Making an Offer: How much of a discount is too much?

Asked by BJ, Oxford, MI Sun Apr 13, 2008

Pending a career change, we may be looking in the Lake Orion/Oxford, MI area very soon. Considering how soft the market is, and the lack of substantial evidence supporting claims of any market relief (or the elusive "market bottom"). Can you provide advice regarding depth of discounting offers relative to asking prices? How much is too much? Given the economic outlook for SE MI, 80% of most asking prices still seems too rich. Any thoughts?

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19
Mr.P, , Arizona
Tue Apr 15, 2008
BEST ANSWER
Hey BJ,
How much of a discount?
It is easy to say that this 500K home is only worth 400K, look a 20% discount! Comps usually can tell you that the house is priced to high or low. I can swing the price 100K using zestimates.

In Arizona we have an advantage. Our housing is newer. lets say Mr.Seller is offering his 2003 built home at 450K. You really like that home and want to buy it, however it is overpriced. You look in the records and see that Mr. Seller bought his home new in 2003 from the builder for 300K. You do some research and find out that the average return in Arizona since 1988 has been 3 to 5%.
in early 2005 we ran up 30, 50, 70% in some areas.
So we say to Mr. Seller I am going to give you the best appreciation for your home, and that is 5% per year.
from 2003 to 2004 your home went from 300K to 315K
from 2004 to 2005 your home went from 315K to 331K I am rounding up
from 2005 to 2006 your home went from 331K to 348K
from 2006 to 2007 your home went from 348K to 366K
from 2007 to 2008 your home went from 366K to 384K

So Mr. Seller I love your home and want to buy it for a fair price. I will pay $384,000 for your home that is an above average return on your investment.
Does the Seller say fine we will split the difference? Is the fair price now at $417K....NO!
If we were going to split the difference, we would have used 3% in stead of 5%.

Here is your argument, you are offering a fair reasonable return. We all know that we have or had a market bubble which has or is exploding. Depending on your area.

Well we upgraded this or upgraded that. Great...you put that flamingo pink granite on every counter in the house. We live in the Midwest and you spent 50K on a in ground pool. There is such a thing as wasted money.
But the comps, Look at the COMPS!!!!
Great your neighbors are overpriced too. In my market unless you have pending, and solds, more than 10% of the active listings for that neighborhood, within the last 60days, they are just not good comps. Sorry would you really use a comp from 01/17/08 look how much Real Estate has changed in three months. And another thing, when you see over 10% of pending and solds in a neighborhood in the last 60days. That`s a good neighborhood.

Now in some cases the best indication of value will be the REO sales, so find out what is going on at your local auction

Good day & Good luck.

Patrick
2 votes
Mr.P, , Arizona
Thu Apr 17, 2008
Yes I must chime in
I just closed an REO that was on the market 9 days, multiple offers. offered at 224,900 we paid 225,000
Very strong buyer. Home was in Great shape cost 170K new in 1999 you do the math.

Cleaned repairs and rented for positive cash flow within 10 days of closing. Yes a personal best.
The Numbers worked.

My Point .... Each deal is different.

JR knows me pretty well, I am not a suck up.

What I do appreciate from this thread is what the buyer doesn`t want....B.S.
J.R. and I ( and whoever ) know that.

I tell buyers, avoid a short sale.......It looks like to good of a deal. So they go for it and wait and wait and wait. finally they say you were right.

20% off asking, Win - Loose - counter. If it a piece of trash that the bank owns...Maybe
If it is a seller living in 2005 wont happen.
If it is a great deal priced where it is...I tell my clients to buy it.

Most important is your agent, because every home is different.
2 votes
CG, Home Buyer, Michigan
Tue Apr 15, 2008
It's disappointing that such a question doesn't have a bit more depth to the responses. I'm not sure how simply looking for comparables, as suggested, properly addresses the judgment call surrounding deep discounting in a declining market. As referenced in the question, the market doesn't appear to be hitting the breaks in terms of the valuation slide, so there's only limited value in comparables for recent time periods. By the time you would come to close, you would want to renegotiate if that's what you're benching yourself against, no?

The second response wasn't very helpful at all. I think the point was, given some level of experience, at what discount would you run the greatest risk of not seeing a counter? Was it not?

That last post is just scary. That's a really stupid law in NY. Sure, I get the emotional premise from which it’s based, but such a phrase as "fair market value" is almost laughable if it wasn’t for real. The problem has been the overstated values that have been commonly accepted as "fair." Ask Bear Stearns about valuation processes, and the pitfalls thereof. I’m sure their leveraged positions were marked to “fair market value” within regulatory reason, and yet we’ve all witnessed the fall out.

I’m very interested to see the professional opinions on this question as well. I hope that responses will continue, but perhaps with some greater substance.
2 votes
Dineen Grosso, Agent, Lighthouse Point, FL
Sun Apr 13, 2008
In this market, it can vary from house to house and neighborhood to neighborhood. The best way to determine how much to offer on any given home is by comparing recent homes sold in the very same area(sold within the last 3 months.) Today's market has many homes available, some not necessarily priced at today's market value, but what the seller feels their home is (or was) worth, so it is difficult to say to offer a % amount less than the asking price. Determine the differences to comparable sold homes carefully by adding a dollar amount for things the house you are considering does not have, and subtracting a dollar amount from the comparable things it does not have compared to the home you are considering. You can also calculate the sold price per square foot for another way to calculate value. Of course, an experienced realtor can help you calculate a home's value with their local knowledge and experience.
2 votes
Kori Shook, Agent, Owosso, MI
Thu Apr 17, 2008
Sorry you didn't like my answer, but it is reality. If you just want some examples then:
I just sold a repo priced at $103,500. It had 4 other offers on it, it was worth at least $130K (in fact there are no other homes in the neighborhood priced at or sold under $154,900), so I told my buyer to offer $115,000 and he got the house. Did he pay too much--- no because it is worth it to him. The other buyers offered too little. --- this is over 10% over list price because it was underpriced.

