What is a Lowball Offer in a Hot Real Estate Market?

In today's Agent Insights post, Teri Eckholm - a Real Estate Agent in White Bear Lake, Minnesota  - talks about what steps she follows (and suggests you follow) to make an intelligent offer in a hot real estate market.

Here's Teri:

In a hot real estate market, what initial offer would be insulting to a home seller? 10% less than asking? 5% less? A full priced offer with 3% of buyer's closing costs paid by the seller?

When the housing inventory is as tight as it is currently in many metro areas, the definition of a "lowball offer" may be considerably different than you think.

As a REALTOR®, I have seen my share of sellers who were insulted by a buyer’s offer over the years. There are times when anything less than a full priced offer is insulting... but should a buyer be afraid to request a few thousand dollars toward closing costs? Will the seller balk and accept the next offer in line?

In my case, a lot of it depends on the price and location within the Twin Cities. In some neighborhoods, it could be insulting to offer less than full price especially if it is a home priced under $200,000. There are an abundance of first time buyers out there looking for affordable, move-in ready homes, and a well prepared and priced property can get an offer (or 2, 3 or more) in a matter of hours. There are also many neighborhoods and communities in my area with a very small number of homes for sale. Well priced homes do not stay on the market long. It can be tough being a home buyer with a limited budget in this changed market.

Buyers get advice from friends and relatives to never pay full price because sellers always negotiate. In reality, many sellers will not negotiate significantly, and a "lowball" offer could put the buyers’ dream home purchase in jeopardy.

How to come up with an acceptable starting point:

• Do a market analysis:

  When representing a buyer, I look up the recent comparable homes sold in the neighborhood before the offer discussion begins. In a low inventory market, a seller that lists at market value could still be in a multiple offer situation due to demand. If the home is properly priced and in a high-demand area, anything that is not close to full price could mean that the seller will wait for another offer. By looking at the neighborhood comparables, my buyers better understand what offer will be considered reasonable.
   

• Consider the original list price:

  If a seller started off too high and adjusted the price of the home, it could be priced right now. If a market analysis shows the current price of the home is fair, offering 5-10% less could be considered insulting. When a buyer has found the house and fallen in love with it, it might make sense to make an offer closer to the asking price rather than haggle and risk losing it.
  
  

• If the home is overpriced: 

  If the market analysis shows that home to be significantly overpriced and the offer will be more than 10% less than the current asking price, it may be helpful to provide the comparables to the seller and his/her agent. Sometimes when the offer is accompanied by documentation to back up the offer, the seller is less offended - but be careful not to overlook good comps to justify your offer. This strategy can be worse if not providing any documentation.
   

• Consider the buyer’s plans to remodel and update: 

  Some buyers think sending a long list of planned updates complete with associated estimates is a good strategy to negotiate a price reduction - but beware! If the updates are necessary due to age or wear, make note of the fact, but slamming a well maintained and updated home to justify a low offer is insulting and makes continued negotiations difficult if not impossible.
  
  

• Avoid considering the price paid for home:

  I have come across a few buyers who research tax records to determine the price the seller paid for the property. They assume if someone purchased a home at a very low price, they have a ton of equity. This can be true, but it's not always the case. Some sellers have taken the equity out of their home for improvements or for other reasons - and if sellers do have equity, they usually don't intend to give it away. Keep the negotiations focused on the fair market value of the home.

Right now, sellers are excitedly anticipating a non-contingent, pre-approved home buyer willing write an offer for their home. In most cases, they understand the market and have worked hard to prepare their properties to entice a written purchase agreement (or several). Buyers must think through their offers and contemplate their negotiations carefully. Discussions can go south very quickly between buyer and seller when the initial offer is not on point.

Learn more about Teri on her website: www.terieckhol.com