Four Reasons Why Real Estate Investors Should Avoid MLS Properties
When I first started out as a real estate investor, I spent a lot of time scouring the internet looking for rental properties listed on the multiple listing service (MLS). Zillow was a site I visited daily looking at new listings and checking on other properties that have been on market for a while to see if they came down in price. Before we knew what we were doing Kelly and I walked through dozens of on-market properties making offers that we knew had a low chance of being accepted.
Here are four reasons why real estate investors should avoid MLS properties.:
1. Heavy Competition
Where is the first place people go when they are looking to buy a house? They look online at many of the sites that scrub the MLS such as Zillow, Realtor.com, Trulia, or their favorite realtor’s site. Real estate investors are no different. When they are looking to buy a rental property or a house to fix and flip many investors will go to the same places.
Sure investors typically are using different search criteria than traditional home buyers. These include looking for multiple unit properties or houses under $100,000. They also may search keywords in the public comments and descriptions like “handyman special,” “needs TLC” or “fixer-upper,” “investor special” or my personal favorite “ATTENTION INVESTORS.”
The point I’m trying to make is the MLS is still a go-to place for many real estate investors as there are no barriers to entry. Anyone with a phone or PC can find investment properties, schedule a showing, and make an offer. It is the path of least resistance.
2. MLS Listed Properties are Overpriced
You probably are saying “thanks Captain Obvious!” Well, name-calling doesn’t make a point less valid. I’ve personally never made an offer on a property listed on the MLS that was at or above asking. Heck, I’ve never made an offer on a property listed on the MLS that was anywhere close to the asking price.
Why are MLS properties overpriced? For starters see point number one above. Competition raises demand. If I had a nickel for every time I heard “there are no good real estate deals out there” at a real estate investment association meeting, I’d be retired. Given the idea that “good” real estate deals are in short supply and competition is fierce (high demand), simple economics will tell you that properties listed on the MLS should be priced aggressively. Even properties in terrible condition are listed for tens of thousands of dollars more than most educated and experienced investors would ever think of paying. I’m sure you have heard the phrase “a sucker is born every minute.” Well, it only takes one sucker to buy the MLS listed property at a ridiculous price. That sucker is who the seller is looking to find among the crowd of buyers on the MLS.
Don’t forget that real estate agents are involved, typically on both sides of the transaction. The real estate agent’s job is not just to sell a property but to get the seller the highest and best offer possible. When you are the seller that is a good thing for you. In case you didn’t know real estate agents do not do a lot of pro-bono work. Commissions and fees for real estate agents typically fall between four to six percent, so that further pushes up prices to give sellers a higher net.
3. Unmotivated Sellers List on the MLS
Real estate investors who are looking for a good deal and win-win situations need to be looking for motivated sellers. Sure there are many motivated sellers on the MLS. They want to sell which is why they listed their house, right? However, many sellers who list investor-type properties with a real estate agent are not motivated in the ways that make the deal a win-win situation. They are motivated by one thing and one thing only….getting the highest and best price!
If you look at the MLS you will find properties with days on market (DOM) in the hundreds. You may think, “Hey this property has been on the market a while, I bet they would be willing to take a discount.” Sure that may be the case, or it could be an instance where the seller is unmotivated and will not budge on their price. This is not the type of seller a real estate investor wants to be dealing with. We should be focusing on property sellers who have real problems that we can solve or who need to sell fast. Motivated sellers are many times willing to take a discount for someone to help them solve their problems with little to no hassle. This makes for win-win solutions.
4. Negotiation is done via a middle man
Even with all of the negatives outlined above, good negotiation skills can overcome these obstacles. However, even the best negotiators will tell you that they would much rather be negotiating directly with the other party, preferably in person, rather than through a middle man.
You’ve probably heard the saying that 93% of communication is nonverbal. By negotiating through a middle man you lose at least 93% of what the other party is saying, and that is assuming the middle man perfectly repeats the words between the two negotiating parties. Negotiating through a middle man means you lose facial expressions, posture, body movements, sighs, and the way people sound when talking. As a real estate investor negotiating a deal, this is valuable information.
When buying houses off of the MLS a real estate agent is almost always involved and typically on both sides. So not only is there one middle man, but there are usually two. Oh lord, what a nightmare! Not to mention, a real estate agent has a conflict of interest as they are paid a commission, which is typically a percentage of the sales price. Even your buyer’s agent would prefer that you pay more for a property so they receive a fatter check!
Negotiation is one of the top skillsets any real estate investor should develop. However, negotiating through real estate agents is not the best way to sharpen the saw and puts you at a disadvantage when trying to negotiate a good deal. Investors should be negotiating belly-to-belly with sellers.
For all the reasons outline above, it should be clear that real estate investors should spend as little time looking at properties listed on the MLS as possible. Sure, you can find good real estate deals on the MLS. I know plenty of investors who have bought multiple properties listed on the market. But as the great and wise Dwight Schrute once said,
“Oh great! You found the needle in the haystack? You know what your prize is? Nothing. Lesson: some tasks are not worth doing.” – Dwight Schrute, The Office
All kidding aside, I can promise you that the best real estate deals are found off-market, out of plain sight. These deals not only bring financial rewards but allow you to help another human being out of a tough situation, to be their knight in shining armor. Good luck finding those types of deals on the MLS.