The process of making an offer to buy a home is fairly straightforward, provided that you don’t have competition from other buyers. The offer basically conveys the price you want to pay, and which inspections you want to conduct. Once the documents and addenda are completed, your agent will present the offer to the listing agent, who in turn presents it to the seller. The seller can accept, reject, or counter your offer.
Of course, the best scenario is that the seller accepts your offer without any counter to price and terms. However, if your offer is below list price, chances are that the seller will counter your price. And if your offer is significantly lower than list, the seller may reject the offer outright.
Since the great recession, an increasing number of homes for sale have serious issues due to deferred maintenance. It’s routine for homes in need of repair and/or a total renovation to receive low ball offers. Real estate investors typically don’t attach emotion to their offers, and as such making low offers on property is business as usual. But if you’re like the average home buyer, you may shy away from making a low ball offer fearing being rejected.
You can increase your chances of engaging the seller in working out a deal by packaging your offer correctly. The conventional wisdom is to make a “cash” offer that is non-contingent. The reasoning is that the owner would be more apt to take your lower offer knowing they don’t have to wait for a lender to approve your loan or worry about appraised value; or hassle with negotiating home inspection repairs.
This approach typically works in a buyer’s market, especially when home prices are declining (as we experienced from 2008 to 2010). However, this tactic may fall flat in today’s market for a number of reasons, including strong year-over-year home price gains, low listing inventory, and increased home buyer competition. Being confronted about their home’s value is a tough pill for a home seller to swallow, especially when they see other homes selling for more. Notwithstanding the seller’s ability to accurately interpret housing data; many sellers have high sale price expectations regardless of their homes’ condition, and rationalize a higher asking price – even when not justified.
Another reason this tactic has lost its effectiveness is that the enticement of a “cash” offer has lost its impact when in actuality it’s all about the sale price. Whether the sale is all cash or financed, the primary concern to the seller is the amount of money they net in the sale.
Non-contingent offers don’t go far enough when making a low offer on a home; you also need to build a case to help the seller understand the rationale of your offer. Have your agent comprehensively analyze the neighborhood market and include the analysis in your offer. The analysis should be detailed and point out differences that add and negate value to the comps and the subject property. Your offer should also include a detailed estimate on repairs and updates (from a licensed contractor).
Making the seller aware of the differences between their home and neighborhood comps, as well as educating them on the costs associated with repairs and updates goes a long way in getting a seller to better understand the value of their home, and moves you closer to making the deal.
By Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.