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On-Market Vs. Off-Market Properties

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Both methods have certain advantages and disadvantages.

On-market transactions take a more shotgun approach to selling. Market research is done and an asking price is determined. A listing agreement is signed between the owner and the broker.   Marketing efforts are prepared showing relevant information a buyer would need to assess their interest in the property. A brokerage sign is usually displayed on the property. The property is listed on the listing broker’s website and possibly on a database like CoStar. The broker will discuss the property with a few of his buyers and some of the local brokers that deal in like properties. The broker will then take incoming questions, scheduling on-site tours and if all goes well negotiate offers and eventually close the sale. The market is covered as much as possible in this approach and buyers will be aware it is for sale.

Off-market transactions take a more targeted approach to the sale. While a compensation agreement between the owner and the broker is signed there is no listing agreement. The objective is not to show the property to the market as a whole, but rather market to a handful of well qualified buyers that the broker knows. Marketing tends to be limited and omits many of the facts that a buyer would use to determine his interest in acquiring the property. A confidentiality agreement is reviewed by lawyers and signed before proprietary information like appraisals, operating statements and rent rolls are given to the prospective buyer.   In off-market transactions, a broker’s role is to discuss the property with the optimal buyers for the property rather than the whole market.

Which style is best depends on what you’re selling and the buyer.

Local buyers are best found using on-market tactics. Buildings appealing to local buyers include owner/user type buildings, buildings in poor neighborhoods or low traffic zones, special purpose buildings, buildings occupied by local business and small buildings targeted for redevelopment. For these kinds of properties, local buyers are best because they know local issues. Also, larger buyers stay away from smaller properties. It takes about the same amount of resources to manage a small building as a big building. Big buyers like pension funds have pools of money to put in investments and they can’t spend the time to look at smaller deals.   Even larger buyers will only be looking at properties or portfolios with values over a hundred million dollars. Large buyers have narrow parameters for what they will buy. They also require a lot of diligence that smaller building sellers may not be able to give.

Even though institutional purchasers, large real estate management firms and REITS will examine any property that fits the criteria, they are more likely to be looking at off-market deals rather than on-market deals. They want the respect that they think they deserve because of their ability to close. They don’t want to be competing with unqualified purchasers that will drive the price of a property up with unrealistic bids. They would rather wait until the seller has wasted time with unqualified buyers and then go in with a good offer backed up by their ability to close quickly.   Properties priced less than, say, twenty million dollars are better sold using the on-market style and buildings or portfolios priced over twenty million are better sold using the off-market approach. Buildings with problematic issues are better sold off-market where the broker has time to explain the nuances of the deal. This way, the buyer that goes into escrow is less likely to bail because of a surprise issue. The broker also has the ability to go after the buyers that are knowledgeable handling the issues associated with that property. The best buyers are able to spend time studying a property and showing it to their investment team if they know they can close the deal. Time and resources are needed to analyze a building that an institution or REIT is interested in buying. Large buyers that to go after deals and lose out to smaller buyers that have little ability to close can be very frustrating.

Whichever method an owner uses, what matters is selecting the right broker to handle the sale of their particular property.