Often when looking to put an offer on a property you will be told to consider making a low ball offer first. That is, offering less than what you believe the property to be worth. This can be a strategy worthwhile pursuing, however there are some circumstances where it works better than others.
Usually, a low ball bid will not be accepted. In this case it is best seen as a platform from which to negotiate. Sellers can reveal a substantial amount of their hand with their counter offer. If they will not discount at all, they may either be insulted or not interested in any drop below the list price at this time.
If they reduce the price by counter offering just a few thousand dollars down from their list price then perhaps they’re not going to be willing to budge to the level you are after. Some sellers may surprise you with a significant drop or even an acceptance of your offer.
When should you use a low ball offer?
Some buyers will say that you should almost always make a low ball offer first, however the truth is that it’s a little more nuanced than a blanket rule.
In areas with plenty of choice and few buyers, it’s not uncommon to see investors making low offers on a number of properties to see if they get a nibble. However, home buyers who have stumbled across a property they don’t want to see sell to someone else may want to be a little more careful with their offers to avoid missing out. Personal circumstance and the reasons you’re purchasing can affect your strategy.
The market activity also determines whether or not a low ball bid is a valid option for you. In property markets where homes are transacting fast and they are in strong demand with lots of buyers per property, it is likely not worth offering too low an opening bid.
However, on the flipside, slower ‘cold’ markets where properties are struggling to sell and vendor discounting is high can be ripe for low ball bids. If property price growth has been slow for some time or has even been dropping slightly, you may see homeowners increasingly desperate to offload their property and therefore more willing to pay attention to your bid.
It’s also worth considering the timing of your bid. When homes are fresh on the market, property owners are likely to be more optimistic and irritated by lower offers. However, if they have been up for sale for some time they may be getting increasingly desperate to sell.
Consider looking at slower seasons and in the lead up to the end of the year where vendors are really looking to finalise what is happening with their home.
You may want to consider skipping a low ball offer if:
- The market is hot
- The home is desirable
- You know higher bids have already been made
- The home is rare or scarce, adding to its likelihood of selling for a significant amount
You may also find that poorly presented properties with sub-par advertising may be more fitting targets for the low ball offer, as they may slip under the radar of other property buyers. Do not write off a home just because it requires some elbow grease.
How low should you go?
How much lower than the list price you should offer is individual to each property you are considering and up for debate.
If the home is truly asking for more than what it is worth, then start looking at the price you consider acceptable. While 5% to 10% is often deemed a reasonable discount, some people have offered up to 25% less and seen their offer accepted.
What’s crucial to remember is that you should not choose a rule of thumb and apply it to every market. You need to be able to justify your low ball bid. Is the market slow or is the home less attractive than others on the street?You should be looking to explain this to the real estate agent when you make the offer so that the feedback can be provided to the vendor. Remember not to be rude or the vendor may consider it insulting and be less inclined to consider selling to you.
To determine how much to offer consider the following statistics:
- Changes in the area’s asking price
- Vendor discounting across the suburb (or how much homes are selling for compared to how much they are being marketed for)
- Whether the property already been discounted and why that was the case
- How much activity is there in the current market?
Of course, remember that this figure is your baseline. You are open for negotiation, but cannot offer lower. Ensure you have given yourself reasonable room to offer more but not to reach your personal maximum.
Five crucial points to bear in mind
- Sometimes a vendor will unexpectedly accept a low ball offer, so ensure that you have not been making a number of these offers on properties before knowing whether the prior bid has been accepted.
- Low ball bids can irritate the vendor and the real estate agent who may believe you are taking them for a ride or not serious about purchasing. Avoiding this comes back to just how low you decide to make an offer.
- Another prospective buyer may have already offered a low ball bid. Always ask the real estate agent about any previous bids and why they haven’t been accepted to avoid failing the same test.
- Do not complicate the rest of the offer. If the vendor is likely to be taken aback by the offer you have made, do not over complicate the rest of the process. For instance, don’t be asking for settlement terms out of the ordinary or anything else that may be unsavory.
- It’s useful to know the seller’s motivation, which can let you know how likely they personally are to accept your offer and finish the sales campaign. You can read this article about how to determine what they want and why the vendor is selling.