Exclusive Off-Market vs. MLS Listings: What’s A Better Deal For Toronto Real Estate Investments?

Exclusive Off-Market vs. MLS Listings: What's A Better Deal For Toronto Real Estate Investments?

As a buyer, off-market listings might sound attractive. Less people knowing about the property means less buying competition, which probably means that you might a better chance of scoring a deal.  But most of the deals we find are actually from on MLS. In this video, let’s learn more about off-market or exclusive listings: the good, the bad, and why exclusive listings doesn’t necessarily give you the best chance for finding deals.

Why Would A Seller Choose An Exclusive Listing?

If you’re a seller, your main objective is to maximize your selling price of your property. You’ll want to get as many eyes to see your property as possible, so typically the best thing to do is to list your property on the real estate multiple listing service – MLS, and that’s why most of the properties for sale are listed there. Now if that’s the case, why would some sellers choose an off market listing, meaning they don’t put their listing on MLS?

The first reason that happens once in a while is when an income property has a higher purchase price that exceeds what most individuals can qualify for. There are typically multiplexes and it’s in that awkward middle spot where individuals tap out at the banks and can’t borrow to buy, but the property is still too small to attract attention from big time developers. In this case, buyer demand drops significantly which can impact the days on market and it looks bad when this info can be seen publicly on MLS. So these sellers might decide to list privately with us because we have access to the right real estate investor audience that are looking for investment properties in Toronto.

The second reason for exclusive listings might be because the seller isn’t in a rush and want to test the market first, typically with a higher selling price. At a higher list price, there will be less buyer action, so the property might sit on the market for a long time. When a property sits on the market for a long time, again – it starts to look bad and the end result might be opposite to what they want to achieve … which is sell at a higher price. So again, these sellers might choose an exclusive listing to give them more flexibility and less pressure to sell quickly.

The last probably most popular reason for an exclusive listing is that the property is just simply harder to sell because there’s something wrong with it: Nightmare tenants, shockingly low rents, or the house is falling apart and probably needs a ton of work. It’s the same reason here though, the sellers don’t want to a long days on market so they choose an off market listing here too.

What Are The Best Exclusive Listing Deals

So if you’re looking for an off market deal, the most attractive “deals” are those in the last situation. Again, these properties aren’t your typical properties and most likely need a ton of work in order to turn things around. It’s true that it’s possible to get better returns here because mainly because you’ll benefit from the higher value add appreciation that you put in and perhaps a slight discount as well because of less buyer competition but the more important thing here is to remember that what you’re doing is essentially trading in higher risk and work for higher returns.

Other Things To Consider When Choosing Exclusive Listings

If you’re new to real estate investing, it’s probably not the best first project to take on because things can get overwhelming. Inheriting bad tenants can be very complex – you might have to go through the landlord tenant board which takes a long term in a normal market, and now with COVID, things have been delayed even more so there’s a big element of unknown.. plus likely higher costs, work, and time involved in turning over the tenants.

Major renovations are also high risk and not always as pleasant as what you see on HGTV … where you see everything easily resolved by the end of the episode in 30 minutes. Once you open up walls, you might unveil bigger problems which the home inspector couldn’t see and then you’re left with delays in much longer renovation time and higher renovation costs that anticipated.

The last thing you have to keep in mind is the higher borrowing risk. When a property isn’t your “normal” property, banks might give it a lower appraised value because it’s not in a good condition. When that happens, instead of qualifying for 80% loan to purchase price, you might only qualify for 60%, and this can significantly bump up your capital requirements.

Comparison Of Returns

So to recap, what you might get with off market listings, which are rare in general, is higher risk, higher reward. And just for fun, here’s how I would compare risk and returns on a typical MLS listing vs. an off market listing … and we can even compare that with scoring a deal on an MLS listing. We’ll skip leverage to keep it simple, and look at total returns that come from a combination of rental income, market appreciation, value add appreciation, and gains from buying with a discount.

For a typical MLS investment property that you buy at market value – you’ll be getting market rents and market appreciation. You might put in some cosmetic renovations to maximize your rental potential but these are generally pretty low risk. After the upgrade, you’ll benefit from a one time small bump in value add appreciation. Remember things can vary drastically between properties so here are just some general return numbers as an example – 4% annually from rental income, 5% from appreciation, and you might also get a 5% bump in property value after your cosmetic renovations.

If you’re looking at an off market deal, you’ll have to put in a lot more work in to turn things around in order to achieve market rents and market appreciation. At the same time, you trade your work or high risk for better returns and you’ll probably get better a bigger bump in value add appreciation here. So, as another example, this off market property will generate the same 4% rental income and 5% appreciation after you put in the work, plus you also gain a bigger 10% instead of 5% from value add appreciation. And because it’s an off market deal, you also score a 5% discount.

Now let’s consider the third case – scoring a deal on MLS. The market has slowed since the peak in Q1 and we’ve been able get some decent similar or even better discounts on certain MLS properties when you encounter the right motivated seller. So here you benefit from buying at a good discount but you don’t inherit the more complex investment risk from the previous off market deal. And of course there are MLS properties that also need a lot of work, so if you buy these properties from MLS, then you might get the same higher value add appreciation as the off market case, plus you might score a bigger discount with a motivated MLS seller.

How We Can Help

The takeaway here is that “deals” can be anywhere – and because there is so much more inventory on MLS, the chance that you find a deal on MLS is probably better. We’re constantly searching the market, so we know where the best opportunities are on the market at any time. If you’re looking to buy an investment property, we will look at your requirements and can match you up with the best investment property for you. If you want to have a chat, just connect with us!

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