A Lowball Offer Helps Nobody

So this has been an issue with me for a while now.  Buying a house is fun and I really enjoy helping my clients find one.  What I don't like is finding the right house and then my client wanting to put a lowball offer in.  A Lowball offer helps nobody. What it does do is:

• Offend the seller - they might not counter the offer

• Shows that the buyer is truly not that interested in the property

• Generally kills the deal

Here is the thing, when you are putting in an offer there is a formula to this.  Realtors just don't throw a number out and neither should a home buyer.  There are specific criteria to look at and analyze when you are making the right offer.  The criteria is below.

Making the Right Offer

• Comparable homes - homes that have sold in the last 6 months. If you are buying a 4 sided brick ranch, a two story traditional is not a comparable.

• Look at comparable homes currently under contract - your Realtor should be calling the listing agents of those homes to find out how close the accepted offer is to the asking price.

• Square footage

• Upgrades - lets talk about this.

Upgrades are:  renovated kitchens, granite, wood flooring, updated bathroom, adding an addition, etc.

Not upgrades:  New HVAC, Roof, Windows, interior and exterior paint, gutters - these are maintenance items on a home.  They do make the home more sellable but not upgrades.

• Features of the house - Deck, in-ground pool, front porch, garage, etc.

• The market - right now there is very little inventory - It is a sellers market in most price points. Lack of inventory means multiple offers, higher sales prices, and better terms. Knowing the market in the area is important when writing an offer.

Once you come to a price for the offer then you have to talk about terms.  Everything  is negotiable in the contract.  These terms include:

• Closing costs paid by seller

• Closing date

• Earnest Money - How much to put down. My clients, I instruct them that lower priced homes it is typically $1000 and higher priced homes up to 1% or more.

• Possession - Does the buyer take possession of the house at closing or a few days later.

• Closing Attorney

• Due Diligence - How many days you get to complete the inspection, negotiate repairs, drive the neighborhood, etc. Anything you need to do to make sure you are happy with the house.

• Stipulations - This could include a home warranty, termite letter or bond, certain items remaining with the sale of the property (most common is appliances), etc.

These are the most common negotiated items.  So when you are talking about an offer, terms are just as important.  For example, closing costs to buy the home.  Closing costs are real money and will need to be paid to get the home closed.  When a buyer has to bring a downpayment and closing costs, that is a lot of money out of pocket.  During negotiations if a buyer could get some or all closing costs covered by seller that would help to reduce the amount of money needed to close the house.

Once you and your Realtor have looked at all these factors, it will be easy to determine a price and terms.  Lets say that the house is priced at $200,000.   After you look at all the factors and determine that the offer amount should be $195,000 then offering $175,000 would be considered a lowball offer.  A lowball offer does not always mean price.  A buyer could come in with a $190,000 offer and ask for lots of closing costs, home warranty, termite bond, trees removed, etc.  With all these factors it makes the competitive offer not as competitive.  Coming to an agreement on price and terms is not one sided.  Both buyer and seller have to come to a price and terms that they are ok with.  You want it to be a win--win situation.  If you, as the buyer, want everything and concede nothing, then you will lose out on every offer you submit.

One more thing about buying a home and negotiating offers and counter offers, it is business. This means do not get emotionally involved.  There are times this could happen, but always remember that it is about dollars and cents and give and take.  Go in with a mindset of what you realistically would want to pay and then make adjustment based on the counter offer by the seller.  A good Realtor will help you with the numbers.  I have a great example that I have used with many of my clients during negotiations.  The case scenario below happens quite often.

Case Scenario

• Purchase Price - $215,000

• My clients offered - $210,000 and they wanted $6,300 in closing cost

The seller countered at $215,000 and they would pay the $6,300 in closing costs.  My clients were upset because they wanted to get a price that was a little lower.  I talked with him about the difference between $5,000 financed in the loan and $6,300 out of pocket for closing costs.  Here is how it breaks down.

• Purchase price - increased from $210,000 to $215,000 - that will be an increase of $24 on a mortgage payment.

• Closing Costs - seller will pay $6,300 - if you take the $24 a month increase in the mortgage payment and divide that into the closing costs (6,300/24) that equals 262.5 months or 21.875 years before you will pay yourself back. The numbers do not match up. Take the increase of $5,000 and have the seller pay the closing costs. There are many things that you could do with the additional $6,300.

  • Save it for an emergency fund.

  • Use it for upgrades on your home - the upgrades will increase the value and make it more your style of home.

  • Invest it - invest the $6,300 and get even a modest 5% return. You will have made 11,231 in 21 years.

If you only remember a couple of things from this, remember these:

• Know the market - If it is a sellers market, you have to have a more competitive offer or you will lose out on the house you want.

• It is not personal it is business - Don't get emotionally involved.

• Look at the numbers - not only to make the initial offer but when countering. Numbers are your best friend.

If you have any questions or need help buying or selling contact me, I am glad to help anyway I can.

Additional Information

How to find a home in a low inventory market

Successfully negotiating repairs