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The Art Of The Lowball Offer To Buy
Property buyers have a nasty habit of looking for good properties that are selling on the cheap. These buyers usually fall into the profile of investors rather than owners as investors usually have a knack to haggle for the lowest possible price to boost their returns. But when you are looking at going for a low transaction price, bear in mind that you are usually coming up against an owner rather than another investor like you. And owners can sometimes have great expectations when they talk about the value of their home as there is an emotional element to it.
If sellers are to gang up and write a book, the number one rule they would write about is that lowball offers don’t work. But that does not stop rookie investors or veteran ones to continue throwing that curve ball. This is because they still work in one way or another. It is the seller’s own problem if they take this action as a form of personal insult to their intelligence. The truth is that even in this day and age where the lowball offer is a classic strategy that sellers deflect off their armour, there are still owners in situations where they would transact at prices below valuation for one reason or another that an outsider cannot understand.
What exactly is a lowball offer?
I don’t know if there is an official definition of what constitutes to an offer being defined as lowball. Maybe some street smart dictionary has the answer. But to the layman, it is simply an offer that is so much lower than what a seller is asking that someone’s jaw will hit the floor. Be it the seller or the selling agent, maybe even the spouse of the seller. At least one of which has to hit the ground. Usually an offer of around 25% below asking price should be enough to achieve that effect. Doubling it up to 50% might achieve the phenomena whereby a jaw actually falls through the floor. Depending on personal characteristics, just about any offer below asking price can be “lowball” if it provokes a seller into an outrage as if his basic human rights have been violated.
This is actually a tricky situation for both parties. Sellers would rightfully want to sell for as high as what the property is worth. Investing buyers need to ensure that they buy at a price that will be profitable for them when including the costs of repairs and remodeling. It is also at this time where you, as a dispicable lowballer, will realise how important a role your real estate agent can be. It will reveal if he is a competent and experienced player or an invisible one. Agents who brush off your ideas are those that you should fire immediately. They are only interested in a sale, not you.
A nice trick
The best trick that I picked up from an agent is to agree on a price range in which to start negotiating instead of making an offer with a fixed number. Getting from the point of showing an interest to buy to the point of closing is a stage by stage process like a mating dance. Your objective is to get from stage to stage instead of jumping from stage 1 to stage 9 in an instant. As negotiations get underway, you look for justified reasons to move the price towards the lower end. If you have successfully applied this tactic, you might find that you are paying a lowball price that would have been thrown into the fireplace had you started with that number.
It can be a different story if you are playing ball with mega-sized institutions. There is a chain of command when dealing with these players. And more often than not, you will never get to see the person who made the ultimate final call to sell at whatever price. So instead of facing an awkward situation where you just made the property look cheap, it becomes the manager’s problem to communicate your offer to the ultimate decision maker. The big boss will be presented with all offers and decide on a course of action with little emotional attachment. This is why you can lowball away when dealing with corporations. Their goal might be to let go of as many properties as possible and your low offer with better terms may just get the nod ahead of others. There are many reasons why these transactions can happen. Many of which you can never imagined. Don’t think too much into it. Just make an offer and move on.
Don’t forget that there is a social element that comes with real estate transactions. Some sellers are willing to sell at your price, but need to negotiate upwards just that little for the sake of preserving their egos. Don’t be a jerk. Allow them that route unless you absolutely cannot make a profit out of the deal anywhere above your low price offer.
A key consideration when selecting the houses to submit your embarrassing offers is the time on market. A fresh listing has a much lower chance of a successful play compared to one that has been on the market for 6 months. Fresh listing involves fresh sellers who are motivated to get the highest price on record in their class and are more likely to brush off your offer like a speck of dust. This is even when they know deep inside that the price they want is just a fantasy. In less than a month, most will come back down to earth knowing that setting a new price record is next to impossible. When all that work and hassle is put into marketing and arranging open houses, 4 to 6 weeks of no real offers will negatively impact the owner’s expectations. A little bit after that and they are primed for your lowballing. Little will they know that you are waiting on the wings motivated to set a new price record for yourself – a new low price record.
