First, determine what the house is really worth. Forget the list price. Get your Realtor to run a CMA. Establish the value. That's step one.
Second, determine what you can reasonably afford to spend. Not what you might be preapproved or prequalified for, but what you feel comfortable spending. That's step two.
Now, take the lower of the two numbers: (1) the true value of the home, and (2) what you can comfortably afford to spend. That resulting number is the most you should spend on the property. Notice we haven't even looked at the list price yet? There's a reason: The list price up to this point is totally irrelevant.
Third, now take a look at list price. Is the list price lower than the number you came up with in step two? If so, then you lower your maximum to the list price. Is the list price higher? If so, ignore the list price.
You've now determined the maximum you'll spend. The question now is: What offer do you make? Do you offer close to your maximum? Or do you offer less? You can peek at the list price again. Recognize that the American form of negotiation is usually to split the difference. It's not a good strategy, but that's what people expect.
So, let's say, hypothetically, that your maximum price on the house in question is $190,000. There are two schools of thought. The "split the difference" one would suggest making an offer around $180,000. After going back and forth, assuming they feel like negotiating, you'll probably end up around $190,000. The other common strategy is to go in close to $190,000 with a strong "best and final" offer, probably supported by your comps. You include that nice letter saying how much you love the house. Oh, and even if you're prequalified up to, say, $230,000, get another letter from the lender with a prequalification at $190,000. You present it pretty much as "take it or leave it."
There are other strategies, too. Michael and Jacki are right: The seller's motivation, if you can determine it, will play a major role.
But no one can tell what will "offend" the seller. Not unless you're the Amazing Kreskin. In some cases, a penny under the listing price is offensive. In other cases, offers of 10%, 20%, or even more under the listing price will be eagerly welcomed. You just can't worry about what someone else may, or may not, find offense. What you have to worry about is what the house is worth and what you can afford.
Hope that helps.
If you really want the house, you should start with something reasonable based on what the house is worth... regardless of what it is listed at. If that happens to be a lowball, so be it.
Buyers are in the driver's seat, but a lot of them seem to want to suicide themselves when writing an offer so low that it has no basis in the comparables.
Ask your Realtor to provide a market analysis for the home. The home sold at auction should have information available. If it is not in the tax record yet, that can take a few months depending on the closing company and county, ask your agent to contact the auction company for what the home sold for.
In my opinion, no seller should be insulted in this market. Most sellers are greatful for an offer as a starting point to the negotiation!
I recently posted an article on my blog in regard to lowball offers it looks at several scenarios. I'll post the link below. Maybe that would help to give a starting point.
Was just curious. Thanks.
Your agent on the other hand is not doing a very good job if they aren't doing their job by offering you advice. Truth be told many agents don't want to hassle with "low ball offers" because it makes them look bad to their constituents. Do what you feel is best for you and remember the agents in the transaction work for you. If you don't buy/sell they don't get paid.