How low below the asking price is to low to offer?

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How low below the asking price is to low to offer?

Benjamin Zwiebel
Douglas, WY · Member since 2018 · 28 posts · 14 votes

TL;DR: I want to offer on a few properties but the number that works for is well be low asking price. Like 30% lower than asking. Other than the risk of rejection is there any down side to offering? 

My market is pretty rough. My city is only 7000 permanent residents and then a few thousand other transient oilfield workers. The entire economy is tied to oil and gas, which means that when times are good rents are high and vacancy is low and then suddenly it can go bad for years. So, with that in mind, when I have been running my numbers for rentals I have been doing the math using exclusively bust time rental prices, to make sure I can survive the bad times. The problem is, is that for some reason that I don't understand, property prices here are exceptionally high whether the town is booming or busting. Because the town is very small, it also means there is very few opportunists as properties don't change hands often and 95% of the town is a mix of single family homes and low income apartments. So, I have found few properties and in order to make them work, with any kind of positive cash flow, I have to offer WAY below asking price. 

For example, there is a triplex for sale of 3, 1 bed 1 bath units. They will rent for approximately $500 per month in bust times. The asking price for the triplex is $165,000 and it has been on the market for 6 months. Doing the math at the asking price with all 3 units rented, this property will cash flow negative -$5.59 per month. In order to get to a meager $150 a month in positive cash flow, I cannot afford to offer more than $128,000. This is obviously $37,000 (or 22%) below asking price. Is this an offer worth making? Getting my offer rejected will not hurt my feelings, but is there an down side to offering this low that I am not seeing? 

Thanks in advance. 

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Tom Shallcross
Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
7y

@Benjamin Zwiebel  - you'll probably received mixed replies on this one, but the majority (and I strongly agree with the majority) will say that there is no downside.  The asking price is a number thrown out there by the seller and might not be based on anything except what he needs.  Everything is negotiable and you owe it to yourself, your partners, your contractors, and your team to stay within your discipline and only make offers that will provide value to you and the people you work with. 

So two things:

1. Before writing up an official I recommend calling the listing agent directly to see if something even lower than your target offer would even be reviewed by the seller.  This does two things, you can let him/her represent you on the buyer side so she's incentivized to make it work and she may give you info you need ("Seller told me his drop bottom is $120k"  "if you come cash to close he'll be willing to talk as he bought another house and needs to move asap"  "he's not accepting a dime under $140k"....etc).  You can also look up what the seller owes on the county site.  If he owes $145k than even if he wanted to sell at 120k you're going to have a lot of red tape and might be time to move on to the next one.  Maybe you can offer seller financing so you pay 120k but with the interest payments he gets closer to the 160k over time.  There's a lot of ways to make it work. 

2. Chris Voss was on podcast 260 and he does a great job of explaining negotiations.  I read his book and now apply what he calls the  Ackerman model to my negotiations:

1. Set your target

2. Offer 65% of your target

3. Make three raises of decreasing increments - 85%, 95% and 100% of target

4. Leverage empathy framework explained in the book without ever saying no to the seller 

5. Use precise numbers on your final offer so it is perceived as well calculated and your bottom offer

6. Offer up some sort of non-monetary incentive to show you are at your bottom dollar and also trying to make the deal work.  

There's much more to it than these 6 steps, but it's a good framework for starting a negotiation.  Be prepared to get a lot of No's, but persistency will prevail and you will be able to find common ground with one of these sellers. 

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  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
    7y

    @Benjamin Zwiebel  - you'll probably received mixed replies on this one, but the majority (and I strongly agree with the majority) will say that there is no downside.  The asking price is a number thrown out there by the seller and might not be based on anything except what he needs.  Everything is negotiable and you owe it to yourself, your partners, your contractors, and your team to stay within your discipline and only make offers that will provide value to you and the people you work with. 

    So two things:

    1. Before writing up an official I recommend calling the listing agent directly to see if something even lower than your target offer would even be reviewed by the seller.  This does two things, you can let him/her represent you on the buyer side so she's incentivized to make it work and she may give you info you need ("Seller told me his drop bottom is $120k"  "if you come cash to close he'll be willing to talk as he bought another house and needs to move asap"  "he's not accepting a dime under $140k"....etc).  You can also look up what the seller owes on the county site.  If he owes $145k than even if he wanted to sell at 120k you're going to have a lot of red tape and might be time to move on to the next one.  Maybe you can offer seller financing so you pay 120k but with the interest payments he gets closer to the 160k over time.  There's a lot of ways to make it work. 

