House hunters frustrated with the area’s scant supply of homes have shifted their search from the streets to underground.

More buyers are targeting homes that haven’t yet hit the market, a trend agents say will grow as inventory shrinks and the mismatch of what’s available and what’s desired continues.

Such back-pocket deals used to involve mostly luxury homes where buyers and sellers wanted to keep the sale hush-hush. But lower-priced houses are becoming a bigger part of the mix because even those are in short supply.

Working behind the scenes gives buyers access to the deep well of Twin Cities homeowners who would like to sell, but don’t think the market is healthy enough to list. Agents say they identify these sellers through referrals, as well as track those who listed their homes but backed out when they couldn’t sell. There are also buyers who work with agents to make unsolicited bids on homes they think fit their needs.

“There is a shadow market out there with a lot of people who want to sell,” said Joe Grunnet, broker at the Downtown Resource Group. Homeowners “just don’t know they can sell in this market. They still think the world is coming to an end.”

Housing experts say there is a robust stash of Twin Cities homes that aren’t on the Multiple Listing Service (MLS). CoreLogic says that for every two houses available in the United States in January, there was one in the “shadow,” or not yet on the market. There’s also a deep overhang of prospective sellers who have already decided to rent their homes rather than sell.

Mike Blood, who struggled to find a $150,000 to $200,000 home in the northern suburbs, recently caught a break. He spotted a construction dumpster in front of a house in Blaine that he saw during an earlier hunt.

After learning that it was being readied for resale, he and his agent made an offer even though the home was months from being listed.

“I was so frustrated,” said Blood, who expects to close on the home next month. “And felt like I didn’t have anything to lose.”

Blood didn’t disclose the purchase price. He said he looked at about 60 homes, but they needed too much work or he got outbid.

Combing through rentals

Grunnet, whose firm specializes in sales and rentals of urban condos, said the stock of available units downtown is so tight that he often runs down the list of owners who are renting out their units to see whether they would sell.

During the first four months of this year, he said his brokerage has already sold more off-market properties than in the previous three years combined.

For Alison and Fred Parks, the decision not to list was a way to test the market and avoid having strangers traipsing through their $1 million-plus condo near the Mississippi River in downtown Minneapolis.

“We’re private people, living in a popular neighborhood,” they said.

The Parkses contacted Cindy Froid, a Keller Williams agent who says that, on average, 30 to 40 percent of her deals come together before a public listing.

The couple gave Froid three months to sell, and it ended up selling within days to someone who already lived in the neighborhood for the full list price of $1.4 million.

Unusually low inventory is forcing Froid to get more creative in her efforts to reach prospective sellers. “It is a function of necessity,” she said. “It’s hunting and gathering. If it’s not online, I’m going to try to find it for you.”

Brokerages’ internal listings

Edina Realty and other big brokerages often skip the MLS and use internal listing systems to share information about what buyers want and what’s coming online.

A group of agents have also created a Facebook page where they can exchange data about what buyers want and what sellers have.

Jim Young, an Edina Realty regional manager and vice president, said that the company’s internal website now has about 1,000 listings, but he cautions that the non-MLS route isn’t always the best option for sellers who want maximum exposure. He said the company discourages its agents from doing private listings unless it’s what a client wants.

Marshall Saunders, co-owner and broker at ReMax Results, said that his company has a similar internal network that has helped sell 50 upper-bracket houses last year.

“It’s happening all the time now,” he said.

Graham Smith, the agent who helped Blood, said that in some ways these premarket deals are simply a return to the basics.

“It’s good old-fashioned networking, that’s all it is,” he said. “It’s just using the tools available today to make it easier and more efficient to sell houses.”

Jim Buchta • 612-673-7376

When Chris and Diane Finney decided to buy a bank-owned condo in St. Paul, they knew there would be competition.

Their strategy? Offer less — but offer cash.

While others said they would pay more, they needed to finance the deal. The bank took less and took the cash.

“We were in the driver’s seat,” Chris Finney said.

