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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  • Benjamin Zwiebel
    OP
    Douglas, WY · Member since 2018 · 28 posts · 14 votes
    7y
    Originally posted by @Cassi Justiz:

    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! 

     Thanks Cassi. I am certainly not trying to low ball just to low ball. All of my math is done based on getting a $50 per door positive cash flow per month and an 8% cash on cash return. Both of which I feel are fairly modest metrics. But the cost of property is high and the cost for rent is low. That is why the huge discrepancy between their asking price and my offer price.  

    0Reply
  • Angela Yan
    Rental Property Investor · San Francisco, CA · Member since 2017 · 207 posts · 138 votes
    7y

    Right out of the bat, no. I bought a 4 plex at your price in Columbus ohio at that price and they all pay $700 per month. I would look into other markets or offer a lot lower. 

    2Reply
  • Brian Clark
    CA · Member since 2018 · 1 post · 0 votes
    7y

    How you below or above the asking price depends on how bad you want it!

    0Reply
  • Ryan Dossey
    Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
    7y

    "The seller's asking price is meaningless" is one of the best quotes I've heard in real estate. 

    This especially applies when you're doing direct to seller marketing, dealing with FSBO, or distressed properties.

    We explain the condition, the cost of repairs, and try to come to a mutually beneficial transaction. They don't always see the light... but a LOT of them do. 

    3Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    There isn't a 'too low'. Make the offer that works for you and your strategy. In general , the best deals I see, are usually 20-30% of the true ARV.

    0Reply
  • Brad Braun
    Realtor · Charleston, SC · Member since 2018 · 84 posts · 51 votes
    7y

    In my market, homes typically sell for 98-100% of asking price, typically with 5-10 multiple offers.  You'd never get one for 65% of market value.  We call those "unicorns". Each market is different, I'd love to be in a buyer's market that was so downtrodden that I could offer 65% of a homes asking price, but in a strong seller's market, that doesn't exist.

    1Reply
  • Jim Macedon
    Round Rock, TX · Member since 2017 · 86 posts · 45 votes
    7y

    If your market is certain to bust in the foreseeable future, why would you buy now?  I don't generally advocate waiting around for a downturn, but your case seems unique.

    0Reply
  • Rafael Zavala
    Investor · Lebanon, PA · Member since 2016 · 62 posts · 65 votes
    7y

    as warren buffet say, dont be afraid of asking as much as you want , when you are selling and as little as you want , when you are. Buying. Personally i always offer the amount that works for me regardless  of what the house is worth, or what the  asking  price  is.   I have made so many offers in 3 years,  i don't  even remember  how many that was, out of them 11 were accepted,  works for me and im making money, which  is the number 1 reason  im an real estate  investor  in the first place. 

    5Reply
  • Roshan K.Pro Member
    Oklahoma City, OK · Member since 2017 · 258 posts · 215 votes
    7y

    Offer as low as you want. I'll send out a 100 lowball offers before I send out one closer to list price. I don't care about my reputation, because the thing is, once a contract is signed, I close. So if I'm known as a guy who lowballs but comes through, I'd take that over someone who overpaid. 

    Regardless, I have no concern over my reputation as a real estate investor. I make offers and if I don't hear back, great move to the next one. And if that property is still on the market again 30 days later, I make the same offer again. 

    Don't care about your reputation, as long as you actually close on signed contracts

    0Reply
  • Matthew Johnson
    Jackson, TN · Member since 2017 · 12 posts · 11 votes
    7y

    @Benjamin Zwiebel I wouldn't feel bad about making a much lower offer. 

    You may not necessarily know the position of the seller, but if it seems like they need to sell it, and you don't necessarily have to buy it, then you have the leverage. If it turns out after you make a lower offer that they don't have to sell it and will not for a much lower price then you just move on to the next deal. 

     Be patient and never feel like you have to buy something. 