The anticipation play
Another useful method to apply is to communicate to the selling agent that you will be making an offer. Then delay your offer for as long as you can count. This will activate the agent to keep you in the loop of what is happening. In the event that there are no serious buyers, you can also expect the agent to urge you to “just make an offer”. It is important that you do not communicate this directly to the seller. As there is a social aspect involved, a seller might just forget about you or discard you altogether. The way real estate agents work, it will be tough to speak directly to the seller anyway. By delaying your offer while fully communicating that you will be making one, you actually put yourself in a good position to sweep up the mess if the sale ever gets into one. If a seller has finally given up and willing to sell at a low price, who is the first person the agent will call? The only buyer who has yet to make an offer of course. Everyone else has already made their offers and were rejected. Turning back to them is going to make the seller look weak. You become the final throw of the dice before the seller takes the property off the market for a few months.
Another key point to note when scheming your evil plan to buy way below value is evaluating the market. Is it a buyers market or a sellers one? In a buyers market, more people are selling than buying. This makes it easier to negotiate for good deals when the seller knows that there are 5 similar apartments in the area and you are not short of options. Game theory may also set in as sellers are afraid that a competing seller might be the first to blink and accept a low price. And since serious buyers are hard to find, taking up your evil offer might just be the best course of action. This goes vice-versa in a sellers market.
Mistakes to avoid
The very first thing you have to avoid is to play the sympathy card. Fresh investors might tell a seller that all they can afford is $1m as that is what the bank has approved to them. Nobody cares about your borrowing limit. Revealing your limitations put you in a bad light. You might even become the joke of the day over the seller’s family dinner. If you have revealed this information to your trusty real estate agent, make sure you inform them not to reveal this under any circumstances. Sometimes, in an effort to close the deal for you, agents could “sound” out your limitations to the other party.
The next mistake that will leave the buyer mystified is by offering to pay cash. Unless you are trying to structure a complex creative financing deal that makes cash favourable, offering to pay cash is nothing to blow your horn over. The cash strategy can help you close fast at a minor discount. Not at a low ball price. As long as the transaction goes through, the seller gets cash whether it is via your personal bank account or a lender’s mortgage. If anything, offering cash removes your conditional clause that you can walk away if you are unable to secure a loan for the purchase.
Walking away is one of the hallmarks of a great negotiation strategy. Just remember that the strategy includes coming back to the negotiation table. If you walk away and never look back, you will never arrive back at the negotiation table. Remember that negotiation is like a mating ritual that moves from stage to stage.
The play book
The number one rule that get repeated again and again by investors and “gurus” is that you have to uncover the seller’s motivation to sell. You are specifically looking for information regarding whether the seller has a deadline to meet or a certain amount of money has to be raised. This could be caused by debt, immigration, personal reasons, etc. The closer the deadline, the more receptive your offer becomes. The lower the emergency money needed to be raised, the more acceptable your low offer looks as well.
While you are looking for weaknesses in the seller’s armour, he is evaluating your arsenal as well. This means you have to act with poise and conviction while being out of sight as much as you can. The more a seller and his agent sees you the more likely they are going to assess you as a player. Leave your agent as your “face” in the deal. And remind your agent that every document has to appear professional with little mistakes to avoid the seller underestimating your competence.
When it finally comes for you to roll out the red carpet for your jaw-dropping offer, expect a counter offer. You must be playing too many computer games on your tablet if you expect you offer to be accepted immediately. Instead of viewing the counter offer as a straight out rejection, take it as an invitation to make another offer. It is important at this point that your offer increase no matter how minute and insignificant it might seem to you. If your price does not move, the seller will assume that you are inflexible and let the deal fall through altogether. By increasing your price subtly, you are communicating that you are committed to find a point to meet while maintaining that the price has to be a low one. Again, remember the mating dance.
It will inevitably come to a point when the seller tries to justify a higher price. It will then be your cue to pull out your arsenal of market data and costs estimates to justify your lowball. Things you might include are those for repairs, furnishing, furniture, appliances, flooring, new air-conditioners, etc. This is not the time to hold back.
A counter tactic that you may encounter is that recent transacted prices in the area are presented to show that a property is worth more that you are offering. It would be wise to check out these listings beforehand so that you can pull out the shotgun when instigated. Prices could be high for other homes in the area because of a modern remodelled kitchen, a proximity to amenities, great view, etc. These are of course, things that you will insist the seller’s home does not have.
When all else fails
There’s no need to go into depression and make an appointment with your psychiatrist if your endeavours fail. Sellers sell at high or low prices for their own reasons. The property may end up being taken off the market if there is no buyer anyway. Send the seller a message some time later in case it is still unsold. This time he will be more motivated than ever to sell.