    2. Chris Voss was on podcast 260 and he does a great job of explaining negotiations.  I read his book and now apply what he calls the  Ackerman model to my negotiations:

    1. Set your target

    2. Offer 65% of your target

    3. Make three raises of decreasing increments - 85%, 95% and 100% of target

    4. Leverage empathy framework explained in the book without ever saying no to the seller 

    5. Use precise numbers on your final offer so it is perceived as well calculated and your bottom offer

    6. Offer up some sort of non-monetary incentive to show you are at your bottom dollar and also trying to make the deal work.  

    There's much more to it than these 6 steps, but it's a good framework for starting a negotiation.  Be prepared to get a lot of No's, but persistency will prevail and you will be able to find common ground with one of these sellers. 

    49Reply
  • Amanda G.
    Rental Property Investor · Augusta, GA · Member since 2017 · 825 posts · 278 votes
    7y

    I like the target method, but I tend not to go all the way to 65% below it. I set my target, and then my initial offer, and then use the 85/95/100 on the spread.

    7Reply
  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
    7y

    @Amanda G. - yes I agree it's situational on how low you should offer from the get-go as every circumstance is different and markets are extremely competitive.  Regardless of which numbers we use, Just having that planned process of how to get to an agreement has been great.  

    I've only recently implemented this (and I don't make that many purchases so it's not like I'm making daily offers) but it has installed a higher level of confidence and also made it easy for me to not get attached to the deal and walk away when I'm past my 100% number. 

    2Reply
  • Bill Plymouth
    Real Estate Agent · Philadelphia, PA · Member since 2018 · 416 posts · 396 votes
    7y

    There is no risk. As an agent, I always suggest to offer just enough to get a conversation started. If the property you're looking at is on the MLS, look at days on market. If it's a FSBO on Zillow see how long it's been listed. Every day on market is a bargaining chip for you. They may not accept your offer the first time around. Go back a week later and come in with another offer.

    Also, try to includ as little contingencies as possible.  Especially if you’re coming in low.  There are other ways to make your offer attractive other than the purchase price.  

    Hope this helps.  Good luck!

    13Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Benjamin Zwiebel the down side is wasting your time and getting a bad reputation as a low baller. A city of 7000 is pretty small, so trust me if you start throwing around low offers, people will quickly consider dealing with you a waste of time. 

    Properties are not valued at what rents were in the past during a "bust". They are valued based on current rents. Future prospects always figure into value, but I think you may be putting too much weight on a "bust" future.

    Six months on the market is a long time, so the seller is probably priced high and the seller is not very motivated to sell. You mentioned limited supply in the city, which is a factor that will keep prices higher.

    No problem making offers, but if they are that low, I would make them cash offers with no contingencies. Sellers are more likely to take lower offers if they perceive them as trouble free. The answer may also be looking in a different market or looking for off market deals. 

    15Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y
    @Benjamin Zwiebel there is far more risk in offering a higher price that ruins your numbers, and have that accepted, than offering a price that works for you and is rejected.
    8Reply
  • Abraham Anderson
    Investor · Sevierville, TN · Member since 2015 · 121 posts · 674 votes
    7y
    My philosophy is, if your offer doesn't embarrass you, it's too high! You'd be surprised at how inflated it can be sometimes. Asking price was $150K on a property I looked at recently, and I got it under contract for $97.5K.
    12Reply
  • Benjamin Zwiebel
    OP
    Douglas, WY · Member since 2018 · 28 posts · 14 votes
    7y

    Thank you all very much for your answers and advice. Sounds like the general consensus is go for it. So I will go and make a few offers. I dont imagine they will be accepted, but hey, you never know. 

    5Reply
  • Benjamin Zwiebel
    OP
    Douglas, WY · Member since 2018 · 28 posts · 14 votes
    7y
    Originally posted by @Joe Splitrock:

    @Benjamin Zwiebel the down side is wasting your time and getting a bad reputation as a low baller. A city of 7000 is pretty small, so trust me if you start throwing around low offers, people will quickly consider dealing with you a waste of time. 

    Properties are not valued at what rents were in the past during a "bust". They are valued based on current rents. Future prospects always figure into value, but I think you may be putting too much weight on a "bust" future.

    Six months on the market is a long time, so the seller is probably priced high and the seller is not very motivated to sell. You mentioned limited supply in the city, which is a factor that will keep prices higher.

