Let’s start with an assumption and our definition of a “low-ball” offer.
Assumption: The seller or his/her agent has done their homework and priced the home properly.
Our definition (not that there is a generally accepted definition) of a low ball offer is an offer that is more than three times as low as the typically accepted offer.
What does that mean? Let’s say the average ratio between asking and selling prices in your market is 98%. Another way of looking at it is buyers are typically purchasing homes at 2% under asking price. For example, let’s say homes priced at $100,000 sell, on average, for $98,000 and homes priced at $300,000, sell for $294,000.
A “low-ball offer” on the $100,000 home would be anything less than $94,000. We determine that by multiplying the average discount of 2% by a factor of 3 = 6%. Similarly, on a home with an asking price of $300,000, a low-ball offer would be anything less than $282,000.
Keep in mind, this is just an example. The actual average asking to selling ratio can be much higher or much lower.
How do you find out what is that ratio in your market? Call your buyer’s agent or the local Realtor Association. Both are likely to have access to that type of statistic.
When to Consider Making a Low-Ball Offer
Strong Buyer’s Market
If there are an abundant number of homes on the market; it takes several months for one to sell; and prices are slipping; by all means make a low-offer.
On a “Stale” Property
When a property has been on the market far longer than the average number of days it takes most to sell, there may be an opportunity to pick it up at a bargain price. However, don’t be surprised if a low-ball offer doesn’t fly. Often times, properties sit because the sellers won’t budge on the price. However, if it’s been long enough, the sellers may be getting a grip on reality and may soften their stand on an acceptable price.
You Can Accommodate the Seller’s Every Other Need
Sometimes other terms, such as timing of closing or willingness to lease back to the seller after closing, weigh almost as heavily as the price. Some sellers will entertain a lower price if all the other terms line up to make the seller’s life as hassle-free as possible.
You Have Plenty of Back–Up Options
The fact is most low-ball offers are rejected or countered at a price unacceptable to the buyer. So, if you have a strong Plan B that will satisfy you and your situation, go ahead and give the low-ball offer a shot. If it doesn’t work out, you can always move on to your backup plan.
You Have No Other Options
By this, we mean your budget doesn’t allow you to make anything but a low-ball offer. If your strategy is to make offers on several homes above your price range by offering less than what everyone acknowledges they are worth, be prepared for a lot of “no’s.” Also, accept that most experienced agents will pass on working with you because the likelihood of a successful transaction is too low compared to the amount of time they must invest to prepare so many offers. Your best bet may be to contact a real estate company, explain your situation and ask if they have an newer agent who would welcome the chance to hone his or her offer-writing skills. An aggressive new agent who is hungry for opportunities to learn may be thrilled to help you.
When to Avoid Making a Low-Ball Offer
You Will Be Emotionally Crushed If Your Offer Is Not Accepted
If you absolutely love the house, and you’ve been looking long enough to know similar houses aren’t readily available, don’t risk your opportunity to land your dream home by throwing out a low-ball offer. You may think it can’t hurt to try, but that’s because you aren’t aware of how many low-ball offers are flat out rejected. Further, if you opt to make a new offer after the first has been rejected, you are, in effect, saying, “I know you rejected the first offer, but I really want this place, so what will it take?” Imagine what that does to your negotiating power.
It Is a Strong Sellers’ Market
In a strong seller’s market, the seller will likely receive multiple offers, most of them at or over asking price. Clearly, a low-ball offer (yes, even if it’s “cash”) will get zero consideration. How do you know if that’s the type of market you’re in? A good agent will have the stats to prove it. If you’re going it on your own, it will become clear about the time you miss out on your third property. 😉
The Asking Price is Already a Steal
This situation causes more buyer remorse than nearly any other. Many buyers see the asking price, and regardless of how low it is, they want to get an even better price. While they’re negotiating back and forth with the seller, another buyer sees the property and recognizes it is the very nicest house he’s seen at that asking price, so he jumps on it and offers full price. Interestingly, the first buyer usually gets upset with the seller rather than with himself for not snatching it up before someone else got to it.
In every case, the decision to submit a low-ball offer should depend on solid market information. The more you and your agent know about what’s happening in the local (not national, which could be very different) real estate market, the better. Accurate info will prevent you from offering too little or, conversely, offering too much.