Off market listings are a bad idea

Reader Question: Off market listings? We recently read an online article on one of the major real estate sites about off market listings. These listings were described as listings not entered into the MLS system. The gist of the article was that there are benefits to using this approach to sell your home in a hot market. We wonder about the logic and want to know what you think about the idea of an off-market listing?

Monty’s Answer: The term off-market listing is new terminology. The term is similar to “pocket listings,” or another recent term, “coming soon” listings. There have been several recent articles discussing this strategy in a hot real estate market.

In the simplest terms, no exposure is the principal reason there is no cause to consider utilizing off-market listings, or some form of this strategy, to sell your home.

What drives the off-market listing strategy?

When a market is hot, some real estate agents see the overheated market as an opportunity to collect both the listing side and the selling side of the commission the sale generates. It means that the listing agent earns about twice as much commission. An agent presents the tactic as short-lived, so they enter the listing into the MLS if no buyer surfaces in a short time period. It is the brevity of the strategy that allows the listing agent to feel if there is no harm, there is no foul for attempting it.

What is the harm in trying?

When a market is “hot” the essential factor creating its “hotness” is an abundance of eager home buyers. Withholding the property from the MLS is restricting access to it. The law of supply and demand states that, all else equal, an increase in price results in an increase in quantity supplied. In this case the increase in quantity is home buyers. The harm is that if the off-market strategy succeeds, the home seller will never know what the home may have sold for in an open market. In some markets that unknown could be tens-of-thousands of dollars.

How are home sellers approached with this strategy?

Some real estate agents have a variety of pitches to a home seller as to why an off-market listing is a good way to start the sales process.

  • Easier – No broker tours, open houses, yard sign, showings, all normal activities when seeking a buyer for your home.
  • Confidentiality – Some sellers have reasons for a low-key sale, but most often low-key does not have to mean avoiding the MLS.
  • Agent network – One agent’s extensive network and reputation is no match for the MLS.
  • Exclusivity – Not all sellers have a home nice enough to qualify for this service.
  • Marketing – Sharing the idea with unwitting real estate writers who promote the concept for them.

Even if the listing agent disclosed the possibility the seller may not receive the best price, it is difficult for a seller to compare the value of an off-market strategy because the amount of money they may be giving up is unknown. The value of any advantage a home seller may perceive in an off-market sale pales in comparison to the money they may be foregoing.

From the homebuyers point of view

Home buyers would love this scenario. They would forego the pressure of competition. They may feel like they have the exclusive right to buy the home. They would feel they are receiving special treatment. While real estate agent advocates of the off-market strategy believe a buyer will pay more under the off-market approach, agents that think the opposite far outnumber them.

Beware of “coming soon” or “pocket” listings

An article in the Denver Post, a hot real estate market, stated in part, “The Colorado Real Estate Commission is concerned about brokers who put up signs saying listings are “coming soon” to the market and find buyers before they go public. ‘Because the full market can’t bid, sellers might not get as much as they could, but agents benefit,’ said Marcia Waters, director of the Department of Regulatory Agencies’ real estate division.” In that same article, Marcia Cotlar, an agent at 8z Real Estate in Boulder, Colorado, said “Sellers could stand to lose as much as 25 percent of their homes’ value by going under contract before hitting the market. I think sellers these days are, ‘Oh, my God, I can get that much? I’ll take it,’ where really the seller can get even more than that,” Cotlar said.