    0Reply
  • Scott Schaar
    Rental Property Investor · Evansville, IN · Member since 2018 · 62 posts · 53 votes
    7y
    Just make offers, you never know what they'll say . What's the worse thing that happens . They say NO, I've heard lots of No . If they say yes just think how much money you saved, from that one yes .
    0Reply
  • Luciano A.
    Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
    7y

    I have no shame in offering what I feel is right for my investment strategy. That said you might have to make 10-20 offers before you get a seller that is motivated whether its due to a job transfer, health, divorce etc. However, given its currently a sellers market your strategy might work better when it becomes a bust market. I picked up properties for cheap in Houston back in 2008-2010. I tend to try to work with sellers agent directly. As mentioned in BP podcasts that agent has more of an incentive to try to find common ground for both parties. Call and speak with agent or email and ask to make an informal offer. If they reject no need to waste paper and send a full contract. When you make an offer, add something to entice the seller, like quick close or all cash. I will go in and make an offer and state that I will do inspection for informational purposes only. I will not use inspection to try to knock price down further if they already agreed to my offer. Best of luck take your time. Real Estate is at top or near top dont need to rush and get caught at the height of the boom. 

    0Reply
  • Frank Patalano
    Rental Property Investor · East Providence, RI · Member since 2018 · 1k+ posts · 1k+ votes
    7y

    @Benjamin Zwiebel

    I've submitted plenty of low-ball offers. One example is a 4-unit short sale. The owner owed 275. I offered 169. The bank countered at 179. That means they were willing to take a $90,000 haircut. The owner actually gave me an attitude and said that if he could buy it at 169 then he could have made money. I responded "Good, that's my goal". I ended up passing on the deal because the property needed work. It would have been tough to do a wholesale or double close because it was a short sale. If you're worried about your location being too small, offer it through a partnership name, or an LLC.

    0Reply
  • Luciano A.
    Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
    7y

    One offer of advice with cashflow. Making $150 a month on three unit property is in my opinion too risky. I would want at least $500 if not more. If a water heater goes out you loose months of cashflow to pay back for that new water heater. I know taxes and depreciation off set this but just basic math. A new AC system will eat up your cashflow for over a years income. 

    Getting lower cashflow bc you did BRRRR strategy is different. But also small cashflow when you have 30 properties is doable but not if you have 1-5 properties. It will have you spinning in place without getting ahead.

    too many people feel like they need to get into the market. It was like my friends in CA that had to buy because they were afraid they would be priced out of the market if they dont buy now. Be patient take your time. DONT be emotional. Real Estate like stock market if done right is about numbers. 

    1Reply
  • David Lichtenstadter
    Rental Property Investor · Northern NJ · Member since 2016 · 341 posts · 144 votes
    7y

    If you are not embarrassed with you offer then it was probably to much, and obviously the numbers have to work, however in a competitive environment the seller or agent might not take you serious. 

    1Reply
  • DJ DawsonBusiness Member
    Real Estate Agent · Sacramento, CA · Member since 2015 · 394 posts · 259 votes
    7y

    An investor I know who is VERY successful said this and it has stuck with me ever since, "If your offer doesn't embarrass you a little, ITS TO HIGH"

    Business is just that BUSINESS. If they take it GREAT, if not we move on to the next.

    take the emotions and pride out of it and you'll be a smarter investor

    0Reply
  • Rich S.
    Central, MN · Member since 2015 · 148 posts · 184 votes
    7y

    I think the one thing folks are missing when giving advice is how small the market is where this investor is looking.  I completely agree that you always need to offer what works for you and don't worry about what others think and that is a great strategy in high volume areas with lots of opportunity.  That doesn't seem like the case here.  It sounds like a tricky spot for @Benjamin Zwiebel... I think the biggest factor is sticking to your numbers and only moving forward if your numbers can work.  Another key I think is looking for ways to CREATE opportunity by converting a property to multi-family, MHP, etc... I say this because with a smaller town, opportunities are fewer, so you may have to think outside the box.  If your goal is to invest in your town, because you want to make money, but also because you care about it, throwing lowballs all over the place I'm afraid will leave you on the outside looking in.  In a large market, I completely agree with the strategy of not caring... but in yours, not so much.  The last thing I would say is make sure your RE agent and yourself are on the same page... their reputation is at stake if you lowball all the time as well...again, not a big deal in a big market, but I'd guess a pretty big deal in yours.  Good luck.