    No problem making offers, but if they are that low, I would make them cash offers with no contingencies. Sellers are more likely to take lower offers if they perceive them as trouble free. The answer may also be looking in a different market or looking for off market deals. 

    Thanks for your reply Joe. I wanted to talk to talk to you specifically since you were the one voice of caution. 

    I would love to invest in another market but I just cannot afford it and at my current saving plan it will take me 4 years to cobble together enough money for a 25% down payment on something. That is why I am looking to do my 1st deal here where I am living. My goal is to house hack my way into turning that 3 year savings plan into 1.5 years. But my market is hard for everything. 

    As far as planning for a bust future goes, the only I can garuntee about my market is that it will bust again. Oil and gas is wildly unpredictable and since coal went belly up, oil and gas is the only major employer in the town. It goes it cycles but they are biased on so many factors world wide that they cannot be predicted. The last bust in 2015 came when Saudi Arabia got mad at Russia and flooded the market with cheap oil. In 2 weeks the towns economy crumbled. That is why I feel I bust plan to see any kind of positive cashflow in bust times if I will survive it. 

    0Reply
  • Cartus Aikens
    Rental Property Investor · Greensboro, NC · Member since 2017 · 32 posts · 8 votes
    7y
    @Benjamin Zwiebel
    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y
    Originally posted by @Benjamin Zwiebel:
    Originally posted by @Joe Splitrock:

    @Benjamin Zwiebel the down side is wasting your time and getting a bad reputation as a low baller. A city of 7000 is pretty small, so trust me if you start throwing around low offers, people will quickly consider dealing with you a waste of time. 

    Properties are not valued at what rents were in the past during a "bust". They are valued based on current rents. Future prospects always figure into value, but I think you may be putting too much weight on a "bust" future.

    Six months on the market is a long time, so the seller is probably priced high and the seller is not very motivated to sell. You mentioned limited supply in the city, which is a factor that will keep prices higher.

    No problem making offers, but if they are that low, I would make them cash offers with no contingencies. Sellers are more likely to take lower offers if they perceive them as trouble free. The answer may also be looking in a different market or looking for off market deals. 

    Thanks for your reply Joe. I wanted to talk to talk to you specifically since you were the one voice of caution. 

    I would love to invest in another market but I just cannot afford it and at my current saving plan it will take me 4 years to cobble together enough money for a 25% down payment on something. That is why I am looking to do my 1st deal here where I am living. My goal is to house hack my way into turning that 3 year savings plan into 1.5 years. But my market is hard for everything. 

    As far as planning for a bust future goes, the only I can garuntee about my market is that it will bust again. Oil and gas is wildly unpredictable and since coal went belly up, oil and gas is the only major employer in the town. It goes it cycles but they are biased on so many factors world wide that they cannot be predicted. The last bust in 2015 came when Saudi Arabia got mad at Russia and flooded the market with cheap oil. In 2 weeks the towns economy crumbled. That is why I feel I bust plan to see any kind of positive cashflow in bust times if I will survive it. 

    I am not disagreeing with you on your concern about the local economy. The problem is if the sellers in the market and other buyers don't recognize the same concern, it will not affect values. You may have to wait for something to drive the market down. Saudis are flooding the market somewhat right now, but it probably hasn't been enough to hurt your economy yet. 

    Make whatever offers you want, but think about it this way. If a seller is willing to take 30% below asking, why wouldn't they just drop their asking price 10% on the MLS to spur interest, instead of taking your offer? Another question is what price have comparable sales been at in the last 6-12 months? That will give you a good idea if the price is fair to market.

    1Reply
  • Cartus Aikens
    Rental Property Investor · Greensboro, NC · Member since 2017 · 32 posts · 8 votes
    7y
    @Benjamin Zwiebel if the numbers don't work don't force them.its not a good deal.its all about numbers.
    2Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Benjamin Zwiebel I would offer what you fee comfortable with. The worst they can say is no, and either counter or not.

    I paid $80k for a house listed $116k and.. $187,500 paid for another listed $219,900.. and they paid $10k of my closing costs.

    I looked at a cheap foreclosure last year, listed at $19,900, I was ready to offer lowball $10k, they had already accepted $8k.

    Go with your gut and what will make you $!

