How Low Can We Go?

August 27, 2011 7:16 AM

How low is too low when offering bids to buy a house?

We are looking for a house in Pittsburgh and recently toured a 5-bedroom brick house in our neighborhood. It's priced at $59k, which I believe is pretty reasonable. There did not appear to be any structural/electrical problems but there were a number of minor superficial issues that will need to be corrected.

I understand that the next step of the process is that we offer a bid for the house. What is the protocol for the bid? How does the negotiation work? Is there a percentage you bid below and work your way up from there?

Afterwards, how do you handle any work that needs to go into the house? Does that get negotiated as well?

I am obviously new to the entire process and would appreciate any guiding words about home-buying. Thank you!

posted by amicamentis to Home & Garden (13 answers total)

Get a really firm idea in your mind of what you are looking to spend. Base this number on an extremely honest assessment of your finances. If you've never owned a house before, it is difficult to explain the surprised ways in which it will be more expensive than you think. You're also going to want to change things (such as painting) after you move in. As a minimum conservative estimate, tack on an extra $400 a month to what your mortgage payment will be to cover these expenses.

Your first offer is going to be a lowball offer to test the waters. Last year I purchased my first house. The asking price was $270k. Our initial offer was $235K. We did not want to spend more than $250K, max. Our real estate agent told us we'd never get them that low. They rejected our first offer and came back with $268K (a joke of a counter offer).

We let them wait a few days, then came back with $250K plus $5K in closing costs paid by them (effectively making us pay $245 for the house - this is a good trick, because it makes them still think they're getting a lot for the house, versus offering $245K and no closing costs). They rejected and came down to $255K. We said that was too much and "walked".

Being able to "walk" is very important. Say it and mean it. Don't let your realtor know you are bluffing. We had our realtor start showing us different houses over a two week period. We had serious discussions in his presence about how awesome this or that new house would be. Sure enough, a week after making our offer, their realtor started contacting ours and asking if we planned on making any other offers. We let them squirm for another week.

Then we came back and remade our last offer, of $250K with $5K in closing costs paid by them. We made it clear that this was our "last and final offer" and that they had 24 hours from that moment to accept or reject. Two hours later they accepted.

It is important to keep your nerve. The housing market sucks. It is unlikely someone else is going to come along and outbid you. Patience is key. And even if you do lose the house, I promise there are other houses out there that you can love.

To answer your other questions, you get the house inspection done after an offer has been made and accepted. When you sign the offer contract, there will be wording there to protect you, such as "if more than $2K worth or repairs need to be made to the home (and trust me, 2K of repairs can be found in ANY home) then buyer can walk at any time." After the inspection you'll get a list of the things that are wrong. Now you have to really decide whether you want certain things fixed. This opens a new round of negotiations that either the seller has to fix, or essentially provide money for you to fix (by lowering price whatever amount). This can go back and forth, too.

Eventually, after a stressful and exciting period of time, you will close on your house and move in.

Good luck!
posted by corn_bread at 7:26 AM on August 27, 2011 [23 favorites]

If you have a real estate agent you're working with, they can help you think about how much to bid. In my experience, there's no formula for it--it can depend on things like how the market is, how long the house has been on the market (so how desperate the seller might be getting, for instance. If it's been on the market a week, the seller probably isn't ready to cut the price by much. If it's been on the market a year? Different story). Once when we had a small house on the market, we got several super low-ball offers from people looking to buy for renting, and we just rejected them, whereas if you're more or less in the ballpark, the seller might come back with a counter offer. If the market is strong (not likely these days), you might not get away with anything but a full-price offer.

You can build any repairs you want done into your offer. The seller's counter-offer may refuse to do them. For instance, you might offer $57k as long as appliances are included and the broken fence is fixed by the seller; the seller might come back with "OK, $57k, but we're not gonna fix the fence." This is part of the negotiating process. If you ask for too much and seem unreasonable, the seller may not see you as someone worth working with and may not counter-offer, so the advice we got was always to ask for only the things that were real deal-breakers. Also, one piece of advice I see a lot is that it can actually be a bad idea to ask the seller to do repairs--their motivation is going to be to do it as cheaply as possible, not necessarily to do it as well as possible, since they won't have to live with the results. One alternative is to ask for a certain amount of money toward the repairs, which you would get at closing. So you might say, "Seller to give buyer $500 toward new flooring." Their counter-offer might OK that, or refuse it. You will also consider the repairs that need to be done when you make your offer--but they might already have taken them into account when they set their price. They might have listed it at $62k except they knew it needed work, for instance.

You mention that the house appears to be in good shape, but your offer will be contingent on an acceptable inspection. If anything major shows up in the home inspection, that can re-open negotiations or kill the deal.

One thing that can help you in all this is to try not to get too attached to a specific house, or get caught up in the drama and excitement of buying. Be ready to walk away if the deal doesn't work out--there will be another house for you. Think in advance about what your upper limit is, and be ready to say "no thanks" if you can't get the house for that. It's too easy when spending a lot of money to think, "oh, what's another couple thousand?"

All my expertise in this area comes from having bought four houses and sold three.
posted by not that girl at 7:33 AM on August 27, 2011 [1 favorite]

Being able to "walk" is very important. Say it and mean it.

Seconding this. I had a price in mind, and a couple of key conditions (about a proper survey being done, and some other things), and that was my bottom line. They were wishy-washy about those conditions, and our first deal fell apart because of it. I waited a couple of weeks (which was a risk, sure), and came back. This time, I got everything I wanted.

I probably overpaid by a little bit, but I was happy to pay that money for this house, which is all that matters.

You hear all kinds of things when you negotiate something like this, like starting at 5% below asking or whatever, but I think corn_bread has it. Whatever your first number is, it has to be a serious number. Keep your ultimate number in mind, and stick to it. Be prepared to walk, and let them know you're serious about walking.

