In today’s episode, Jeff Rutkowski discusses the main differences between off-market and on-market properties. There might be more inventory on market, but off-market properties present a large set of opportunities for real estate investors. Listen to the whole episode to hear where Jeff thinks you can find the most success.
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Off market vs. On Market Real Estate Deals
Hey everyone, Jeff Rakowski here, welcome to this week’s episode of the FortuneBuilders Real Estate Investing Show. I’m excited to be with you. We’re going to get into on market versus off-market properties today. As real estate investors, we are always playing in one of those two buckets. We’re going to break down what they are, what the difference is, and where we should spend the most of our time as real estate investors.
Word of the Week
Let’s kick it off with the Word of the Week. The Word of the Week this week is “proof of funds”. It pretty much is what it sounds like: Showing proof and showing evidence that we have the funds to support the offer that we are making on a piece of real estate.
The good news, though, is it does not have to be our own money. It certainly can. However, a proof of funds could be a bank account statement with your name on it. If you’re making an offer for $200,000, you have $200,000 cash in the bank, you show a bank statement, bam, there is your proof of funds. I don’t know about you, though. When I got started, I didn’t have $200,000 sitting in the bank. I probably had about $200 sitting in the bank. So that was not going to get the job done for me.
There are many lenders out there, hard money lenders, specifically. There are many online lenders and transactional lenders. You can just Google transactional lenders in Atlanta, Georgia, transactional lenders or hard money lenders in Hartford, Connecticut (wherever you’re investing), and very quickly, you’ll find a list of them. We could reach out to these companies for a proof of funds letter. There are even many online services. What I’ve used in a pinch before was BestTransactionLenders.com where you could just put in the property information and in about five minutes have proof of funds come to your email box.
The bottom line is for market properties, we’re going to need to show proof of funds. As a real estate investor, that’s something that we want to have so when it is needed, we can position or put it forward. That’s the word of the week: “proof of funds”. Let’s get into today’s show.
On Market Properties
Let’s get started here with on-market properties. On-market properties are listed with a real estate agent. They list their properties on what is called the MLS, which stands for Multiple Listing Service. We had Dan on the show a few weeks ago. We’ve talked a lot about that. It’s definitely a great way of acquiring properties if you have a very systematized approach.
The great thing about on-market properties is that once a realtor lists it, it becomes public information on the MLS. The MLS will then syndicate and push those listings out to many sites that we’re familiar with like Redfin, Zillow, Trulia, Realtor.com, and different places where you have internet access (or access to a real estate agent) you have access to those properties. That’s a good thing. It doesn’t cost us anything to find those leads and leads are very valuable.
The downside to it is everybody else in the world has access to them as well. On-market properties tend to be where you find the most competition. Now, JD and CT Homes have talked about their MLS system. In previous episodes, it’s something that we teach implement at a very high level. Last year out of 123 of the homes that CT Homes did, I believe about 48 of them (if I’m not mistaken) came through on market properties. Just because there’s a lot of competition, it’s not something that we should be discouraged from pursuing.
The main reason why you want to have a strategy for acquiring on-market properties is that about 80% of all properties that trade or sell in the United States trade on market. The inventory is massive. It’s too big to ignore. Typically, it’s hard to build a business. If you’re looking at making real estate investing a career where that’s what you want to do full time, that’s what you want to get into. You want to look at on-market properties as just one line in the water.
You want to have a few other (at least two to three) marketing campaign strategies for acquiring properties where you get direct to seller on market properties listed with a realtor or listed with a broker. In order to go see those properties, you’re going to need to go directly to that listing agent that’s listing the property or what they call a buyer’s agent.
For those of you that are brand new to this, when Realtor lists a property, typically they have an agreement with the seller to list and sell their property for (usually) between 5% to 6% commission. If the property sells for $100,000 and it’s listed at 5%, then there’s $5,000 in commissions that the seller is going to pay the agent or the agents that take part in the deal. When a listing agent lists a property, if they listed at 5% they’re going to put it out on the MLS and they’re going to offer about half of that (2.5% percent) to a buyer’s agent.
If I’m a listing agent and I list a property, and JD happens to be a buyer’s agent and he brings the buyer and we do the transaction together, then 2.5% percent is going to me as the listing agent and two and a half percent is going to JD as the buyer’s agent. We’re going to be dealing with that now. I found it most effective (especially in this market) to go directly to the listing agents because if the listing agent is listing the property for the seller they have an agreement (probably) where there’s 5% in commissions available.
