A lot of buyers like to put lowball offers on the table. You’re savvy and sophisticated if you lowball, and a sucker if you don’t. It was a strategy that I often supported, because, hey, I’m a buyer agent, right? And a lowball offer can elicit a counter from the selling side that will tell us a lot about motivation and ultimately where the seller’s bottom line might be.
In the last few months, I’ve changed my tune. I’m not sure that starting out with a lowball offer is in a buyer’s best interest, at least if they want the property. Of course, I want to help my clients get the property at the best price with the best terms. But a key objective here is get the property, and a lowball offer can sometimes run counter to that goal.
In this discussion, its important to keep in mind I’m talking about negotiating for a property with an asking price that’s realistic, within striking distance of market value. If a property has a ridiculously high asking price on it, and a buyer floats an offer close to market value, the seller may perceive it as a lowball offer, but it isn’t. Its a realistic offer. A lowball offer is different, an offer well below a reasonable market value for the property, in the hopes you’ll hit the real estate lottery and find a desperate seller who’ll jump at it, sort of like a longshot ticket at the races.
I’m finding two negative consequences of starting out with a lowball offer. It can set up a bad faith negotiating climate, with ill will at the start from the seller to the buyer. The seller can feel that the buyer’s only motivation is to ‘steal’ the property from them. They become defensive and may be actually less willing to negotiate and compromise. Even if you end up agreeing at a price you would have otherwise ended up at if you started at a higher base, the seller will remember that initial volley — and be wary of any subsequent negotiations over items like inspection or appraisal issues. Maintaining a climate of good will is one of the most important factors to a successful close, and one of the toughest jobs that brokers have. Failure to maintain a climate of good will is probably one of the main reasons that so many "For Sale By Owner" transactions, without the involvement of brokers as intermediaries, don’t successfully close.
A second consequence is that a lowball offer can motivate the seller (via their agent) to aggressively troll for another offer. I’m seeing this happen more and more. A very low offer comes in and the agent starts calling every potential buyer (or their agent) who had recently seen the property to see if they’d be willing to beat the low offer. At the right price, a buyer who had been sitting on the fence may decide to jump in. If the first buyer’s initial offer was seen as more realistic, and within striking distance of the seller’s price objective, the seller’s agent would likely negotiate the offer and not try to drum up other buyers. If you’ve ever entered into an auction on eBay for an item you didn’t really want or need just because the deal seemed too good to pass up, you get the dynamic.
As a buyer agent, one of my most valuable functions with my clients is helping them shape an offer and develop a bidding strategy. Buyers have 2 common questions — what’s the property worth, and where should we start? Regarding what a property is worth, I typically give a range, something like "I’m really comfortable with this property anywhere between price A and price B." That’s relatively easy, based on experience, comparable sales, features and quality of the property, etc. The harder question is "Where should we start?" Sometimes I give a recommended starting bid, and am surprised at how many clients want to start 10% or even 20% below that number.
There isn’t a magic starting point, nor is there some universal negotiating formula. Every situation and every negotiation is different. Sometimes you have a lot of information, as to a seller’s motivation or offer history, sometimes you have none. But one thing I’m finding lately is that lowball offers, rather than a savvy strategy that works in the buyer’s favor can actually work against a buyer’s interest. And before seller’s agents stand up and cheer that this buyer’s rep has abandoned his principles, my change of perspective is not a sign of rolling over and playing dead, but rather a maturing of my negotiating perspective. My fiduciary responsibility to my client, the buyer, to get the best price and terms for a property, remains intact. I’m just no longer sure that a lowball offer is the best first step to achieve that goal.