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Thursday, February 16, 2006

The art of the lowball offer

As housing sales slow, home buyers are in a better position to offer substantially less than the seller's asking. Here are 8 bargain-hunting tips.

By Joanna Glasner, Bankrate.com


After five years of sizzling growth, U.S. home price appreciation is showing signs of cooling.

Pending home sales -- a leading market indicator -- are down from a year ago, according to the National Association of Realtors. In many of the nation's hottest markets, brokers also are reporting a growing gap between sellers' asking prices and what purchasers are willing to pay.

For prospective home buyers, the market shift provides a chance to remaster an old negotiating tactic: the art of the lowball offer. Strategies for securing a below-market price vary by locality. In any region, however, experts say bargain-hunting buyers can close favorable deals by applying a few basic principles.

Shop in the off-seasonThe best time to buy a house is the week between Christmas and New Year's Day, says Robert Irwin, a real estate author and investor. Why? No one is looking.
"The only ones out there are people who desperately need a home or investors looking for a bargain," says Irwin.

By the same logic, early spring ranks among the worst times to make a deeply discounted offer. It's a popular time for sellers to put homes on the market, taking advantage of pleasant weather, longer daylight hours and heightened interest among buyers.

That seasonal pattern applies to most of the country. But warm climates might be the exception. Florida, Arizona and other locales popular with sun-seekers are likely to see high levels of home-buying activity in winter.

Accept imperfectionsLots of buyers are looking for spacious, well-maintained homes in upscale neighborhoods. Few will find bargains meeting that description.

To secure a low price on a home, buyers ought to accept a few shortcomings, says Ilyce Glink, a real estate writer and talk show host. This might mean a property that needs repairs or faces a busy street. It could also be a home in a more run-down neighborhood that appears to be improving.

Just don't be reckless. Buyers might be tempted by the price of a local "handyman's special." Such homes can be quite profitable for do-it-yourselfers or investors with experience in renovations. But if you're not handy and don't know any reliable building contractors, it's probably wise to pass, says Curt Darragh, president of the Mid-Hudson Valley Real Estate Investment Club. If you do pursue the purchase, Darragh recommends getting a professional estimate for the cost of repairs and upgrades.

Rejection is healthyUnless it's truly the house of your dreams, don't be upset if a seller turns down your initial offers. Rejection is a normal part of the negotiating process. Some would even call it essential.

"Never make an offer you think they will accept," says Thomas Early, president of the National Association of Exclusive Buyer Agents, who lists rejection as his first rule of savvy home buying.
His second rule? More rejection.

"Make the seller say 'no' at least twice. It's too easy to say no the first time."

Granted, that strategy doesn't work everywhere. Early wouldn't recommend it for competitive real estate markets like San Francisco or Boston, where it's been common in recent years for sellers to get multiple offers above the asking price. But for Early's practice in Columbus, Ohio, where homes sell for an average of 94% of listing price, he finds the method works well.

Make many offersBargain-oriented buyers should also plan to make offers on several homes, says Irwin. An investor who makes lowball offers on 10 houses is more likely to find a willing seller than one who pursues only one or two properties.

That said, Irwin doesn't see much point in making wildly underpriced offers. They're rarely accepted.

Find a guideWhen you see a great-looking house in a real estate circular, you might be tempted to call the agent listed by the photo. That could be a mistake.

"A lot of buyers think that 'If I call the listing agent, I'll get a better deal.' That's not true," said Bob Wilson, an agent with the Guiltinan Group in San Diego County. Because listing agents have a duty to get the best possible price for the seller, they're not suitable advisers for crafting a lowball offer.

Buyers need someone to represent their interests. Typically, that person is a buyer's agent, who researches listings exclusively for a home seeker. When a purchase closes, the buyer's agent normally splits the sales commission with the seller's Realtor. In most states, the buyer's agent is required to deal with the seller honestly but, unlike the listing agent, is under no obligation to get the highest possible price for the seller.

A good buyer's agent earns much more than the 2%-to-3% commission, says Glink. That's because buyers don't have the deep knowledge of neighborhoods, comparable homes and current prices of an experienced agent.

"Your agent is more than just someone who drives you around," says Glink. "Your agent is supposed to be your eyes and your ears, helping you sift through what information is valuable or not when constructing an offer."

Look for motivated sellersThe more desperate homeowners are to sell, the more likely they are to accept discounted offers. Therefore, bargain hunters should be on the lookout for homeowners anxious to unload their properties.

One strategy that broker Chris Edwards of Raleigh, N.C., recommends is to look for listings that have been on the market longer than normal. In Edwards' market, a well-kept home in a good neighborhood typically sells within a month. Sellers with homes on the market two months or more are probably more receptive to lower offers.

Another tactic Wilson suggests is to keep watch for announcements of large-scale company layoffs, closures or relocations. In the months to follow, large numbers of affected employees are likely to be selling their homes. This could provide a buying opportunity.

Offer incentivesThis strategy works best for people with some experience in real-estate investing. The basic premise: If you offer a lower price than sellers expect, you need to give them a reason to take your offer.

Darragh's favorite incentives include offering to close quickly, to pay in cash and to attach few contingencies to completing the deal. Such offers, he says, are particularly attractive to homeowners under duress, who might be facing foreclosure, a forced relocation or are struggling
with debt.

Don't fixate on list priceThe true value of a home might not be reflected in its listed price. A property's listed price simply reflects what a seller hopes to get, usually based at least in part on selling prices of similar homes.

Glink cautions buyers against taking too much glee in getting a property substantially below list. In some cases, initial list prices are so inflated that even a buyer who negotiates a substantial discount still overpays.

"It's no indication of what you should pay," says Irwin. "You have to do your own analysis."

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