Low Ball Offers on Homes

Making low ball offers on homes in the retail market is not much different from writing a low ball offer on bank owned foreclosure properties.  Although many of my original thoughts remain, I still get many questions about this process.  One example is that there are 74 comments on that post!  Lots of people are still confused by how much they can offer.  Let’s review. Many of my customers and people who comment on the above post want to talk about tax assessed value, previous mortgage amount, how much work it needs, etc.   The number one driving force that allows you to make low ball offers on homes and get them accepted is….(wait for it)…..time on market.  Nothing else typically matters!  Here is why:

• Yes, the property is a pile of junk, needs 47 windows, a new furnace and a new kitchen.  If the seller (maybe a bank if this is an REO) did their pricing process correctly,
  the listing agent they hired should have accounted for the current condition and priced the home accordingly.  Unfortunately, just like anything in life, some listing agents are better at their job than others.  Some listing agents think that if they give the seller a higher resale number up front, they may get lucky and get the listing (often they are correct).  You can argue all you want that this home is not worth $200k because it needs this and that.  In the end, that argument is falling on deaf ears.
• Tax assessed value is absolutely worthless in this market.  Repeat.  Tax assessed value is absolutely worthless in this market.  It serves no value for determining anything any longer.  These values were set by the tax assessor 1-2 years ago.  Many municipalities will not reduce the market value dramatically because they lose too much tax revenue.  Plus, with the wild swings in prices in the last 3-5 years, you need to compare this house to the others currently on the market, not data from 2 years ago.
• I have yet to see where the previous mortgage amount is at all relevant on what the bank sets the listing price at.  If this was the case, there would have been zero $30,000 houses like we saw by the truckload in North Minneapolis back in 2007-2012.  In fact, I wrote a story about a how the bank had a $189k mortgage on a house that my customer bought for $12k.

Most sellers determine how much of a discount off of list price they will accept based upon time on market.  Day 1 a house hits the market, you are going to get a token 1% off the price just for showing up.  It declines from there.  Plus, the amount of time since the last price drop is also relevant.  It somewhat resets the timer on the amount that you can offer.  Here’s some examples.

• Lets say the property has been on the market 30 days with no price drop.  You could probably offer 5% below list and they would accept.
• If on day 31, they drop the price 5%, you would again need to offer near list price as this is the new bar.
• After 90 days, most of the time, all bets are off and the seller is depressed and getting desperate.  They just want the house gone (if they are truly serious sellers).  They have realized that either there is serious issues with the house or their agent completely missed the mark on the price.  Go in at 20-30% off list.
• At 150 days, if it is an REO the banks want to start making deals!  I have received calls from agents saying:  “the bank just wants an offer, send me anything”.  If it is a traditional sale, most likely the seller has taken it off the market or gone with another agent.

In one page, that is how to cut through all the calculations and analysis to make low ball offers on homes.  In a nutshell, just worry about how long it has been on the market.