In a normal housing market, multiple bids usually lead to higher home prices, and the highest bid wins. But when credit markets are tighter and appraisals are often lower, many sellers will take less to be sure that the deal will get done.

“If I get five offers on a property and the cash offer is darned close to being one of those top offers, I’d take the cash offer any day,” said Marshall Saunders, owner/broker at Re/Max Results.

In December, 33 percent of all U.S. home sales were cash deals — a record since the downturn started in 2006, according to Campbell Survey and Inside Mortgage Finance. As a result, home prices can’t gain much traction because many sellers won’t necessarily accept the highest offer.

For most home buyers, it’s confounding to be rejected because they are financing the deal. For the housing market, it means more downward pressure on prices despite tight supplies and rising demand.

“It’s a real sign of what’s going on,” said Guy Cecala, publisher of Inside Mortgage Finance. “All things being equal, cash wins.”

The volume of cash deals is offsetting other positive trends in the market that should be leading to higher prices. The number of houses on the market has fallen to an eight-year low, and sales are up double digits. At the same time, home prices continue to fall.

At least a third of all homes sales last year involved an investor, Cecala said, and they often pay cash.

Throughout the metro area multiple offers are becoming increasingly common, especially among investors and first-time buyers who hope to score a good deal. Multiple offers are particularly common on foreclosures and short sales, which represented half of all home sales last year. And there’s no sign that listings of financially distressed properties will abate anytime soon.

Throughout the metro area, distressed sales represented 42 percent of all active listings last month. In some areas, the percentage is much higher. In Brooklyn Center, for example, there are almost double the number of short sales and foreclosures on the market as there are traditional deals.

Those distressed sales not only put a drag on prices, they make it very difficult for appraisers to find comparable sales to support higher prices on traditional listings. When a lender can’t get an appraisal that’s equal to the purchase price, the buyer and seller need to make up the difference, or the deal falls apart and the property goes back on the market.

“Banks tend to be much more motivated to sell quickly because they have holding and carrying costs,” Cecala said. “All that puts downward pressure on prices.”

John McWhite, a sales agent with Coldwell Banker Burnet, said he recently worked with a client who made a full-price cash offer of $65,000 on a Minneapolis condo. It was one of three offers, but not the highest. But because it was cash and guaranteed to close, it was the winning bid. “That happens quite a bit,” he said.

In that case, McWhite’s client tried to buy the condo when it was a short sale, but the bank didn’t approve the deal in time to avoid foreclosure. His client ended up getting the property for significantly less.

Still, buyers need to be remember that there’s a limit to how low a seller will go, Saunders said. Not every seller is going to favor cash deals the same way.

The cash strategy doesn’t work all the time. An outrageously low cash offer can easily offend a seller, especially one who has an emotional attachment to a house. And Ryan Kempenich, a sales agent for Coldwell Banker Burnet who specializes in foreclosure sales, said that Fannie Mae and Freddie Mac have rules that favor buyers who plan to occupy the properties they’re trying to sell, or they want a first-time buyer, he said.

Those who can’t offer cash aren’t without options. Sellers always look favorably on those offers that don’t have a lot of contingencies. Jennifer Olstad, a sales agent for Keller Williams who is also an experienced investor, said that non-cash buyers should make sure that they are pre-qualified for the mortgage and can offer a quick close date. “Yes, a cash offer is better,” she said. “But if they’re qualified and have letter of qualification and can close in 30 days, I don’t see why a cash offer should always prevail.”

Experts agree that at a certain point prices will fall to a level where there will be enough buyers — and demand — that many sellers won’t have to take less than they’re asking, whether it’s cash or not.

For now, the proliferation of cash deals in today’s market is just another sign of how desperate lenders are to unload their listings. Kempenich said that he recently worked with a client who made a $35,000 cash offer on a condo that had originally sold for $200,000.

“Being a cash buyer is powerful,” he said. “Loan standards are so tight, the bank says, ‘Just get rid of it.’”

Jim Buchta • 612-673-7376

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