One of the reasons why I’m always on the lookout for real estate opportunities is because every once in a while, a property will come up that seems mispriced or poorly marketed.
In 2014, our current primary residence was being marketed by a retired, out-of-town agent who only got the listing because he was a childhood friend in the 1960s. He had no pictures on the Multiple Listing Service (MLS) and only had a simple one-page, black and white flier.
Because he was not from the area, he didn’t have a network of other agents to blast his listing to. All he did was hope and pray someone made him an offer in an unknown neighborhood.
So I made a low-ball offer that ultimately got accepted after one counter. In real estate, money is often made on the purchase, not on the sale.
It turns out, there was another buyer who was willing to pay $110,000 more than my offer, but I had already sealed the deal with an old fashioned handshake. I know this to be fact because the agent who helped sell one of my SF rental properties in 2017 turned out to be the competing buyer’s agent for my existing property in 2014!
The real estate market is so much less efficient than the stock market. If you are extremely diligent at looking on your own, you should be able to find some deals. And most recently, I found an off-market listing by luck that could be a great investment.
How To Make A Respectable Low-Ball Offer
With the invention of Docusign, it has become extremely easy to submit multiple offers quickly. If you work with an agent, you can submit an electronic offer in under five minutes after she fills out all the basic offer details for you. All you have to do is e-sign with your phone. There is little downside to submitting an offer nowadays.
In 2016, I missed out on buying a property that sold for $150,000 below what I was willing to pay. After that lost opportunity, I decided to pay more attention to my neighborhood real estate market.
Here are the keys to making a low-ball offer without insulting the seller. The goal of your low-ball offer is to not get it accepted at face value. The goal of the low-ball offer is to get the negotiation started.
1) Understand the neighborhood comps. It is vital for you (and your agent) to know all the recently sold comps in the neighborhood over the past 12-24 months. You must then choose the comp that sold for the least on an absolute price basis and a price/sqft basis. This comp will act as your reasonable anchor for submitting a low ball offer, even if the comp isn’t like-for-like.
2) Understand the seller’s background. All good negotiators will try and find as much background information about the seller as possible. You should find out the following:
- Male or female seller
- Individual or couple
- Divorce sale or amicable sale
- Is the seller currently living in the house
- The size and type of mortgage
- Trust sale or regular sale
- Length of ownership
- Has the seller already bought another property
- Is the seller relocating
A savvy agent will keep this information close to her chest. However, you should be able to extract at least 3 – 5 points through normal dialogue. Don’t be so direct and ask each point one-by-one. Instead, come up with some introductory questions like, “Where is the seller moving to?” or “How long has the seller owned the property?” From there, you can expand your data gathering.
One of the key benefits of working directly with the listing agent is that you’ll be able to more readily ascertain all this information. After all, the listing agent is motivated to make you comfortable enough to put in an offer so she can earn a double commission.
3) Understand your city’s listing culture. In some markets, like San Francisco, real estate agents tend to list 5% – 10% below market price to drum up demand. The goal is to create a bidding war where one overzealous buyer overpays.
I remember putting in an offer for $1.48 million for a property in early 2014 when the asking price was $1.19 million. I felt kind of foolish submitting an offer 23% above asking price, but I knew they were underpricing the property. Further, I asked the selling agent to represent me. It turns out, the winning offer was for $1.8 million! I wasn’t even close.
Many cities seem to have a listing culture that tends to list at market price or slightly above market price because they know buyers will try to negotiate them down. The result is a final selling price that is usually lower than asking.
It is easier to submit a low-ball offer in a city with a listing culture that tends to list at market price or slightly above. But even in a market that tends to underprice its properties, you have every right to submit a full offer asking price, despite knowing the seller is hoping for much more.
4) Write a letter. Even if you use my Spray N’ Pray methodology where you’re submitting multiple low-ball offers at a time, you should still come up with a generic letter that discusses how amazing the property is, a little bit about yourself, and how you plan to cherish the property forever.
But if you really care about a specific property and want to ensure that the seller isn’t insulted by your low-ball offer, you must write as personal and heartfelt a letter as possible.
The goal of the letter is to not only make a connection, but to also make it clear that your lines of communication are open. Once you make a seller feel insulted, there’s little chance they’ll come back to the negotiating table.
