Quite often in today’s market buyers ask, “How low can I go?” This question is in regards to making an offer on a property for sale. Sometimes writing a low ball offer makes sense. However, if you don’t do your homework up front, you may end up writing a bunch of low ball offers without ever actually getting one accepted. Deciding on what price to offer on a property depends on several different variables including value, demand, market time, and sold/list ratios (other variables also play a role, but we will keep it confined for the sake of time).
The first thing to consider when making an offer to buy a property, is value (see “Price vs. Value.” ). We can assume that the desire to submit low offers is ultimately an attempt to get a property below fair market value. In this economic climate it definitely makes sense to try and ensure that your money is well spent. With speculation that the market may not yet be at the bottom, it also makes sense to try and walk into some instant equity, to lessen the blow of any future deflation in values. So, if the list price is very far north of fair market value, submitting a low offer may be the only way to accomplish instant equity. However, if the property your interested in is already listed below fair market value, you may not need to make a low ball offer in order to get a good deal. So you should not only relate your offer price to the asking/list price, but also to what the value of the property is.
The second thing to consider is demand. If the property type is in high demand, and the asking price is listed below value, there may be multiple offers, at which point a low ball offer may be futile. One way to guage demand, is to look at absorption rates in the area (see “Is this a buyer’s market?” ). Absorption rates will tell you how quickly inventory in the market place is turning over. The third thing to consider, which will also help you guage demand in your demographic, is market time. Market time can be viewed in two ways. The amount of time properties were on the market before they sold, as well as the amount of time an active listing has been on the market. In the first instance, if all the properties in your demographic (say 2 bedroom homes) are averaging less than a week of market time before selling, that could be an indication of very high buyer demand in your specific demographic. In the second instance, if homes are selling very quickly, and a new active listing has only been on the market for a couple days, the seller will probably not consider low offers if they know their property type is in high demand. Conversely, if an active listing has been on the market for 90 days or longer, this can signal an opportunity to get a good deal as the seller may be starting to get desperate to sell. However, it can also signal that the property is overpriced, so don’t skip over item number one: value.
The fourth thing to consider is sold/list ratios. This is merely the percentage of sold price to list price (i.e. a property that sells for 95K, that was listed for 100K, would give you a sold/list ratio of 95%), and is probably the most important information of all to consider, as it gives you hard data as to exactly how low sellers are willing to go. If we take a look at 2 bedroom stand alone homes in the North Seattle area, we find that in the month of October 2011 a total of 23 properties sold. Of these 23 properties, the average sold/list ratio was 99.16%. So on average, sellers in this area were getting almost full list price for their properties. These of course are just averages. If we take a closer look we see that the lowest sold/list ratio was 90.05%, and the highest was 120.09% (in the second scenario, it is probable that the property was drastically underpriced). So, at least in this very specific demographic, having the approach of submitting offers much lower than 10% under list price is probably unrealistic. However, these numbers only hold relevance to you if you are actually looking to buy a 2 bedroom stand alone home in North Seattle. Every demographic is different and should be treated accordingly. These numbers could be drastically different for 4 bedroom homes in Beacon Hill, or 1 bedroom condos in Shoreline. If you would like to find out more about a specific area, or just general information about buying a home in this market, please go to our Calendar/Reservations page and sign up for one of our FREE seminars.