There was some discussion of lowballing here and on Fish’s blog recently, and from my point of view there is still a lot of misunderstanding of the lowballing process. Some people recommend lowballing, but I’m not quite sure of their agendas. Its not clear to me, in other words, whether they want a successful purchase at a great price, or whether they want to be able to play the part of a shrewd buyer who never pays too much (due to the fact that they never actually buy).
The first thing to determine is what lowballing is. Is it offering way under list price, or way under market value? That, of course, raises the concept of the difference between list price and market value. I can’t see much of a direct relationship. Although on a daily basis we see properties sell, on average, for within 2% of list price, we regularly see properties sell 15% and 20% below list price, and for almost that much over list price. Even that thinking assumes that sales price is the same as market value, and that’s only true if you put an actual dollar figure on the intangibles.
Coco recently described a classic scenario of describing an offer as a lowball when its based on list price. She offered considerably less than list price, subject to inspection. The inspection was less than satisfactory, and Coco decided to drop the offer. If she hadn’t written a subject offer, but still written well under list, she may not have been able to back out. Would we still call that a lowball offer? Would it have been a good tactic? After all, she would have concievably ended up paying more for the property than what it was worth. She would have paid the sellers much less than what they were asking, but more than market value. Clearly, taking pride in succesful lowball offer that is based on list price, rather than market value, is simply an exercise in self-delusion (and don’t take that the wrong way – Coco liked the price for what she thought she was getting, but was wise to include a subject so that she could confirm that market value was actually close to what she thought it was. Her actions avoided a potentially costly mistake. Thanks, Coco, for providing that valuable real world experience.).
What about lowballing based on market value? That’s a different story. We start with a property for sale, and that includes a list price. A buyer”s agent, however, should do their own CMA on the property to confirm how close (or far apart) list price and market value are. If list price is $100,000, but market value, (based on one of the three standard appraisal approaches) is $80,000, offering 25% less than list price really isn’t lowballing.
On the other hand, if list price is $100,000, and market value is $80,000, is it wise, or worthwhile, to offer $60,000? That’s a horse of an entirely different colour, but one thing is for certain: offering 25% less than market value is an honest to goodness lowball offer.
As a Realtor I have to ask a few questions. First, who would accept that kind of lowball offer? There are two types of sellers who would do so. Sellers want some kind of combination of best price, least amount of time and a minimum of inconvenience. Some sellers may know what market value is, but may also be willing to sacrifice on price in order to get a faster sale with less inconvenience. Finding these sellers can be lucrative to buyers, and concluding a sale with them is nothing to be ashamed of. Some sellers, meanwhile simply don’t know the value of their property. Personally, I don’t feel comfortable representing a buyer who wants to pay someone less than their property is worth, even if the seller is willing to accept the low price, if it all depends on the seller being ignorant of market value. Life is too short and karma too certain. I don’t need business that badly.
Second, who would make a lowball offer? Its a fact that most people don’t want to make lowball offers. That doesn’t make lowballs wrong or bad. Some people want to save money, and don’t mind running the risk of offending sellers. That’s perfectly fine. After all, if you don’t lowball someone who can’t seem to sell then you can’t give them the chance to accept your fast, convenient sale. Your lowball may be exactly what they’re looking for. If it is, then I’m happy to help. Both sides emerge winners.
That said, anyone writing a lowball offer should understand a few things. They should be clear on whether they’re looking for sellers who want fast, convenient sales, or if they’re looking for people to take advantage of. If the lowballer is looking for someone to take advantage of (in the negative sense of the phrase), a Realtor is probably foolish to get involved. After all, if the lowballer wants to take advantage of the seller, he probably won’t hesitate taking advantage of the Realtor. On the other hand, if the lowballer is looking for sellers who want fast, convenient sales, both the lowballer and the Realtor should be on the same page, and should realize that they will have to look long and hard (and the stronger the market, the harder and longer they’ll have to look). There’s nothing wrong with that. The lowballer should also try to make their offer as strong in all non-price related ways as possible. Give the seller their dates. Let them rent back. Give them subject free offers (do your due diligence ahead of time). Put up the biggest deposit you can.
Should the lowballer commit to using only one Realtor? My only comment is that actually getting a property considerably under market value is tough in any market, and very tough in this one. A Realtor who is willing to beat the bushes and write lowballs without getting rock solid loyalty in exchange is probably not going to contribute a lot of skill to the exercise. Beginner’s luck, maybe, but probably not much skill.
Are the chances of success high with lowballing? Don’t fool yourself. If you define lowballing as 25%+ off market value, the chances of success are low. That said, the pay offs are high. In many markets you’ll find that a lowball offer can result in a positive cash flow property with no equity investment. Imagine,for a moment, that this market goes due south. The heirs of an investor want a quick liquidation, and accept 75% of depressed market values on a rented property. You use your LOC mortgage on your principal residence to pay them within 10 days of acceptance, and find yourself with a revenue property that covers the LOC payment/maintenance and taxes. Was it worth looking? Did both sides get what they wanted? Great deal for all concerned, including the Realtors.
There is an assumption that a Realtor won’t write lowballs because it will insult listing Realtors. Perhaps that’s true, but its an invalid reason. I won’t write lowballs for someone who isn’t serious (as in, put a deposit in my trust account now, before we even find a property), someone who isn’t loyal, someone who isn’t realistic (this won’t likely provide succesful results overnight), or someone looking to take advantage of someone else. As for the listing Realtor, let’s face it: the numbers suggest that most Realtors won’t be in the business in a few years, but buyers and sellers will always be around. I’m better off worrying about the buyers and sellers, clearly.
Somewhat off topic, Coco’s deal raised another interesting item. Realtors are ethically bound to disclose known latent defects to any party making an offer on a property, regardless of what agency relationships exist. A latent defect is one that is not immediately obvious to a reasonable person. A roof with a hole and a stained ceiling is a patent defect – anyone can see it. A furnace with a broken heat exchanger is a latent defect. The Realtor doesn’t have todisclose the roof leak, but if he knows about the heat exchanger (or, for example, an underground oil tank) he has to disclose it. Failure to do so can lead to damages against both the seller and the Realtor.
What happens when a buyer gets an inspection, doesn’t like it and so doesn’t remove subjects due to bona fide latent defects? Does the listing Realtor get to see the inspection report? Does the seller? That is far from clear, (not all buyer’s agents tell listing agents why their buyers aren’t proceeding, and not all listing agents ask) but if the answer is no, can either the seller or the listing Realtor be said to know about the latent defects? In Coco’s case it seems that both the sellers and the listing Realtor do know about the latent defects. If so, they now have to disclose them. Connect the dots. Is the house over-priced? Was the offer a real low ball? Could it be beneficial to epressly share the results of a home inspection with a seller? Is it ethical? Can it be counter-productive?