Long-time owners of a property like to know that they are selling to someone who plans to own the property for a long time as well. Flippers like potential buyers to appreciate the work they’ve done on the property to make it better. Pointing out the details is a great way to make a flipper feel good.
Do not underestimate the importance of recognition. Think about all those times you got a laudatory e-mail from your boss or colleague at work for a job well done. I bet it felt great.
5) Hint that you’re willing to go higher. Your goal as a master negotiator is to anchor at the lowest price point possible without insulting the seller and then meet somewhere in the middle. The way you hint that you’re willing to go higher is through your letter and/or agent. Phrases such as, “We’re looking forward to hearing from you,” or “Please let us know your thoughts,” are effective.
Selling property is a super stressful process because you have so much to lose – your pride, your time, and your money. Therefore, even though a low-ball offer won’t be what your seller wants, if you submit a low-ball offer properly, you will make the seller feel better knowing that at least they have something to show for their efforts.
By meeting in the middle, you will make the seller feel good knowing they got more than the initial offer, even though that was your plan all along.
A Low-ball Offer Was Once A Great Offer Years Ago
One of the best situations for low-ball offers is if the seller has owned the property for a very long time. I’m talking 30 years or more. The reason why length of ownership matters in this case is because sellers are often anchored to much lower prices.
Recall how some parents continue to treat their grown adult children like grade school kids? It’s because, in these parents’ minds, their children will always be “daddy’s little girl” or “mommy’s precious boy.“
You know how some old bosses still can’t give you respect, despite you going on to become a boss at a larger firm? It’s because, in the boss’s mind, you’ll always be the intern or the grunt. This is why it’s often beneficial for employees to job hop and reset their image.
Many sellers who’ve owned for decades can’t believe the market has risen so much. As a result, they might feel guilty for trying to sell to someone who has made a connection at such a high price. In other words, as a buyer, you have much more wiggle room to negotiate, especially if the seller didn’t even buy the property in the first place.
For example, the property I’m interested in buying was sold for around $100,000 circa 1950. The listing agent is thinking of asking $1.99 million. Even if I submit a low-ball offer for $1.5 million, that is still a large absolute price gain.
So that’s what I did.
Submitting My Low-Ball Offer With Confidence
Here’s what I found out about the sellers:
- The sellers of the off-market property are two siblings in their early 70s.
- The property is in their mother’s trust and they are the trustees.
- The sellers inherited the trust.
- The siblings grew up in the place and have fond memories.
- The mother lived until 104 and peacefully passed away in hospice care.
- The property also has a reverse mortgage of roughly $500,000. The reverse mortgage was used to pay for her living expenses.
- The mother had a total of five children.
- The sellers preferred to sell to a family and not a foreign investor or local flipper.
- While I visited for a private showing, one of the daughters called to speak to the listing agent. Interestingly, the listing agent put the conversation on speakerphone a room away. I was able to hear the entire dialogue because the listing agent kept coming in to check on me. The daughter was anxious to sell the house and pay off the mortgage and her mother’s outstanding liabilities. She was thrilled to hear that I was interested and that I had a little one.
Even though I knew the listing agent wanted to list for $1.99 million or $765 a square foot, I submitted an all cash offer for $1.5 million or $576 a square foot. The current price per square foot of a home in this condition is roughly $800. Regarding pricing, I hopped into my Delorean and went back 10 years in time.
In my offer, I included a picture of my family and a real estate love letter. In my next post, I’ll share with you the details of my real estate love letter and how you can write an effective one too.
The official negotiation has begun!
Alternative real estate investing option: If you don’t want to bother going through my tactics of owning physical real estate, then consider investing in real estate crowdfunding to keep things simple. Fundrise is my favorite real estate crowdfunding platform for non-accredited investors. They were founded in 2012 and have consistently been one of the most innovative companies I’ve come across with the best product offerings. It’s free to sign up and explore.
Invest in commercial real estate: If you are an accredited investor, take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities. These cities include Denver, Austin, Memphis, and Charleston. Due to technology and the rise of the freelance economy, I think investing in lower cost growth cities will be a multi-decade trend. CrowdStreet is free to sign up and explore.