Getting more for less is always the ideal as an investor. Whether you're buying a bargain-basement-priced foreclosure or nine-figure luxury property, you want a good deal -- the absolute lowest price possible to protect your bottom line.
But that's easier said than done. Sure, you can lowball your offer and hope the seller accepts. More than likely, though? You'll offend them, and you'll be taken out of the running altogether.
So, exactly how low can you offer on a house without hurting your chances? And what should you think about when deciding the right offer price? Let's dig in.
What to factor in
Determining what price to offer is always a challenge when buying real estate. And offering below asking price isn't that crazy -- the question is, how low can you go?
That really depends on the home seller, the property, and the type of real estate market it's being sold in. Here are a few things you'll want to take into account when determining what to offer on a home.
The state of the market
Offering slightly below asking price is pretty common -- at least in a slow buyer's market. If you're the only person eyeing the property and the seller has had the home listed for a while, they're probably flexible on price. They might be willing to accept less cash just to be done with it all.
If, on the other hand, it's a seller's market and there are dozens of interested buyers in the area, a lowball offer isn't going to get you far. You can bet most buyers are offering asking price or higher if the competition is really stiff.
You'll also want to look at recently sold homes, or comps, in the neighborhood. If the property you're eyeing is priced higher than these, you have plenty of justification to offer less. (The home likely won't appraise for that higher list price anyway).
But if homes are going for more than the asking price -- or right around the same number -- then a low offer probably won't work here. (Make sure you're only looking at homes of similar size, age, and condition, though.)
The condition of the home
You can usually get away with offering less for properties that need some TLC. If the home's a foreclosure or just looking a bit run down, you probably have more leeway to go down on price. You should also take into account the home's age. If its systems are all 50 years old and it needs a major tuneup, a lower price might make more sense, too.
Homes in pristine condition are the opposite scenario. Sellers can ask (and expect) a premium sale price on homes that are new, recently renovated, or move-in ready.
How motivated is the seller? If the home has been on the market for six months, you can bet they're ready to have it sold and off their radar. You should also ask your real estate agent to mine other details about the seller's motivation from their listing agent. Are they moving for a job on a quick timeline? Do they have another mortgage they're paying until this house sells? Is the sale due to a divorce?
This info can all point to how motivated a seller is to offload the property. And the more motivated they are, the more wiggle room you have on purchase price.
Cash or financed?
Are you making your offer in cash, or does it rely on a mortgage lender's financing? Financed offers are riskier for sellers, as there's always the chance that loan can fall through. They also mean longer closing processes.
If you're offering cash, it's the opposite. The seller gets a done deal, and the process is significantly faster as a result. There's also no tedious appraisal process, which can be quite the hassle for sellers. A cash offer generally qualifies you for the biggest discounts, so if you can go this route, definitely do so.
How low is too low?
There's no hard-and-fast rule for how low you can offer on a house, so use comparable sales and your real estate agent's expertise to guide you. Generally, 5% to 10% under listing price is the norm, though it depends on what other area homes are going for, as well as all the factors listed above. Again, cash offers can go quite a bit below this in the right scenario.
If you're really considering a lowball offer, try to make the offer attractive in other ways. You can:
- Offer all cash.
- Waive certain contingencies.
- Make a bigger earnest money deposit.
- Skip the appraisal (but not the home inspection).
- Avoid asking for extras, like appliances or furnishings currently in the home.
- Cover some of their closing costs.
You can also include an offer letter and make a personal appeal to the seller. Sometimes, this can be a good way to outshine other offers currently on the table.
The bottom line
At the end of the day, you're running a business, and minimizing your costs is one of the best ways to ensure healthy profits for the long haul. Before submitting a lowball offer, make sure to ask yourself "How much is the home worth to me?"
Offer what would work for your budget and also guarantee you the returns you're looking for as an investor. Going beyond this just to win a property will only hurt your bottom line long term.
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