Writing an Offer: How Much of a Discount Should I Write the Initial Offer at?

Watterson had it correct in this Calvin and Hobbes cartoon, and dealing with the compromise and negotiations of an offer can be difficult.  The question in the title is a common one I get from buyers.  The house is listed at “such-and-such” price.  What should we write the initial offer at?  10% off the asking price?  More?

The thought is that there is some kind of formula which will allow you to get the best deal.  However, the most important thing to note is that the offer you should write is based off the market value of the home, not the price it’s listed at.  In other words, if a house is worth $400,000 and it’s listed at $500,000 a 10% discount off the asking price would still be over paying for the house.  On the same token, if the same house is listed at $375,000 there is no need to go in at a discount because it’s listed at a discount.  Learning market value is key and discerning the features that may add or subtract value is extremely important.  Now, just because a house is worth $400,000 (market value) doesn’t mean it’s worth that to you.  Maybe you aren’t totally in love with it but at the right price it would make sense and the best price for you is $375,000 no matter what.

In writing the initial offer I generally work under two strategies, each with their own advantages and disadvantages I’ll discuss:

1) Write an offer that’s strong enough that it doesn’t piss the seller off where they don’t respond, but low enough that you create some room to negotiate.  Let’s say the house is worth $400,000 and it’s obvious (i.e. it’s a tract home with a model match of similar upgrades that sold two weeks ago at $400,000 with no difference in view, lots size, location, etc etc).  The first strategy is have your Realtor do some background work.  Why is the seller selling?  What’s their motivation?  Did they get a job transfer and he’s leaving in two weeks or are they just testing the market?  What kind of activity have they had on the house?  Any previous offers?  Any offer now?  Anything we should know about the property before writing the offer (i.e. seller wants to take all the appliances or that the seller will credit for a carpet allowance)?  Identifying these things will help with the initial offer.  With that information I make my recommendations as to what the initial offer should be.  If the seller has a job relocation and needs to sell it, maybe we start at $370,000 and hope we split the difference around the mid $380,000’s and can feel like we’re walking into equity.   Sometimes this happens where the buyer writes the offer at $370,000 and we end up splitting it right down the middle and go into escrow at $385,000.  The common complaint is, “Had I known we were going to split it 50/50 I would’ve started lower.”  Makes sense but remember it’s based off market value not the initial offer written.  If that was the case then we should’ve written the initial offer at $1 and the seller would’ve split the difference and we’d be in escrow at $200,000 right?  Wrong.  Thus, the biggest challenge of this style of offer writing: writing the initial offer too low.  Same scenario but the buyer writes the offer at $350,000 and the seller rejects the offer outright as an insult or ridiculous.  Now, as a buyer you’ve put yourself in a tough spot because you need to go back to the seller and increase your offer.  Now it looks like you really want the house and you’re begging for it.  Not exactly the way you want to start out with negotiations.

2.  The second style of offer writing is the “highest-and-best” tactic.  For the scenario above, this would be like writing the offer at $385,000 and holding firm on it.  You go in relatively strong and back it up with data and explain that this is the best you will do.  The biggest part of this is that you have to stand firm.  The seller will probably test you and may even become frustrated with you because it’s such a power play.  Usually when I write these kinds of offers with clients the seller doesn’t agree to it because of the lack of negotiations and 4-6 weeks later I check in with the listing agent and say that the offer still stands (if we haven’t found something else) and we’ll go into escrow.  Psychologically it’s tough on a seller to deal with this kind of offer because everybody wants the game.  I’ll give up this if you give up that.  The biggest challenge I find is two-fold for these kinds of offers: 1) is the challenge that a seller may pass on a legitimate, good offer because of the lack of negotiations and 2) is the susceptibility of the buyer to not stand firm on their offer.  If you go in and say that $385,000 is your highest-and-best, “take it or leave it”, and the seller counters at $387,500 what do you do?  It’s a difference of $2,500.  Are you willing to let the deal fall apart over $2,500?  But are you willing to enter a more challenging escrow from the beginning because what you originally said was highest and best really isn’t?

When it really comes down to it I think one of the biggest advantages of having a Realtor is having a qualified person who has been through the process many times to bounce your ideas off.  If you just want an order-taker anyone can be your agent.  If you want someone that can help you get a good deal through the negotiations, give me a call.