It happens all the time. Sue hears that a friend of a friend, Bob, is looking to buy a place. Turns out, Sue is looking to sell her home. Or a guest in someone’s one-of-a-kind home tells the owners they’d love to buy the property, should the homeowners ever decide to sell.
And so begins the discussion between the would-be buyer and seller of a home that’s not even on the real estate market. How do they do the transaction? What steps are involved? What are the risks?
There are pros and cons for both parties and major considerations before either signs on the bottom line. But too often, these sellers and buyers get ahead of themselves and don’t think through the logistics and details. Here are seven questions to ask yourself about selling or buying a home that’s off the market.
Are both parties serious?
Buyers and sellers like the idea of making a deal off the market. But when it comes down to it, are both parties really on the same page? Has the buyer been in the market for a while? Are they truly ready to buy? Is the seller really ready to sell? Are their numbers in the same range, or is one way off?
Often, an unrealistic seller will throw out a number that’s way higher than what the market supports. They do this because they’re either uninformed or they feel they should get more because they’re risking selling off the market. On the opposite side, an uneducated buyer will throw out a lowball offer if they haven’t been in the game long enough to know the value.
How to decide on price?
Both parties have a serious commitment and are ready to do a deal. Great; now they need to agree on how to make it work.
Among other things, a price needs to be established. If they’re in the same price range but can’t agree on a number, there are a few options. One would be to have two independent appraisers come out and do formal appraisals of the property. The buyer and the seller can average the two. However, many argue that the appraised value (the number the appraiser comes up with) is always lower than the market value (the amount an able and willing buyer/seller would pay on the open market). In this case, a real estate agent may be called in; more on that in a minute.
Are there savings on the real estate commission?
Many sellers see the opportunity to sell off the market as a chance to save the agent’s standard 6 percent commission. But this can be short-sighted. First, both parties often bring a real estate agent into the transaction at some point. Second, the buyer might want the 6 percent commission deducted from the purchase price, but the seller doesn’t see it that way. For example, the seller might want $500,000. The buyer offers $470,000 ($500,000 minus the 6 percent commission). If they split the difference and the home sells for $485,000, they both win.
What ultimately happens is that the market decides the purchase price. If inventory is low and the buyer wants to make the deal work, they may pass the savings on to the seller. Or if it’s a slow market and there’s too much inventory, the seller may pass on the savings to the buyer. Many times, however, the seller and buyer agree on a number in the middle of the 6 percent, so each party benefits.
What are the risks?
The buyer and seller will likely have that little voice inside saying, “What would this sell for if it were on the market?” Buyers may wonder if they’re paying too much, while sellers might worry they could get more money on the open market. This is the risk both parties take in an off-market deal. Both the buyer and seller need to feel comfortable before they sign the contract. This is why a real estate agent is often consulted.
What is the role of the real estate agent?
With so much at stake financially and emotionally, most buyers and sellers ultimately don’t want to go it totally alone. The fear or uncertainty will outweigh any potential savings. An active buyer may have been working closely with an agent for months. A serious seller could be on the verge of signing a listing agreement. One or both may want the feedback or advice of their agents on price.
Some real estate agents will provide an opinion of value for a nominal fee or for free. Another good option is to ask the agent, in addition to providing the opinion of value, to take on the back-end parts of the deal at a discounted rate. In this case the agent might be responsible for inspections, disclosure review, title search and the contract, but not any marketing, open houses or showings. How this is negotiated is up to both parties. And be aware that some agents won’t feel it’s appropriate to reduce their fee at all.
Should you hire an attorney or escrow company?
There are some situations in which the buyer has a specific home they want to buy and a fair price is obvious to both parties. Maybe there is a one-of-a-kind home they’ve been eyeing in their neighborhood for years, and they know the value because they live nearby. Or the buyer may find a home on Zillow with a “Make Me Move” price in line with their budget. If the prices are right for both parties, and there aren’t any complications in the disclosures or inspections, they may hire an attorney or an escrow company to facilitate the deal for a flat or hourly rate.
How to cover all the bases?
If you decide not to go the formal listing and sales route, be sure to cover your bases and protect yourself legally and financially. Always go with your gut. If something doesn’t seem right or you’re uncertain, bring in the professionals. Going it alone may have its upsides, but the downsides could outweigh them in a heartbeat. Don’t be afraid to ask your real estate agent for advice. A good agent will recognize that, while a full commission would be great, two potential future referrals may be worth the time and effort.
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