Buying real estate can elicit a couple of different responses. Or maybe I should restate that to read the preparatory phase of buying real estate. During the beginning stages most people are very optimistic. They have looked at a few properties, read the newspaper ads and done some online research. They have a good idea of where

the market is and what they can afford. Now it comes time to take all of the information you have gathered and put pen to paper. Then something goes terribly wrong. A real estate aneurysm occurs, creating a mental short circuit. Maybe we’ve watched too much Donald Trump, too many shows on HGTV, or seen more real estate infomercials they can be remembered. All of a sudden very smart people begin to make incredibly dumb mistakes.

Houston, We Have A Problem

Pursuant to making any offer some preliminary research needs to be done. The amount the seller purchased the home for is usually available along with the mortgage balance. 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 the number of days the property has been for sale. Now once you have gathered this information, the wildcard in the deck is the seller’s motivation.

We should probably discuss what makes a lowball offer. In my opinion, an offer that is 20% below the market value definitely qualifies. No matter what the seller’s motivation I can tell you they are not likely to sell a house 20% below the asking 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 $600,000 and has been on the market for 60 days. You make the first offer at $480,000.

The Road to Failure

I have come up with several reasons this strategy will provide you with one big goose egg:

1. Emotions – real estate, no matter what every one likes to refer to as a business decision is fraught with emotions. Lots of emotions. Your low ball offer has just insulted the seller and reduced their anticipation below water level. For a contract to take place, a “meeting of the minds” has to exist. You have just driven the first wedge into it. You’ve announced that the property is worth less than the market price.
2. Credibility Factor – if an agreement is going to be reached, the other side has to want what you have or at least agree to continue talking. A low ball offer accomplishes neither.
3. Negotiation – by initiating the offer process 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 $480,000 is easily dismissed by the seller, however an offer of $525,000 would make the seller give it some serious thought. As a buyer, does your counter offer go from $480K to $530K or does it go form $525K to $530. By using the second scenario, you have informed the seller your concessions will be very small.
4. Other 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. A Card Laid is 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”.

GAME OVER!