they don’t tell the other agents in their office about it for a few days, and instead, they ring their “A” clients and offer them this great new property they have just listed for sale.

And then they call their “B” clients and then they ring anyone else they think may be interested.

A few days later they have to tell the other selling agents in their office about the property and these agents do the same - they call their top clients.

And if it doesn’t sell, eventually the property gets listed on the Internet and you find out about it.

How do I find out about off-market properties?

Now this is tough when you are just a "normal" property investor or home buyer.

You're probably only going to deal with selling agents a few times in your life, and with the one particular agent who's listed the property you are after once in your life.

On the other hand, the team at Metropole were involved in close to a quarter of a billion dollars worth of property transactions in the last year alone.

Do you think this puts us on the speed dial of most selling agents in the areas where we are active in the Sydney, Brisbane, and Melbourne property markets?

So while it may be difficult for you to get the call, you can still benefit from this special treatment by having the team at Metropole on your side - let us stack the odds in your favour.

By the way, that’s the easy bit!

If you’re interested in starting or growing your existing property portfolio just click here and organise an obligation-free Wealth Discovery Consultation with one of the Wealth Strategists at Metropole to discuss your options.

Why do some vendors request an off-market sale?

Of course, at times there are genuine reasons why some sellers request an "off-market" sale, usually for personal and financial reasons.

Some of the ones I have come across include:

• Money saving: To save on marketing and advertising costs - while some might do this, in my mind, the lack of open competition usually lowers the selling price.
• Privacy: The need for privacy includes not wanting the neighbours or family to know until the move happens.
• Quick sale: Some sellers prefer a quick transaction, and off-market sales can be faster because they bypass the traditional marketing phase, moving directly to negotiation and sale. Divorce, death or change in personal circumstances and the need for a quick but private sale
• Nerves and stress: Some sellers want to avoid the stress and intrusion of open houses and numerous viewing appointments. These are often sellers who are nervous about auctions or lots of potential buyers tramping through their property.

And why do some buyers look for an off-market sale?

Ultimately, buyers are drawn to off-market listings in the hope of getting ahead of the competition.

• Exclusive access: Some buyers jump at the opportunity to access properties that are not available to the general market, which creates a sense of exclusivity and opportunity. Buyers are attracted to the idea that they are getting a first look at potential homes or investments before anyone else.
• Potential for better deals: Many buyers believe that off-market properties offer better deals, under the assumption that sellers might accept lower offers in exchange for the convenience and speed of a private sale.
• Less competition: Reduced competition for off-market properties is a key benefit for buyers, especially in the current market. With fewer buyers aware of the sale, there’s technically a lower chance of a bidding war, which can drive prices higher.
• Negotiation power: Some buyers think they have more negotiation power in off-market deals, with the potential for more flexible negotiation on price and terms, potentially working more in the buyer's favour.

The reality of off-market transactions: separating fact from fiction

There are many ‘myths’ about off-market transactions; here are the two most common ones… and the real truth behind them.

#1 Myth:

Off-market properties are always cheaper.

Fact:

Many people think that off-market properties are sold at a discount because they bypass some of the traditional selling costs.

But, the price of an off-market property is usually dependent on the seller's circumstances and market knowledge.

In some cases, sellers might expect even higher prices because of a buyer's perceived exclusivity, convenience and control over transaction terms.

#2 Myth:

Off-market deals are always better value.

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Fact:

Value is subjective, and it varies depending on buyer and seller expectations, the condition of the property and its location.

An off-market deal does not automatically guarantee better value.

However, the lack of market exposure could mean a property is priced without the competitive pressure of an auction, which might quickly drive up its value in an open market.

The cons of buying an off-market property

Buying an off-market property might still seem like an attractive option, but here are a few negatives to keep in mind if you still want to go down this route.

• Listings can be overpriced: Without the transparency of the open market to compare prices, some sellers might have inflated expectations of their property's worth. So it’s extra important that buyers do their due diligence and get independent valuations.
• Options are limited: It’s harder for buyers to find the right property for them if they're solely looking at off-market properties. Buyers specifically looking for off-market opportunities could miss out on properties that otherwise would have met their needs.
• You need to network: Buyers typically need to establish strong relationships with real estate agents and buyer’s agents or be well-integrated into the investor community to hear about these opportunities.
• Reliance on buyers’ agents: While working with a buyer’s agent can significantly increase a buyer’s access to off-market deals, it also means that a buyer is dependent on another party's network and expertise. Buyers need to choose their agents wisely, ensuring they have a solid track record and experience in the area you’re looking to buy.

Buying off-market properties: some case studies

I remember a few years ago we were notified by a selling agent (one that usually loves conducting auctions) that he had just listed a great property for sale in a prime spot with water views in the Melbourne suburb of St Kilda.

This well-looked-after, fabulously positioned apartment would suit a large range of owner-occupiers or investors, yet we were offered the first opportunity to look at it and the seller didn't want an active marketing campaign.

Why would this be so?

Despite the property having wide appeal it was tenanted, and the tenants made access very difficult - they were very private people and made inspections very difficult.

Unfortunately, the vendor was in financial problems and wanted a quick sale and couldn't wait for the lease to expire and then sell then auction the property and achieve the maximum price.

The selling agent rang us to see if we had a client who would be interested in this property and we certainly did.

The result was Peter (one of our property investor clients) purchased a fantastic investment off-market, without competition at auction and at a very fair price.

And here's another interesting case study…

We're always looking for development sites for our clients to build small residential townhouse projects to keep as a long-term investment.

Local selling agents (in the suburbs where the team at Metropole are actively looking for properties) know that we are always in the market for our clients and one rang telling our buyers’ agent of a property he had just listed that was a deceased estate.

The sellers were two elderly gentlemen who lived in different parts of regional Australia (brothers of the deceased owner) and had inherited this substantial property that would have given them a considerable windfall.

Interestingly, despite their seven-figure inheritance, they weren't keen to spend the required $20,000 or so on marketing costs and were a bit nervous about taking the property to auction.

Instead, they were happy with the certainty of an unconditional sale.

We were the only buyer notified about this opportunity, our clients made an unconditional offer within 48 hours and now own another great development site.

They had just completed another development using Metropole's project management team and were ready to move on to their next project

The sellers were happy, the agent got a quick sale (and didn't have to share his commission with anyone else in the office), and we got a great deal for our client.

I would call it a bargain.

We get these opportunities all the time at our offices in Melbourne, Sydney, and Brisbane.

As I said, we did six of these off-market or pre-market deals in the last few months.

The most common reason we are offered these opportunities is that there are tenants in place who make it difficult for potential buyers to inspect the property or maybe don't keep the property in a presentable condition.

However, as buyers’ agents, we can see the potential opportunity through the clutter.

But it's not always so easy...

The verdict: Is buying an off-market property a good idea?

The fact is, most pre-market and off-market opportunities aren’t great deals!

You see…many agents list the properties they have for sale by "buying the listing".

In other words, they entice the seller with an inflated price to get the listing and then slowly condition them to the real market price.

This means that many of these opportunities which are offered are not suitable for us, but that's okay.

That's the way the property market works.

So when you’re looking to buy your next investment property, focus on looking for an investment-grade property in an A-grade location.

Not just on off-market properties.

Remember, there will always be some areas more desirable than others, even in the same suburb.

And owning the right property in that location is just as important as the location itself.

After all, A-grade properties are not necessarily located in the most expensive suburbs and don’t all come with a multimillion-dollar price tag, but there will always be a depth of buyers regardless of market conditions.