    1Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    7y

    @Benjamin Zwiebel throw a super low ball offer, in the mean time keep looking for deals. I would be leary of the market since its based solely on oil and gas. Have you thought about investing out of state, there are other markets that could make better returns or even consider out side of your home town may be more stable more markets. 

    My rule of thumb when investing I look at population demographics, jobs in the area, as well as how close in proximity to hospitals and universities/colleges. 

    1Reply
  • Brian Midden
    Flipper/Rehabber · Kansas City, MO · Member since 2018 · 44 posts · 9 votes
    7y

    When presenting your offer I would mention everything you have said above. Let them know that if you paid their asking price, you would loose $6.00 a month. Then present the offer and explain why. 

    If the property has been on the market for 6 months then it seems that it is priced to high.

    But even with the offer you are wanting, your numbers seem to be VERY thin. The moment you need a major repair would put in the hole for a while. 

    Is the $150 a month total cash flow for all 3 or $150 per unit. Either way that is a pretty low ROI if you got the property for $128,000.

    $150 cash follow= CAP rate of 1.4%

    $450 cash follow- CAP Rate of 4.2%

    The ROI you are wanting to receive is completely up to you. Just determine if a profit of $1800 or $5400 (depending on the cash flow) is worth it.

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Benjamin Zwiebel:

    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. 

    No formula.  Let me give you an example of me paying more, and one where I paid less:

    There was a property listed on the MLS that was way below what it was worth. They put it up for $750k. I called 5 minutes after it hit MLS and told the agent "DEAL! I'll wire the $ right now. Full asking". He laughed and said he's already gotten higher offers. I ended up paying $840k (well, $815k net as I had myself in for a commission).

    But a few weeks later I had it appraised for my refi.  Value was $1.2m, so bank gave me a loan for $900k.  I'm now in it for less than $0 and have a cash flow property.

    On the flip side, there was a property listed downtown for $3.2m.  I offered $1.5m.  Less than half.  After several months (of him trying to get north of $3m) we settled on $2.1m

    Moral of the story, there is no formula or right answer.  Depends on the deal.  I just gave two examples.  One of which I offered full ask, and ended up paying over ask (but even over ask was still a great deal).  And another example of offering way less than asking and eventually meeting somewhere in the middle (which was still ~30% less than the origional asking price)

    1Reply
  • Derrick Gordon
    Investor · Tri State Area · Member since 2018 · 107 posts · 24 votes
    7y

    I always believe you should offer what you research says you can afford. If you run the numbers, know your cost, know your estimated profits, that is what you offer. If they are asking 330k and you know you need to get if for 235k for it to make sense for YOU, 235 is what you offer. Stay within your budget, not someone else's. Do not chase asking prices, better to lose a bid, than lose your shirt. Just because someone wants a price, does not mean it is the right price for you.

    0Reply
  • Mauricio Ramos
    Rental Property Investor · San Antonio, TX · Member since 2016 · 87 posts · 31 votes
    7y

    Sellers, especially if listed by a broker, will always ask more than what they want to get, and usually more than the property is worth. Call it room for negotiation or something else.

    To generally answer your question, until you get replies or letters in the mail about how offended they are with your low ball offer,  saying things like who do you think you are to be offering that low, etc etc etc.... you offers are too high.

    Good luck!

    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    Make the offer that works for you. If they reject it, good riddance, it's not a good deal at anything above your offer price. I think it would be a mistake to buy this property BTW...

    0Reply
  • James Mercure
    Realtor · New York, NY · Member since 2018 · 27 posts · 21 votes
    7y
    @Benjamin Zwiebel once you are well qualified even though your offers might be low the seller’s agents or sellers will always make room for negotiation. If you know the market don’t keep lowballing the other parties or they won’t take you serious. Also, be well aware of the competition because while trying to save a few bucks someone else might steal the deal. Good luck!
    0Reply
  • Mayer M.
    Investor · Cherry Hill, NJ · Member since 2016 · 860 posts · 324 votes
    7y
    @Benjamin Zwiebel Offer what makes sense. The gap between the ask price and what you’re willing to offer is irrelevant.
    0Reply
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