Why the Low Ball Offer is Bad Real Estate Strategy

The process of buying real property can elicit different responses. Or maybe I should rephrase that to read the planning phase of buying real estate. During the beginning most people are very positive and eager to get started. They’ve looked at a few houses, read the newspaper ads and looked online. They have a good idea of

The Initial Offer Sets the Tone?

the market. They are familiar with pricing and what they can afford. It’s now time to take all of the information you have gleaned and put it to paper. Then something goes awry. A real estate hemorrhage occurs, creating a mental bypass. Maybe we’ve watched too many shows on HGTV and The Learning Channel, or seen more real estate infomercials on late night TV. All of a sudden people begin to make negotiating errors that may cost them the property.

No Counter Offer Required

Prior to making an offer some initial research should to be done. The amount the seller paid for the property is typically available along with the current loans. A comparative market analysis should be performed to give a potential buyer an idea of what the property is worth. Also another good indicator is how many days the property’s been for sale. Now once you have gathered this information, the seller’s motivation may ultimately impact what you end up paying.

How Low to Go

What makes a lowball offer? I believe an offer 20% below the market value definitely qualifies. No matter the seller’s motivation, most homeowner’s are not likely to sell a house 20% below the listing price. Of course there are exceptions to every rule, (homeowner in foreclosure and property is not listed for sale) but a home that is marketed with a real estate agent is highly unlikely to sell at such a steep discount.

We will use for this example a property listed at $500,000 and has been on the market for 60 days. You make the first offer at $380,000.

The Path to Failureville

Here are several reasons this strategy will lead to failure:

1. Personality – real estate, no matter what everyone likes to refer to as a business decision is fraught with decision based emotions. Lots of emotions. A low ball offer can be insulting to the seller. For a contract to take place, a meeting of the minds has to exist. You have just driven away from the meeting. You have stated the property is worth less than the market price.
2. Credible – if an agreement is going to take place, the other side has to want what you have. At the very least they have to agree to continue talking. A low offer accomplishes none of these.
3. Negotiating – by opening the offer process with an extremely low offer you have backed yourself into a corner, giving yourself an “all or nothing”, “take it or leave it” situation. Negotiation concessions are best given in very small increments. If you are just throwing out an arbitrary offer to see what the seller will accept, be prepared to pay more. Instead of agreeing to $5000 more in price you are now agreeing to as much as 10 times that amount. Sellers usually have an idea what they will be willing to accept. An offer of $380,000 is easily dismissed by the seller; however an offer of $450,000 would make the seller give it some serious thought. As a buyer, does your counter offer go from $440K to $450K or does it go form $425K to $450. By using the second scenario, you have informed the seller your concessions will be very small.
4. Competing Offers – your low ball offer has just given increased credibility to the offer the seller refused last week which was higher but still less than the seller expected.
5. Card Laid, a Card Played – a seller will seriously question your intentions with a ridiculous offer below market price, you may not be given the opportunity of a counter offer. Now you have two options, (1) either walk away from a property you had hoped to purchase or (2) open negotiations with yourself. That’s right; the next more serious offer will be coming from you.

In the past when we have represented the seller and receive an embarrassingly low offer, we usually notify the buyer’s agent to forward over the comparables they used. We let them know that once we receive them we will be happy to review our pricing. At this point we commonly hear, “it’s just an initial offer and to please counter us back”.

Haven’t you just indicated your offer was not really serious, which is what the seller probably thought anyway?