If I go directly to the listing agent and they represent me as well as the seller, then in most states, they can do what they call dual representation and represent both of us. Now, they made a 5% commission and that Realtor makes more on the deal. Most Realtors are looking to sell the properties themselves because it’s a bigger payday for them. It’s a little motivation that makes deals work. If the agent is representing both the seller and the buyer, they may cut their commission.
I just actually had that happen not too long ago on a house I bought for myself where I went directly to the listing agent. The listing agent had an agreement at 5%. He actually cut his commission by 2% and made 3% on the deal, which is still half a percent more than what he would have made if a buyer’s agent brought it. There’s definitely an advantage to doing that.
Now, with that being said, consider ethics and integrity. I need to point this out because it drives me nuts when I see people do this. If you connect with a real estate agent to find new properties and they bring you something that’s not their listing, you should definitely go through that agent and have them represent you to see that listing and get that from them. “Oh, thanks. That’s great”, and then cut them out and go directly to the listing agent. That’s bad business. You’re going to get a bad reputation. They’re not going to send you any more deals. That’s not how we’d like to do that.
We’re going to be dealing with agents and or brokers. Proof of funds will be required almost 100% of the time. Almost 100% of the time when you submit an offer you have to provide corresponding proof funds. That was our Word of the Week this week. As I said, it could be a bank statement with your name on it. It could be something that you acquired from a hard money lender or a transactional lender in your local market. Some private lenders will provide them for you as well.
Off Market Properties
Let’s take a look here at off-market properties. To summarize, on market, you’re dealing with Realtors, you need proof of funds, you have to put down larger deposits, you’re using the Realtors and or brokers’ contracts, and we recommend getting a license. The downside to that is it’s very, very highly competitive. I don’t know about you, but if I’m going fishing, I want to fish in areas that are maybe a little harder to get to, that maybe are a little more secluded than the average fisherman doesn’t know exists.
I have a higher probability of catching a fish (it’s the same exact principle here). You can catch fish off the MLS, you can do deals off the MLS, you just have to kiss some more frogs to find that prince just because of all the competition. Typically whenever I hear somebody complain and say “Jeff I just think the market is so competitive and every time I make an offer on a property, there are 10 other offers on it. I’m just having a hard time getting deals”. After I ask a couple of questions and peel back some layers, typically, that investor is really just working with market properties.
Do that, but let’s also look at adding one or two other lines in the waters that can put us directly to the seller. That’s really what we are after. We’re after off-market properties. We are after what we call hidden markets. They’re not really hidden, it’s just that most people don’t know about them. It’s like that fishing spot that most people just don’t know about. It’s there you just have to know how to access it. We work a lot on that and I’ll talk about that in a moment.
“As a brand new investor we recommend having three to four different lines in the water. One of them should be on market and the other two to three are really targeting specific types of all off market properties”
Direct to Seller
We can get direct to seller, and I’ll go over some of those in a moment. One of the main differences (with direct to seller) is you’re not working through a real estate agent, you are dealing with the person that owns the property and you need their signature on the contract. I love that personally, because, to me, that’s an advantage if you know how to negotiate. Now, when you’re dealing with on-market properties through a real estate agent the agent is the middleman and you’re communicating with them.
They’re communicating to the seller. The sellers are communicating with them. They’re communicating back to you. You don’t know your language. You don’t know how your offer is being translated when you communicate to the agent, and it goes through others, but we just don’t know. I like to be in control of that. I’ve spent a lot of years studying the art of negotiating. We have an incredible class here at FortuneBuilders that I highly, highly recommend, called the “Sales and Negotiation Academy” where we spend two days drilling on how to negotiate, how to sit down across the table from a seller, what to say what not to say, what are the top 10 objections that you could possibly get, how to overcome them, and how to get better pricing.
That’s a skill set. In my opinion, that’s one of the number one advantages that a real estate investor should have: That they’re prepared. That they’ve studied. That they’ve practiced, so when they’re sitting around the table with a seller and an objection gets thrown at you like, “Oh, your price is too low”, or whatever the objection may be, that you’re not lost for words on how to combat that and how to overcome that. You have a tool in your tool belt and it’s second nature to respond back.