If I can offer some of Father Renault's advice, you know you have a good deal when no-one walks away happy -- everyone had to give away something.
posted by Capt. Renault at 7:52 AM on August 27, 2011

I will nth the "walking"--that's how I got my first house, in fact.

Incidentally, you very likely don't want the seller doing the repairs. Because they will do the cheapest possible job. It's usually better to ask for cash back at closing to cover anything major.
posted by thomas j wise at 8:04 AM on August 27, 2011 [1 favorite]

I made a low offer, and sent it along with a long-ish letter detailing how much I liked the house, and then listing all the things wrong with it and estimates for fixing all those things up. The claim was made that the seller had had a lower limit for what she was willing to accept in mind, but the letter lowered her lower limit...

I think the offer was 20% less than asking, and purchase about 13% less?

If you have good reasons for making a low offer on a place -- possibly worth writing them down, softening the blow by also mentioning what you like, as "Your place is a run-down heap, period" is unlikely to curry favour. I used a list on a contractors' association web site for the estimates for the repairs.

'Knob and tube' wiring came up at the inspection; electrician estimated $1k, $1k came off the price. Later on, though, as walls were opened up, lots more was found, and the final bill for the fix was quite a lot more than that. Keep in mind that repair bills are likely to be more, not less, than you anticipate (see also "mission creep," where you look at old bathroom flooring and decide it needs to go; $X, but while you're doing that shouldn't you also replace the sink and toilet, $X $X?); if a place looks like it's going to need some work to be livable, make sure the work is not going to leave you house-poor.
posted by kmennie at 8:09 AM on August 27, 2011 [1 favorite]

The key point is not how much you want the house. It's not even how much you can afford. It's about how much it would cost to find a comparable house. If you feel you can find something equivalent for your preferred price in the near future, then that allows you to walk away.

A few things I did was calculate the price per square foot of comparable properties and use that as a baseline for what I was willing to pay.

You don't always have to under-bid, and under bidding will harm you if there are other buyers competing with you.

In the end, you should have a couple houses you are thinking of buying, and make your offer on your first choice about making your first choice a good deal for you.
posted by deanc at 10:04 AM on August 27, 2011 [1 favorite]

Can you find "comps" that show you how much other similar houses in the neighbourhood have been selling for? When I bought my house, I could see that other houses (some even in better shape than the one we were buying), sold for about the asking price of the house we were looking at. That influenced our bid and it also influenced how the seller responded to our bid. If you think the house is overpriced, you have more room to make an aggressive bid. If you think the house is more or less priced fairly, you should still make a bid at a price you want, but know that there is likely going to be less wiggle room. Good luck!
posted by Nightman at 10:21 AM on August 27, 2011

Don't trust your "buyer's" realtor too much, especially as things drag on. They will nag you to raise your price or compromise quickly.

They get paid a fixed amount (a fraction of the final deal, which presumably will be about the same no matter what house you buy) ... so the longer a deal takes the less they are getting per hour of dealing with your shit.

So, take all agent advice with a huge grain of salt because, if you follow the money, their goal is to get you into a house ASAP.
posted by seanmpuckett at 10:57 AM on August 27, 2011 [2 favorites]

In my area the final sale price is about 93-94% of the asking price. Our realtor periodically sends us a list of all the houses in our area that are for sale or have recently sold, including the asking price and final sale price. The difference is almost always in this range. The incentive is so people might be inclined to sell their houses. I believe the reason is that the 6-7% represents the other costs associated with buying the house (closing costs, inspections, lawyer, survey, etc) so the asking price is the amount the house will cost you, even though the sale price will be lower.
If you have a real estate agent they will probably give you this data if you ask. They usually give you 2-3 comps anyway. A few minutes with a calculator or spreadsheet should probably give you a good idea what the spread is in your area.
posted by Yorrick at 12:30 PM on August 27, 2011

The best way to know how much to bid (or underbid) is to look at a lot of houses. Your realtor may be able to help you get a sense of comparable houses that are on the market and those recently sold; but nothing replace looking at a lot of houses, in multiple neighborhoods, and at many different prices. Once you see enough houses, you can get a good sense of the fair value of the house you want to buy; and how hot the market currently is; which give you confidence in your offer price.

I'd say: be ready to let go the first 3 to 5 houses you offer; and yes, there are always good buys out there. Especially now.
posted by curiousZ at 4:07 PM on August 27, 2011

Response by poster: Thank you all for the thoughtful replies! One additional note: do we have any more leverage given that we are willing to pay cash?
posted by amicamentis at 5:27 PM on August 27, 2011

You should be able to find statistics on how much under asking price houses in your area are selling for on average. In ours, for example, they were selling for only 1% under asking price, so we knew we shouldn't go too low on the initial offer. Also it was a seller's market here, so it was quite plausible that a too-low offer would cause the sellers to not even bother countering and just negotiate with other people instead. We offered 10% under their asking price, and they laughed at us and just explained why they were asking what they were, without countering. So we decided to try a new tack and made our final offer and told them we weren't playing games, it was what it was, etc. It was only 2% under asking, and they accepted it. It was still an incredible bargain for the house's location, so we were happy.

Your market is probably a buyer's market, so you can probably offer a low amount without scaring them off, and then just up it gradually until they bite.
posted by lollusc at 6:14 PM on August 27, 2011

Oh, and being willing to pay cash means you don't have to wait for banks to do their thing, so you can specify a short settlement date, which sellers often like because that gives them the money sooner and they can buy their next house without dicking around with mortgage chains. You can put that in your offer: "settlement within a month" or similar.
posted by lollusc at 6:16 PM on August 27, 2011