Real estate expert Alison Rogers answers the big question: How low can I go?
Welcome to WalletPop's new book club, where we will have an author-in-residence to give us a peek into a new book and be on hand all month to answer reader questions. Our inaugural writer is real estate expert Alison Rogers, who was the founding editor of the New York Post real estate section and a licensed real estate broker. The following is an excerpt from her book,Diary of a Real Estate Rookie, which was called "must reading" by the Wall Street Journal and a "Witty bunch of horror and success stories mixed with real advice for other Realtor newbies" by Newsweek.
Putting in a Lowball Offer
As a working real estate agent (and failed flipper), a question I get all the time from potential buyers is: "How low can I go?" They always ask this in the abstract, as though there's one number that's the absolute answer which I can somehow tell them over the phone-which is roughly like calling your doctor and saying, "Hey, I think I'm having a mild stroke, which medicine should I take?"
So let's go through some general negotiating principles to work with your specific situation a little better. In general, there is a zone where a lowball offer is insultingly low. Some real estate gurus would argue that that's okay, you should go ahead and make ridiculous offers, because if you're willing to ask a gazillion people you'll finally run down one exhausted one who will capitulate. Then, hey, it's like you won the lottery.
One problem with that strategy: I don't generally think it works. I tried it in New Jersey, and it didn't work for me. For one thing, anybody so broke that they might actually face losing their house is so broke that bankruptcy's a viable option. [After I wrote my book Rookie, from which this excerpt is adapted, the phrase "jingle mail" – where homeowners walked away from their properties, leaving the keys in the mailbox for the bank- became popular slang.] Anybody else is probably going to have a middle-class sense of money and entitlement, and they're probably going to delusionally think their house is worth way more than it is. (Perhaps, dear buyer, you've met one or more of these sellers.)So when we think about lowball offers, let's think of pricing like a football field. Visualize two possible strategies: the first, where you start really far away from the goal, and you're just tossing a Hail Mary. If it fails, you expect never to hear from the seller again. The second is a strategy where you want to engage the seller in a pricing dialogue-to move the line of scrimmage, as it were.
I tried an offer of 30% off asking in Jersey. That was a Hail Mary-and it didn't work. The only circumstance where it probably would is where the house is so overpriced to begin with that your lowball is about 10% off actual market value. If you try to get a larger discount than that, the seller starts to think about renting the property out instead.
If you do want to engage the seller, it will help to know a factor called negotiability or discount. (I have to give credit here to economist Jonathan Miller of Miller Samuel, a New York City appraisal firm, for being the first to introduce me to the term.) Negotiability is the average spread between what houses list for and what they sell for. If a house is listed at $500K and sells for $475K, its negotiability was 5 percent. It's an important statistic, because it signals to buyers where sellers expect to end up.
Once you know negotiability, you as a buyer then have a choice of two positions: the first is to come in very close to the negotiability range, and subsequently dig in your heels. Let's say the seller listed at $500K and negotiability is 5%; implicitly, the seller is expecting $475K. As a buyer, I'm going to bid $470K, and I'm going to tell the seller that's the best I can do.
Will that work? Depends on how much of a hurry the seller's in, whether he/she thinks they have a house with above-average marketability, and what their other offers have been like.
If the buyer comes in much lower than the negotiability implies, the seller assumes that there's going to be another round where the two parties "split the difference"-which means that I as the seller assume you as the buyer want to end up halfway between your first bid and my listing price. Let's walk through it: I as the seller list at $500K, you as the buyer bid $420K. As the seller, I'm going to hear that as dictating that you want to get the house for $460K, and I'll evaluate your bid accordingly.
So that's the rough idea; of course there are as many refinements as football coaches have for run and pass plays. (Can you tell I grew up watching sports with my daddy?)
Dispassion counts for a great deal too, which is why people who negotiate for a living, such as lawyers and salespeople, may be good at going back and forth for other people and yet generally should not negotiate their own deals. It's one of the strongest arguments for why you should hire a professional negotiator.
What if you must try this at home-i.e., you've got to put in a lowball offer without using an agent?
Well, first check to make sure the seller's offering price isn't crazy. You do this by shopping around and learning what houses are going for in the neighborhood, and that the seller is in line with recent sales prices. To keep going with our football analogy, check out their field before you play it on it.
Then, I think the trick is to get in at just that point where your bid seems "reasonable," but doesn't sound like a lowball. If your market's current negotiability factor is 6%, you might want to bid 8% under (and stick to it) or 15% under (hoping to split the difference).
Got questions? Ask them below and Alison Rogers will answer them while she is our author-in-residence.
Excerpt adapted from Diary of a Real Estate Rookie, by Alison Rogers, copyright 2007 Kaplan Publishing. A summa cum laude graduate of Harvard, Rogers is a licensed salesperson at the Manhattan firm of DG Neary Realty, where she specializes in high-end rentals and the neighborhoods of Greenwich Village and Tribeca. In addition, she offers consumer information through her website, www.frontporchllc.com.