Where the off-market discount actually comes from

Question

My work is on the capital side and mostly reading other people's diligence, and off-market keeps coming up as the place the margin lives. Fine. What I want to understand is what the seller received in exchange for the discount, because a price 20 percent under retail is either payment for something or it's a mispriced risk sitting on the buyer's side of the table.

The first explanation is that the seller is buying speed and certainty. No listing, no showings, no repair negotiation, a close on a date they choose. That is worth real money to somebody who is overwhelmed, and it explains a discount honestly.

The second explanation is less flattering to the buyer. The discount is the price of everything nobody has checked yet. No inspection contingency, no appraisal, no seller disclosure worth much, title that hasn't been run, heirs who may not all have signed. On that reading the buyer isn't getting a bargain, they're getting a risk transfer and calling it a bargain (I've watched that happen in a syndication write-up more than once).

Comps make it harder. In roughly a dozen non-disclosure states you can't pull sale prices from public record at all, so "20 percent under market" is somebody's estimate rather than a measurement, and that varies state to state.

So which is it doing most of the work in the deals people here actually close.

megan_doyle15 · Answer

I'm brand new and I didn't know the second explanation existed until I read this. Filing it.

jordan_ellis2 · Answer

I haven't closed anything yet, so treat this as theory. What I've seen in write-ups is that the two explanations aren't competing, they're both present in different proportions per deal, and the good operators can tell you which one their number came from. The ones who can't tell you are the ones quoting a percentage off ARV with no line for unknowns. @canton, the non-disclosure state point seems underrated to me, because if the comp is an estimate then the discount is an estimate off an estimate.

laurenkim53 · Answer

Rural is the extreme version of your comp problem. I look at markets where four sales a year in a zip code is a busy year, and half of those are family transfers at a dollar. There is no market price to be 20 percent under. What I have instead is what the last serious buyer paid for something roughly similar eleven months ago and a well that either produces or doesn't. The discount there is mostly payment for illiquidity, because the seller has been trying for two years and I'm the second person who called.

brandonlee36 · Answer

Both, and the split shows up eighteen months later. I bought two houses off the same list. On one the discount was genuinely speed, the owner had moved states and wanted it gone before winter, and it has behaved like any other rental since. On the other the discount was a sewer scope I didn't do and a tenant on a handshake lease I couldn't document, and I spent most of the spread on those. Same list, same percentage under retail, completely different content.

paulgrant17 · Answer

The handshake lease is the part that stops me cold. You inherit whatever the last owner promised them verbally.

nicole_adeyemi · Answer

On land the second explanation dominates and it isn't close. Almost every cheap off-market parcel I've looked at is cheap for a reason recorded somewhere, an access easement that ends at a neighbor's gate, a wetlands line across the buildable half, a zoning designation that means nothing gets permitted this decade. The seller usually knows and often doesn't. The speed premium exists too, mostly with out of state heirs who have been paying taxes on something they've never seen, and those are the ones worth finding early. But I price land as if the title work will find something, because it usually does, and what it finds varies by county as much as by state.

Where the off-market discount actually comes from

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