Now, we’re not going to overcome objections 100% of the time, but in my opinion, you should be overcoming them about 60% to 70% of the time so that if you’re getting objections thrown at you and you’re not overcoming it, then then you just need to you need a little higher level education just to understand how that works. The beauty of off-market properties is we are direct to seller. We are dealing with them. We are presenting our offer, and nobody really should be able to present your offer better than you.
Another advantage of working off-market is you could use whatever contracts you want. I referenced earlier that I have a two to three-page contract I’ve been using for a number of years. It’s very, very simple. The reason why that’s important is that when you’re face to face with a seller in their kitchen and you want something very easy to understand and very straightforward, that’s not going to overwhelm them: easy to understand, easy to follow.
The one that I use is two pages. It outlines who the buyer is, who the seller, is the property that you’re purchasing, how much are you purchasing it for, and your inspection contingency. When you’re going to close it’s very simple and straightforward. That in and of itself will help you get fewer objections. In California, our state contract is about 13 pages and goes up to about 17 pages with attendance. If you’re laying out 17 pages in front of a seller, that can be intimidating.
Off-market, we’re using that and we control how the deal goes. Also in proof of funds. I mean, I’ve been at this for about 15, 16 years, and in those 15, 16 years when I’m dealing with off-market properties, I’ve only been asked for proof of funds twice. So we all should have it if they ask for it, but it’s not something that I put forward in an off-market transaction unless I’m asked for it.
Another huge advantage of off-market properties is smaller deposits. In many cases (in most parts of the country) you can control a contract for as little as $500. In my experience, they are my most profitable deals.
As a real estate investor, I’ve always come off-market. The beauty of off-market for us as investors is the sellers that we’re looking for. It’s all public records. We’re in the business of buying properties at 30% to 50% below market value. Nobody wakes up in the morning in their right mind that says, “Hey, my property’s worth a million dollars. I’d love to sell it today for 700,000”. Nobody does that unless there are circumstances happening in their life that cause them to have to do that.
There are many different categories of distressed sellers. It could be if they’re facing foreclosure, or they could be an absentee owner. One list that I love is absentee owners that own vacant properties with high equity. So that’s kind of like a triple dipper there where we’re layering three different types of leads. An absentee owner is somebody that owns a property in Florida, but let’s say they live here in San Diego.
They’re absent from the state that the property is in. Typically, if somebody is an absentee owner, there probably is a rental property. They are probably a landlord in some capacity. We found in many cases, a lot of times those properties are vacant. I like that list a lot because maybe they’ve owned the property for a number of years. They live in another state. They’re trying to manage the property from across the country, or they’re having trouble finding a good property manager. The house is vacant many times and vacant property is costing you money,
I don’t care who you are, for vacant property, you’re still paying taxes and you’re still paying insurance. Maybe there’s some upkeep utilities or things like that. It’s burning a hole in your pocket. As real estate investors, we can just go pull a list. It’s all public records. Everything that I just mentioned is public records. If somebody is going through a divorce: public records. The property is in probate: public records. They’re facing bankruptcy or foreclosure: public records.
Also, if somebody buys a property in cash, that’s public records. We can pull that list and find out who our cash buyers are in our market. If somebody loans money to a real estate investor to do a transaction, that’s public records. Whether they’re a private lender or hard money lender, we can pull that list. This is all data that is available to us.
When we market to these types of leads, whether you’re doing direct mail (which we like to do) or whether you’re doing Facebook ads (which we also like to do) or text message marketing, (we’re not just picking a random neighborhood) and sending letters to everyone in that neighborhood like maybe like a pizza place does (you ever get one of those flyers by one pizza, get one free? Typically they’ll pick a neighborhood) send one there.
What we’re going to do is we’re going to pull the data from that neighborhood of everybody in that neighborhood that is facing foreclosure, or everybody in that neighborhood that’s going through a divorce, and we’re only going to send letters to those people. So we know that our letters are going out to somebody that is facing a stressful situation. Then we’re able to craft our marketing, whether it’s our text message messages or our yellow letter messages or our Facebook ads. It’s going to be speaking directly to them which will give you a higher conversion rate.
It’s one of the most underutilized pieces of data in this industry where many, many new investors just don’t know where to pull the data. There are many services. We have a system called LeadPro that we use that aggregates public records from all over the country into one piece of software. Then we just log into the software and we pull out a list.
