As a rural property specialist who interacts with buyers daily, I often get asked two predictable offer questions. They’re interesting as they really don’t reflect on the features of the property itself or the real value of the parcel. Instead, they focus on offer strategy and emotion. While they are important in the minds of buyers, they can be detrimental if not kept in perspective so let’s dig into them.
Question #1: How much should my initial offer be?
The first one I hear is, “Is it normal to knock a set percentage off the list price to determine my starting offer?” Unfortunately, no. In a perfect world, you could do a quick math equation and come up with a foolproof offer price but in the real world, it’s seldom that simple. There are times that a ‘lowball’ offer makes perfect sense but there are also situations when an offer OVER full price may be the best tact for getting your dream property.
The first thing to remember is that when a property is listed, the seller has some reason for the list price. Either he/she feels that the property is worth that much, their agent has told them what to ask, they have an appraisal that shows that value, or maybe the seller just needs to net a certain amount to reach their goals. Whether accurate or not, in the seller’s mind, the property is worth at or near their list price.
So now that the buyer knows what the seller is asking for a property, how does the buyer negotiate in his/her best interest? If they offer too much, they could leave money on the table. If a buyer goes in with too low of initial offer, they risk losing the property to another buyer with a better offer or insulting the seller. Offending a seller is usually shortsighted since a seller grudge against the buyer will often taint any future negotiations. This being the case, buyer offer price strategy is often a balancing act to get the property as cheaply as possible while not losing it or alienating the seller.
Question #2: Is the seller motivated?
When buyers are considering an offer, I will often hear one or more questions that are intended to obtain an insight into the seller’s motivation level. While it doesn’t hurt to ask, in my opinion, seller motivation is something buyers give too much credence to. The first challenge with diving too deeply into seller motivation is that sellers often don’t share their true motivation level with buyers so what sellers are saying often isn’t what they really feel. While various seller actions can be indicators of seller motivation, I’ve found that they can also be misleading (sometimes intentionally). The second challenge is that emotions that effect seller motivation can and do fluctuate on a weekly or even daily basis. Since the buyer can only guess at the influences that effect a seller’s daily decisions, why base an offer price on something so fickle?
Desirability, Current Demand, and Buyer Motivation
If buyers don’t put a lot of emphasis on the items above, where should they start on an offer price? I have specific case by case advice that I share with my clients but in general, buyers need to assess three parameters when writing an offer:
1) Desirability of the property.
2) Current demand for the property.
3) Buyer motivation level to purchase that specific property.
An experienced buyer’s agent should be able to advise the buyer on desirability and demand but buyer motivation is something only the buyer can determine. If the property is desirable, in high demand, and the buyer motivation level to purchase the property is high, the initial offer price and terms need to reflect that. In some cases, that may mean writing an offer over list price. If desirability, demand and/or buyer motivation is low, then a low offer may be perfectly acceptable. The bottom line is that initial offer price should fit the known circumstances and there simply isn’t a rule of thumb that can be applied to all situations.
One parting tip for buyers: Remember that while the offer price is an important part of the equation and the subject of this post, it’s not the only term in the offer. In the current strong market, competing offers are often a fact of life. When that happens, the seller will compare all offer terms and having the high price doesn’t always guarantee that you will be the winner. The seller will look at the offer as a complete package and a savvy buyer will also take that into consideration any time an offer is drafted.