The Problem with Lowballing

A lot of buyers like to put lowball offers on the table. You're savvy and sophisticated if you lowball, and a sucker if you don't. It was a strategy that I often supported, because, hey, I'm a buyer agent, right? And a lowball offer can elicit a counter from the selling side that will tell us a lot about motivation and ultimately where the seller's bottom line might be.

In the last few months, I've changed my tune. I'm not sure that starting out with a lowball offer is in a buyer's best interest, at least if they want the property. Of course, I want to help my clients get the property at the best price with the best terms. But a key objective here is get the property, and a lowball offer can sometimes run counter to that goal.

In this discussion, its important to keep in mind I'm talking about negotiating for a property with an asking price that's realistic, within striking distance of market value. If a property has a ridiculously high asking price on it, and a buyer floats an offer close to market value, the seller may perceive it as a lowball offer, but it isn't. Its a realistic offer. A lowball offer is different, an offer well below a reasonable market value for the property, in the hopes you'll hit the real estate lottery and find a desperate seller who'll jump at it, sort of like a longshot ticket at the races.

I'm finding two negative consequences of starting out with a lowball offer. It can set up a bad faith negotiating climate, with ill will at the start from the seller to the buyer. The seller can feel that the buyer's only motivation is to 'steal' the property from them. They become defensive and may be actually less willing to negotiate and compromise. Even if you end up agreeing at a price you would have otherwise ended up at if you started at a higher base, the seller will remember that initial volley --- and be wary of any subsequent negotiations over items like inspection or appraisal issues. Maintaining a climate of good will is one of the most important factors to a successful close, and one of the toughest jobs that brokers have. Failure to maintain a climate of good will is probably one of the main reasons that so many "For Sale By Owner" transactions, without the involvement of brokers as intermediaries, don't successfully close.

A second consequence is that a lowball offer can motivate the seller (via their agent) to aggressively troll for another offer. I'm seeing this happen more and more. A very low offer comes in and the agent starts calling every potential buyer (or their agent) who had recently seen the property to see if they'd be willing to beat the low offer. At the right price, a buyer who had been sitting on the fence may decide to jump in. If the first buyer's initial offer was seen as more realistic, and within striking distance of the seller's price objective, the seller's agent would likely negotiate the offer and not try to drum up other buyers. If you've ever entered into an auction on eBay for an item you didn't really want or need just because the deal seemed too good to pass up, you get the dynamic.

As a buyer agent, one of my most valuable functions with my clients is helping them shape an offer and develop a bidding strategy. Buyers have 2 common questions --- what's the property worth, and where should we start? Regarding what a property is worth, I typically give a range, something like "I'm really comfortable with this property anywhere between price A and price B." That's relatively easy, based on experience, comparable sales, features and quality of the property, etc. The harder question is "Where should we start?" Sometimes I give a recommended starting bid, and am surprised at how many clients want to start 10% or even 20% below that number.

There isn't a magic starting point, nor is there some universal negotiating formula. Every situation and every negotiation is different. Sometimes you have a lot of information, as to a seller's motivation or offer history, sometimes you have none. But one thing I'm finding lately is that lowball offers, rather than a savvy strategy that works in the buyer's favor can actually work against a buyer's interest. And before seller's agents stand up and cheer that this buyer's rep has abandoned his principles, my change of perspective is not a sign of rolling over and playing dead, but rather a maturing of my negotiating perspective. My fiduciary responsibility to my client, the buyer, to get the best price and terms for a property, remains intact. I'm just no longer sure that a lowball offer is the best first step to achieve that goal.

Comments

[Chris L]

The statewide median selling price dropped 14.2 percent in December 2006 compared to December 2005

http://www.nysar.com/files/stats.html

That's a huge drop in one year. I was betting on 30% drop over 4 years. The prices are falling much faster.

[Robert]

I love NYSAR comment: Clearly, there was no ‘bursting bubble’ in the New York housing market in 2006.

What is he smoking?

[Brian]

I wonder why Sullivan County is doing so well compare to other regions?

[David Knudsen]

Statewide numbers can paint a skewed picture. This state has 4 very distinct markets --- new York City, the NYC suburbs (Long Island, Westchester, Dutchess, Putnam and some or Orange), "upper downstate", including Sullivan and as far up as Albany, and then upstate. Each of these markets has different dynamics, and upstate is kind of an economic basket case.

I'm not sure how NYSAR is collecting its data, and that could be a problem. Sales data reported by Realtor organizations often is pulled from sales reported in Multiple Listing Systems. In most states, that paints a pretty accurate picture, because most residential sales come through MLSs. But New York City doesn't have a robust and open MLS, so many NYC sales may not be reported if that's where NYSAR is pulling its data. Also, until recently, coop sales have not been publicly reported (NYC just changed the rules on that), so coop sales, which make up the bulk of the Manhattan market, probably aren't included in the data.

I think Sullivan is doing well for a few reasons. There continues to be a buzz about the Catskills among NYC second home buyers that fuels demand. The inventory of properties here with second home appeal continues to be pretty low. Sullivan is still one of the most affordable second home getaways within a few hours of NYC. And, finally, a lot of second home demand here is a function of many buyers being priced out of the NYC/Manhattan market, and are choosing to continue to rent there and buy something here.

[LIBubble]

Real estate along the coasts are so overpriced from the idiot loans that enabled anyone to enter debtorship; even someone who was unemployed could have gotten a mortgage. The prices sellers are asking are so far away from "striking distance" of market value and without a serious lowball offer (more than 30% off and that is being conservative!), you are only ripping yourself off. I recommend that anyone that is interested in buying a house should at least sit out this year, a recession is just around the corner. Buying a house before a recession is bad, buying an overpriced house before a recession is downright insane!

There is so much inventory and over the spring, that inventory is going to grow even bigger as more people default on their mortgages. Lenders are going under every day and lending standards are tightening up. There will be much more houses that NEED to be sold than there will be fewer people qualified to buy them even with their lowball offers. http://ml-implode.com

Here is my take on the NYSAR http://libubble.atspace.com/nysdata.html I noticed that the NYSAR took down their stats, but you will find on my site along with Staro's idiotic statement.

As far as median and average sales data, this is what I think of them http://libubble.atspace.com/numbersgame.html

[Sadie]

This is very true. I know that this article dates back a bit, but my boyfriend and I are selling our condo and recently received our first, low-ball offer (-10%); whereas, if the offer had been more reasonable (-3 to -5%) we would have been willing to negotiate, now we are left feeling as though the buyer isn't serious and we're sticking to a higher bottom line than we initially figured we would.

Offering below ask is the norm, of course -- even 5% below ask, in this market, makes sense. But when an offer comes in that could be seen as insulting, it's hard to want to work with the person who submitted it.