Real Estate: When It Makes Sense to Make a Lowball Offer

You can't blame someone for trying to strike a bargain, especially not in this economy. Like many real estate brokers, Glen Kelman, the founder of the two year-old brokerage firm, Redfin, think things are getting out of hand. Agents in his offices up and down the West Coast, in Boston and Washington D.C., have been inundated by buyers intent on submitting repeated lowball offers.

Apparently, everyone thinks they can make a killing in this weak housing market. Throughout the spring, Kelman's team dutifully worked with clients who insisted on submitting one lowball bid after another. Such offers rarely resulted in sales. "Our customers are very analytical," Kelman says. "They've done a competitive market analysis, they have spreadsheets up the ying-yang, and they know what a house is fundamentally worth. But what they haven't thought about at all is the psychology of the seller."

Lowballers were weighing on Redfin's brokers too. Filing the offers took too much of its agents' time and amounted to zero revenue. A couple of weeks ago, a frustrated Kelman decided his start-up brokerage needed to curb his clients' lowball offers (which Redfin defines as a bid that's 15 percent below a seller's asking price). To be clear, he hasn't instituted a zero-tolerance policy. Instead, Kelman wants agents and clients to come up with smarter and more successful bids.

How? Kelman's basic advice is that homebuyers who are thinking of submitting a deeply-discounted offer need to spend a little less time thinking about the home, and a little more time thinking about the sellers and their situation. "It's like playing poker," he says. "There are people who play the cards, and people who play the players. If you can read the tells that show you when someone is confident about their price [versus] someone who's ready to deal, you're much more likely to find a bargain."Kelman blogs in detail on the subject and in an interview with NEWSWEEK, he highlighted 5 signs that a property might be ripe for a lowball bid.

The seller has to move, or has already vacated the property. Sometimes the seller's agent will disclose that a client has a firm date by which he must relocate, or that he's already bought a new home and moved. (In general, if a house is empty, there's a better chance the seller is flexible.) These situations make for extremely motivated sellers, who may accept a low offer.

The home has been listed 90 days with no price change. Few sellers are going to take a lowball offer right out of the gate, Kelman says. On the other hand, if they've been seeing little activity at the listed price and are considering dropping the list price anyway, a low offer may seem more enticing.

The seller has plenty of equity in the property and isn't at risk for being "underwater." In most areas, it's relatively easy to use public records find out the amount of a homeowner's outstanding mortgage; for a would-be homebuyer, this can be key information. A homeowner who has listed a property for far more than the amount they owe the bank has more flexibility than a seller who owes the bank nearly the full value of the home. For most homebuyers, submitting a lowball offer that's less than the seller's mortgage balance isn't a strategy with great odds of success.

The home is the last one in a new development. Builders are particularly pessimistic about the housing market right now, and plenty of them are desperate to get unsold homes off their books. That's particularly true if it's the last unsold property-as soon as the builder moves it, he can close up shop, move his sales rep to a new location, etc. That's a huge incentive to cut a deal.

The home is being sold as part of a divorce or estate sale. Particularly in a contentious divorce, soon-to-be exes may be willing to take a discount just to get on with their lives (and apart from their ex). And in an estate sale, inheritors with no sentimental attachment to a property would probably love to have if off their hands, and since an inheritance is often treated like "found money" anyway, they may be less inclined to hold firm for a particular price.

Kelman's advice on lowballs is part of a growing genre, as more buyers seek to take advantage of the soft market. On YouTube, broker Daniel Odio has posted a 16 minute video tutorial on the topic. Lowballing has also been the subject of how-to stories on MarketWatch, The Wall Street Journal and other websites in the past year or so. Kelman sees the current fascination with lowballing as a sign of the times. "My overall take on the market is it's become incredibly anxiety ridden and inefficient, where people don't agree on price as easily," he says.