When I got started in the business, that software didn’t exist. Quite frankly, if it didn’t exist (I couldn’t afford it when I first started), you can simply go down to your local town halls or County town halls. If you’re investing in certain zip codes, make a list of those zip codes and find out where those town halls or County town halls are. You can go down depending on how big the town hall is. If you’re looking for probate leads, for example, some larger town halls will have a probate office where it’s dedicated to that. You could go in there and ask where to pull the list.
If it’s a smaller one, like my hometown of Milford, Connecticut, you go to the clerk’s office, and then you typically pull the list. You just go to the lady or the gentleman behind the counter and say, “Hey, I’m looking to pull a list of all the probate properties over the last six months in this zip code”, and typically there will be a computer that you download that list from or a book. Sometimes you have to gather some information from the computer or book and go into what they call “the vault”. Then you pull the list out from there.
If you want to put in a little bit of time it’s all public records. There are many services where you could just swipe your credit card, which is what I like to do. That just proves to me that I don’t have to go hunting and searching for them. Once you have those lists then you have found that remote little fishing hole that most other people don’t know about. On-market properties are about getting exposed to the entire market and realtors from all over that area that are bringing buyers and getting multiple offers. When you’re dealing with these on-market lists, there’s another investor or two in your area marketing and pulling that same list. Even if that’s the case, you’ve drastically cut down the amount of competition. In many cases, you are going to be face to face with the seller and you are the only one approaching them about their property.
On Market vs. Off Market
That brings us to the question: where should we be spending our time? You may be thinking, well, it’s obvious: off-market. I would say both. If I had to pick one or the other, I would definitely go off-market. Again, don’t ignore on market because 80% of all properties that trade through there. There’s a huge amount of inventory. If you have a systematized approach, go buy it. If you don’t have that, go back a few episodes.
When we had Dan right in here, the Head of Acquisitions for CT Homes, he walked you through our process. We’re being efficient. We’re not spending a ton of time on properties that are going to have 10 offers. We want to have systems for both. Maybe you are an investor that has been focusing on-market and you’ve been feeling the pains of this competitive market. You’ve been feeling the pains of getting consistently outbid on properties and things like that. Then, it sounds like you need an off-market strategy.
I love probates. As I said a moment ago, I love absentee owners and vacant property lists. But really, it’s not the list. That is what is ultimately important. It’s really your consistency in marketing. I don’t care what lists you choose, if you’re consistent in your marketing to them, then you will have consistent results.
One of the things that I love to do: I mentioned yellow letters which are tried and true. I mentioned text messaging. I mentioned Facebook ads. But what we love to do is layer our marketing, so we pull one list. Say we have a list of 500 people that are absentee owners of vacant properties with high equity. I’m going to send yellow letters to them. I’m going to send text messages to them and do Facebook ads to them.
We’ll even pick up the phone and call them. We have different types of marketing to reach that one list versus pulling a list of 500 and sending them yellow letters and then pulling a different list of 500 sending them text messages. We want the army. We want the Navy. We want the Air Force and the Marines coming at that list and giving us the highest probability to success in your life.
That is that folks, on market versus off-market. We want our hands on both, but we really want to be working on those off-market lists in my opinion. Definitely leave some feedback here. Let me know. Let me know what you’re having success in your market. Let me know what type of lists in your market are really giving you good consistent results. What are some creative ways that you’re marketing to land deals?
I love to learn. I’ve been at this a while and FortuneBuilders is, to me, the best in the business. We also consider ourselves students and we’re looking to get better. We’re looking to learn. Leave that feedback. As always, I would be honored and personally blessed if you would share this show with anybody in your world that you think needs to learn financial education or just think about anybody in your life.
This is who I want you to think of: anybody in your life that is not happy with their current job or who is maybe not making enough money to pay the bills or just struggling financially. Whoever is not able to take consistent vacations and is not able to spend the time with their families that they know they should. That’s who I want to reach. That’s who I want to reach because I was that person in all four categories. It was really real estate investing that gave me the time, freedom, and money to prioritize in life what should be prioritized. I want to share that and pass it on.
Share the show. I would definitely appreciate that. Tune in next week. We have a great show in store for you. We should have JD Esajian back in the booth. We’ll get into the latest and greatest at CT Homes. See you next week. Take care.