I get a lot of potential clients reaching out to me from this blog, or from sites like Patrick.net, asking if I would be comfortable writing low-ball offers for them.
My answer is always “yes,” but I’ve found that it really helps for people to understand more about what really is and is not a lowball offer.
First, let’s define “low-ball”
Every property has a fair, market-clearing price. And, the listed price of a property might be close to that price, or nowhere close at all. To me, a low-ball offer is a price well-below fair value, where the buyer is looking to either get really lucky or even take advantage of an uninformed seller. Most of the time the strategy backfires. The seller knows the offer is well-below fair and they are rightly insulted and angry – usually not the best way to begin a large transaction.
Let’s walk through some general scenarios…
Low-balling a Regular Sale
Low-balling a traditional listing where the Sellers have equity is tough because the Sellers, unfortunately, have fragile egos to consider.
But, there are times when low-ball offers can be successful.
The are three factors to weigh: list price vs. fair value, days on market, and the Seller’s motivation. If the list price is well-above fair value, then the home is likely to be for sale for a long time. And the longer the home sits, the more likely the Sellers are to accept reality be sell for a fair price. In short, the longer the home is on the market, the more aggressive your opening offer can be without shooting yourself in the foot.
What do I mean by that? Sellers in this market are stressed, angry, and fragile. Pissing them off will not lead to your buying the house. It’s best for your agent to talk with their agent first to see if they have had (meaning rejected) other offers and what their motivation is to sell in the first place.
If they are a motivated and overpriced-but-starting-to-accept-it Seller, then low-ball away, so long as we can defend your price as being in the neighborhood of fair value.
Low-Balling a Bank-Owned Property
This is the scenario I get asked about the most, and, unfortunately, it is generally the least-successful.
Banks price their homes at values they believe they can get. Before listing the home, the paid usually three different agents and/or appraisers to give their opinion of value (people who have no incentive to inflate their estimates).
Then, the process is a formula. Within the first X days on the market, the asset manager can accept offers X percentage below the list price. Then, after X days, the list price is dropped X percentage. Repeat until the property sells.
Point is, the list price is never far above what the bank will accept. That doesn’t mean that the price is fair, it just means that the bank won’t accept much lower right now. We rarely see REOs selling for less than five percent or so than their list price. And usually if you see a sale close at ten percent or more below list price, it’s because the Buyers found some big problems – like foundation damage – during their inspections.
The best deals can usually be had on foreclosures just before the bank is about to drop the price – which they will usually do every month. Watch the total days on market. Pay attention to how long they have been for sale at the current price and if they have had any offers.
Cash will get you a very small discount – maybe a couple of percent versus an offer with financing. The way to really make money (or gain sweat-equity) is to offer cash on a home that is too distressed to qualify for financing. Maybe the foundation needs $40,000 worth of work, but you can get the property at an $80,000 discount because of it.
Low-balling a Short Sale
In general, short sales are where the buyers can get the best deals. The sellers usually don’t care what the price is, so long as it is somewhat reasonable and defensible to their lender when they review the numbers.
I’ve seen some short sales close at ten or even fifteen percent below fair value. Remember though, Sellers don’t have a reason to tie their home up with a low-ball offer that the bank is unlikely to accept. Your offer has to be reasonable or everyone is wasting their time.
Keep your eyes open for short sales that have been on the market for a long time, OR, short sales that just hit the market but need an offer asap because of a looming foreclosure date. These sellers have more incentive to work with your lower offer.
Finally, It’s Property-Specific
Before I can tell you if we are just wasting our time or risk irreparable damage with the Seller, I need to talk with the listing agent and we need to determine what fair really is, before deciding how aggressive to be.
So, yes, I’ll write your low-ball offer, but let’s make sure we are doing it in a way that will get you the house you want at the best possible price.