How Much Should My First Offer Be?

December 16, 2013

The following is a guest post by Eric Tippelt, a professor at Loyalist College who also goes by Uncle E. His personal blog can be found at BabySteps2Wealth.

Probably the number one question that comes up during my “How to Buy a House” course is: “How do I know how much my first offer should be”? The answer that every real estate investing course will tell you is, that you should offer 50 cents on the dollar. That means that if the asking price is $200,000.00 then you should offer $100,000.00.

Now let’s come back to reality. If you’re an investor, you can do this. As a matter of fact, you need to do this. But if you’re buying your first home, or even your 3^rd, this isn’t your best opening strategy. In most cases, you are buying someone else’s “HOME”. They are emotionally attached to it, and those emotions can, and will, override any logic.

The Seller

Let’s look at the emotional factors first as these are the hardest to overcome. Sellers come in 3 basic flavours:

Sellers who have a listing price which is higher than what they thought they would get (Best case for the Buyer)
Sellers where the listing price is what they were expecting, (normal situation)
Sellers where the listing price is less than they expected (usually my situation)

The next emotional factor is the urgency to sell. How badly do they NEED to get the house sold? The last emotional criteria is, have there been any other offers on the house? (Note; you will seldom know the actual previous offer price) These are the key things that you MUST know.

The Buyer

Now let’s also look at you, the buyer, and your emotions:

The list price of the house is either below what you feel it is worth, (worst case for getting a good deal, you tend not to negotiate as hard)
The list price is what you feel is a fair price
The list price is definitely over what you think the house is worth (usually means you don’t make an offer, often a mistake)

As with the seller, how badly do you NEED to find a house? Your view of the house price and your NEED will dramatically affect your offer price.

The Agent

The next biggest factors are the experience of the agents involved. Your real estate agent MUST be comfortable making “low” offers. They need to have experience in dealing with the initial reaction of the seller and possibly their agent. Experienced agents understand and can convey that the initial offer is only a starting point. They understand that a sale only happens when both the seller and the buyer agree on a price.

These are the main factors in setting an initial offer price. The secondary issues are the actual physical state of the building. These issues are usually easier to deal with as they can be physically seen.

The reason that you MUST know the position of the seller, and their NEED to sell is, because the only time you, for sure, make money on a house, is when you are buying it. This is true for two simple reasons:

Buying is the only time YOU HAVE COMPLETE control of the situation
Because a house is only worth what someone wants to pay for it

An Example

Let’s look at an example. The listing price of the house is $200,000.00. Your agent has found out that the seller is being transferred to a new city in a month. The listing price for the house is about what they expected, and there has been one offer that fell through. Your agent feels that the seller is anxious to sell before they get transferred. How do you set your initial offer?

You get your agent to pull the sales of comparable houses in the area, and look at what they sold for. Let’s say for example, the prices ranged from $192,000.00 to $202,500.00. This shows that the listing price is in the right ball park. Next, how comparable is the $192K house? This can be justification for your “low” offer. With one deal already failed, and the seller “anxious” to sell, fear of loss might be on your side.

You have decided that you want to pay as close to $190,000.00 for the house as possible. To you, this is a good deal, and is below the comparable market range. In order for you to “meet in the middle” at $190,000.00, your first offer then is $180,000.00, or a little less. An insultingly low offer ($100,000.00) is very difficult for your agent to justify, and can make the deal much harder.

If you are using a good agent, there will be a “Signed Back” offer. The price of the Sign Back will tell you what you need to know. If it comes back at full list, or only a movement of $1000.00, you are not likely to get the house for $190,000.00. If the Sign Back has a movement of $5000.00 or more, you might be in luck. Please note; your agent MUST come back with a Sign Back, even if for the full list price. That is the only proof you have that the offer was even presented to the seller.

You can always have your agent present a 50 cent on the dollar offer. Some might even go through. This works for investors because they are not buying the house for themselves. If this one doesn’t work, they just go on to the next one. That usually isn’t an option when you’re trying to buy a house you’re going to live in for the next several years before the start of school.

Never feel guilty about submitting a “low” initial offer. Because:

You can always increase your offer
It is your money that you are spending
This is a NEGOTIATION
The seller can always say NO
You can seldom lower your offer

Low offers need to be accompanied by very few conditions. As the price rises during the negotiation, you can, and should, add more conditions or inclusions. For example, at $180,000.00 the only conditions are financing, and home inspection, and no inclusions other than what was on the listing. During the next round you would go up say $5000.00 but you would add that you want the fridge and stove. Closing time can also be a major negotiating tool. In the above example, the seller is transferring in 30 Days. A 90 day closing is not nearly as attractive as a 30 day closing.

Remember that not every good deal is based on money alone. Happy house hunting.

Eric Tippelt (Uncle E)