Saturday, January 19, 2008

Low Offer and the Spin Doctor

You have found that perfect home and it's time to write an offer. You can't get to this stage of the game in our market without some mention of a low offer. Are low offers a good idea? Is it foolish not to make a low offer? How low is low? Let's get some perspective.

From your point of view, the real estate buyer, this is an important investment. You wouldn't want to pay too much, especially on an investment as big as a house. Everyone is talking about the market and slow home sales. Seems like a no brainer. Offer low and see what happens.

What if you are in love with the property? What if its one of a kind? What if it's already priced low? I'm going to skip the part about figuring out what the house is worth. Valuation is not what I am writing about. What goes on in the minds of the Buyers and Sellers is what this is about.

As the Buyer you will start to figure the price you should offer in your mind. You will think about the cost of things you will have to do. Replacing the furnace or the roof, or ripping out carpet or painting or anything you can think of. You may attach a dollar value to these items and subtract it from the price. You should be thinking, even if you feel it unlikely, about how it would be if someone else came along and bought the house out from under you. Somehow you will weigh these factors when formulating an offer.

It is fair enough, a buyer has to have some way to compare. Buyers come to me with lists showing everything that is wrong with the house they want and the know cost of each correction. As the offering price gets lower, the list gets longer as the Buyer tries to justify what they hope they can get the house for. Some will say "Give this list to the sellers so they know why our offer is low so they understand we are reasonable people."

I say this list is for you, not the seller and don't forget to think about if the items on your list are already factored into the listing price.

If seller has lived in this house they are in a good position to know about the condition. They are going to have their own ideas about price.

Don't burn valuable energy telling someone what's wrong with their stuff. Right or wrong, you are likely to start an adversarial relationship. In fact, a good Realtor will present everything you think is good about the property, what wonderful, well qualified buyers you are, present the price and sit quietly and watch the seller make the list of problems themselves.

Low offers don't always get accepted and they are not always a good idea. They cause pain and sometimes damage a negotiation beyond repair. The stages that a seller goes through when accepting a low offer may seem familiar.

Stage one, anger. "What do they think they are doing, this is crazy, we won't consider this". An agent who hasn't been through this might just say okay and walk away - what a huge mistake. (even if the seller is right)

Stage two: Denial. "Our home is worth more than this, if we wait long enough a better offer will come. (keep in mind the seller could be right)

Stage Three: Depression. I can't believe this is the offer we have to look at. Is it possible our house is only worth this much.

Stage Four: Acceptance: If this is what we have to do lets get it over with, where do I sign?"

As a buyer you need to remember this process can break down at any time for a number of reasons: Financial inability to accept the offer, continued confidence that someone else will come along. Another buyer might actually come along while you are haggling. What a wonderful feeling for the seller to accept a reasonable, clean offer when someone else has been raking them over the coals.

You don't want the reason for the break down to be because of something you can manage - your image. Be pleasant and respectful in your attitude

If the seller is a bank rather than an, there is no telling what they will do. A general rule is that the lower the offer, the greater the possibility of rejection or a counter near the asking price. If you can think like the seller and present an offer that is near their bottom line, you are much more likely to meet with success.

We've also had very low offers accepted on foreclosures only to find that the investor who holds the mortgage cancels the deal before final signing, buys back the property and the house disappears from the market all together.

As the listing agent we get an email that says something like: "Sorry, the original investor has decided to repurchase the mortgage. Cease all marketing activity and let the buyer know the agreement is cancelled." Everybody hates this situation.

The bottom line is that you will have a lot more success negotiating if you manage the seller's first impression of you(which should not be solely someone who throws in a low ball offer). Also pay attention to the Seller's point of view.

Good Luck!

J. T.


Chris H. said...

Hi J.T. - thanks for this cool blog! I am planning to buy my first home this summer, and for now, I'm just trying to get smart on the process. I've enjoyed your postings, and have found them very helpful! Thanks very much!

John Tittle said...

Hello Chris,

It's great to get your comment. The blog is a new thing for me. I've wondered if anyone is finding it and reading.
It's a constant push for things to write about. If you have any real estate questions feel free to put them out there.

Thanks again - John Tittle