What makes an offer “lowball”?

LowballSilicon Valley real estate offers few simple answers but many recurring questions. One of them is whether or not you should write a “lowball offer“. So the first question is this: what makes an offer a lowball one?

It’s entirely relative to how the market in that area (not the county, not the state, but that particular area) is selling.  If houses in one area of San Jose are selling within plus or minus 1% of list price and you come in 5% under, the seller may feel that your offer was not in good faith, that the offer is insulting, or you are not a serious buyer who takes the opportunity to buy seriously.

Most of all, you need to run the comps and pinpoint the pricing.  Often the list price is LOWER than market value and in that case, the seller is probably expecting overbids, particularly if it’s a new listing with just a few days on the market. In other cases (but rarely), the seller may be way high just to “test the market“.  It’s also possible that the Santa Clara County area home is priced exactly at what the market can bear.  So you and your agent absolutely must crunch the numbers to establish the probable buyer’s value or probable market value for that particular piece of San Jose area real estate.

If you do submit a lowball offer, realize the risk that the seller will feel insulted or suspect that the offer is not serious and won’t be amenable to negotiation. When sellers choose to negotiate with a lowball, what I see most often is that a low initial offer results in a very high counter offer (E.G., house is listed for $1 million, offer comes in at $800,000 and seller counters to $995,000, maybe even over list price if they are mostly interested in making a point). Submitting a lowball offer on a home you REALLY want is not recommended as the net result will likely not be favorable to your own interests – especially in today’s hot market!

Good negotiation is to be expected if the market softens at all, but if done poorly or overly aggressively, it can really backfire! So crunch the numbers, be sensitive to the local situation, and put a good foot forward.

Tips for Writing a Competitive Offer: Part One

Right now in San Jose (and Silicon Valley generally), entry level single family homes are selling very briskly. In many cases, sellers are getting multiple offers when they put their clean, updated home on the market with an appropriate price & good marketing.

I work with both buyers and sellers, and can show you what will help your position and what will hurt it if you are writing an offer in a “multiple offer” situation. This will be the first in a series (I can’t put it all into one post) of tips on how to write a more compelling offer when you’re up against other buyers.

Purchase agreements are all about price & terms. Usually price is the main factor, but sometimes the terms can really throw the balance one way or the other. Often by providing better terms, you can nose out the competition.  Or conversely, if a couple of offers are close to each other generally, but your terms are worse, your “position” will suffer for it.

What are “terms”?  They’re the “everything else” of the offer. Things like:

  • initial deposit (amount/percent of offer price)
  • as is (or do you ask for repairs?)
  • number & length of contingencies
  • documentation  (preapproval letter at a minimum)
  • length of escrow, seller move-out timeframe
  • who pays for what

Once I heard of  buyers who wrote in as a term of the offer that the sellers’ dog would stay with the property.  The sellers were so outraged that they refused to sell their house to those buyers at any price.

These are just a few of the terms found in an offer – aside from price, these may be the most important terms for your offer. If you mess up on some or all of these, your contract will be given less consideration by the seller.

Got great terms? That’s awesome. But don’t get too cocky – at the end of the day, the seller does still want fair market value. So for instance, if you have “all cash” and can close fast, that is great and most sellers will want to work with you. But they won’t take an enormous discount for it. If a home’s worth a million dollars and there are several offers at one million dollars (or close to it), that seller will probably not take an offer of $900,000, even if it is “all cash”. If the seller is in a big hurry, he or she might take $950,000 or $980,000. Most of all, it will make your bid the preferred one. But in most cases, the seller won’t take a 10 or 20% discount for all cash.  So get an appropriate understanding of the power of good terms, neither underestimating nor overestimating them.  Often, truly excellent terms may be “worth” 1 – 5% to a seller, depending on what kind of terms are involved. Each situation varies, of course.

Next post on this topic: a list of financing terms (questions I ask my buyers prior to drafting an offer with them) and a discussion of the initial deposit, increase of deposit, and related concepts of liquidated damages and defaults.