    5Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    It’s okay to offer a lowball price here and there but I wouldn’t do it all the time or you’ll get a bad rap or if it’s really really low you’ll offend the seller and he will refuse to deal with you again or counter . All that being said your deal sucks and even with 30 grand off it still sucks so I’d keep looking . 1500 in rent on a 165k property is not going to work .
    2Reply
  • Benjamin Zwiebel
    OP
    Douglas, WY · Member since 2018 · 28 posts · 14 votes
    7y
    Originally posted by @Dennis M.:
    It’s okay to offer a lowball price here and there but I wouldn’t do it all the time or you’ll get a bad rap or if it’s really really low you’ll offend the seller and he will refuse to deal with you again or counter . All that being said your deal sucks and even with 30 grand off it still sucks so I’d keep looking . 1500 in rent on a 165k property is not going to work .

     I agree Dennis, but that's the market here. The deals always suck. Especially if you want multifamily, which is all I would consider buying in this community. Like I said, the town is split between over priced homes and low income apartments. The low income apartments drive rent prices down because they are federally subsidized and make up about 70% of the rentals here. 

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    You need to learn to value the property completely independent of the list price of the property. (And no your desired cash flow is not a way to value it).

    Then you need to come up with a strategy to get the property to that price. 

    If the property has been listed for 6 months with no price drop, thats indicative to me that both the property is over priced, and the owner is not interested in selling for a number close to how the market would value the property.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    6Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y
    @Dennis M. Was that post to me? Because you have no idea what you are talking about with the 2 properties I mentioned. The $80k house I sold after 5 years and walked out of closing with $85k free and clear in my pocket. The other house is my primary residence, worth $320k+ after being here 3 years and doing some cosmetic remodeling.
    1Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    @Matt Michaelson No sir , not to you
    0Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y
    @Dennis M. Ok good. Sorry if I got snippy. This thing sent me a notification that your message was to me.
    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    Originally posted by @Matt M.:
    @Dennis M. Ok good. Sorry if I got snippy. This thing sent me a notification that your message was to me.

    Hey it’s monday everybody is allowed to be a bit snippy on Monday !  

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Matt M.:
    @Dennis M. Ok good. Sorry if I got snippy. This thing sent me a notification that your message was to me.

     Matt Im glad you mentioned that. Ive gotten some mention tag notifications for posts Im not actually tagged in. Ill let those who handle such things to put in a ticket for the developers.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
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    2Reply
  • Cassi Justiz
    Rental Property Investor · Edmond, OK · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    When I'm working with investor clients, I tell them that I will write up low offers for them as long as they justify their rationale to me. I want to know how they came to the number they want to offer. I ask if they are looking at cash flow, cash on cash return, cap rate, plans to re-fi at 70% of appraised value, etc. I don't like the idea of throwing out low ball offers just to low ball. Especially if the house is priced reasonably and in turn key condition. But if you can justify your offer in one way or another then go for it. 

    In such a small town, you do have to be conscious of your reputation as a buyer.  You don't want to be "that guy" that just throws out a 50% offer on every single listing that hits the market. Just be conscious about your decision making process and make offers that work for you! 

    7Reply
  • Daric Myers
    Gillette, WY · Member since 2018 · 44 posts · 19 votes
    7y
    @Benjamin Zwiebel Hey again, I personally believe the true deals are found by situation and not by the numbers themselves. I may have interpreted this wrong, but I believe it was Grant Cardon that said to go to the decision maker for the negotiating, then put in the offer through the realtor. It could turn weeks of back and forth to a 2 hour conversation. Please correct me if I'm wrong BP.
    2Reply
  • Chris Purcell
    Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
    7y

    @Benjamin Zwiebel

    If they say yes on your first offer you left something on the table

    1Reply
  • Benjamin Zwiebel
    OP
    Douglas, WY · Member since 2018 · 28 posts · 14 votes
    7y
    Originally posted by @Russell Brazil:

    You need to learn to value the property completely independent of the list price of the property. (And no your desired cash flow is not a way to value it).

    Then you need to come up with a strategy to get the property to that price. 

    If the property has been listed for 6 months with no price drop, thats indicative to me that both the property is over priced, and the owner is not interested in selling for a number close to how the market would value the property.

     Hey Russell. Can you tell me a little more about what you mean about "learning the value of the property"? The way I have been determining the value of a the property, to me, is that I have been using the a slightly less draconian version of the metrics that Brandon Turner puts out for multifamily properties (which is all i am looking for here.) Brandon says he wants $100 per door in positive cash flow and a 12% or better cash on cash return. My market is rough so I have dropped my metrics to $50 per door cash flow (in bust times) and 8% cash on cash return. Other than that, what value is there that I should be considering? Am I missing a piece of the puzzle when it comes to determining what I should pay for a property? 

    0Reply
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