I just closed on another house that was listed for $69,900. The buyers offered $64,000 but found out there was another offer, so upped their offer to $68,000. Did they pay too much, again, no because it was worth it to them. and the house was priced right so it sold within 3% of list price

I talked to a buyer today that offered $410K on a home listed at $450K after a lot of negotiating and the seller wouldn't go under $425K.... The house has been on the market for over 2 years. The house is definitely overpriced (and I think the seller must be crazy) The house should sell for 10% or less under this list price because it is overpriced for the current market.

I took that average right from my MLS so it was accurate as an average for my area. I agree that it is skewed in that not all houses will sell within that ratio; some may sell for 20% under list price and some sell for over full price, but in my opinion what that really means is that if it is priced right it should sell within 5% of list price, if it doesn't then it was because it was over or under priced. So the only real answer to your question is again that it depends. In my market, because of these statistics, I tell my buyers that in a normal sale that we feel is priced right, then if you offer within 3-5% of list price the seller will probably take it, if you offer under 5% be prepared for a counter, anything beyond 10% is usually ridiculous.... again only if you know it is priced right.... so you really need to look at the house as an individual. To go in and say that the entire area is overpriced can't be correct unless absolutely nothing is selling. If you have people buying then it means the houses are worth that. Any product is worth (and only worth) what a buyer is willing to pay.
1 vote
BJ, Home Buyer, Oxford, MI
Thu Apr 17, 2008
JR – While I appreciate your candor, I don’t appreciate your projections regarding my motivation. No, I didn’t get the answers I was expecting. In my last post, I was quite clear about that. I was expecting some more real life examples, and much less deflective conjecture. I’m not looking for affirmation. I asked the question that I did because I’m interested in quality responses. Thank you for the examples you gave. However, I find it a bit alarming that you don’t understand how the economic landscape of a region should be a factor? As with any market, the price today is always going to be impacted by the perceived value tomorrow. It’s the point of pricing in a discount. It’s at the very heart of my question. At what level does it become too severe? If offered examples (as you have now), we can then have a dialogue about details, so while understanding that each situation is different, I can draw upon the relativity of the situation and apply it to my own. I thought that was where I could derive real value from threads like these. I didn’t realize how many agents want to simply use this as a marketing platform.

From reading some of your other posts on other threads, I’m sure you’re successful. I would find it much more helpful if you could share some of those successes from the buyer’s perspective. You don’t have to give away trade secrets, just relevant information. I simply want to be an educated buyer. There are a lot of wolves in sheep’s clothing out there. I’ve heard horror stories about agents - on both sides. I can’t just assume that sellers and their respective agents have fairly priced a house nor can I assume every agent knows how to navigate the market with true efficiency. With the glut of inventories as high, and volumes of sales as low as they are in MI, I just want to be able to wade through the b.s.
1 vote
Kori Shook, Agent, Owosso, MI
Wed Apr 16, 2008
I agree with the other agents that you need to look at the recent comps- solds, actives, & pendings. Every house is different and every seller is different, sometimes even from day to day. List to sale price in our board (a small community in Michigan) is still within 5.5% average (the average home sells within 5.5% of list price), so even though the media and much of the unexperienced public will tell you that homes are selling for 10% to 20% under list price, it just isn't always true. Sellers and list agents know that the market has softened and are already discounting their homes to compensate. You should pay what the home is worth to you and a price that you won't regret and think "did I pay too much" or not lose the deal because you offered too little and got outbid... which is also happening all of sudden here. Hooray!

Sorry that's not a very definite answer, but there just is no real rule of thumb.
1 vote
John the Bru…, Home Buyer, Connecticut
Tue Apr 15, 2008
My rule of thumb: If your Realtorâ„¢ is not embarrassed in presenting your offer, then you've offered too much.

Important corollary: Don't be worried about offending anyone – it’s your hard earned money.
1 vote
J R, , New York, NY
Tue Apr 15, 2008
BJ, it depends on what price the home is listed at. Some are priced well above comparable sales, other homes are priced correctly. There is no rule of thumb when making an offer. Each case is individual.
1 vote
C Tann-Starr, , 11354
Sun Apr 13, 2008
Hi BJ,

I don't know if your state has a similar law, but here in NY as of February 1, 2007, certain sales of homes that are in foreclosure or default being purchased as investment properties are now governed by a New York State law under the Home Equity Theft Prevention Act. There are exclusions, like if being used for a primary residence, court ordered foreclosure auctions, etc. so you may want to check if your state has anything similar on the books.

In NY, the Act requires that the buyer pay at least 82% of the home’s fair market value (excluding seller's concessions, purchases by relatives, and/or bona fide third party purchasers from the original parties),and also allows the buyer to deduct any debts still owed, including but not limited to:

• Any unpaid rent accrued before the date owner moves out of the house (if leasing
the house from the buyer);

• Reasonable cost of any repairs made by the buyer to the house to fix damage owner caused beyond
reasonable wear and tear;

• Any reasonable costs paid to third parties necessary to complete the reconveyance transaction; and

• Any payments the buyer made for debt or legal obligations of the owner.

I guess in your case a really good comparative market analysis, or broker's price opinion, may be key in determining what value you, as a buyer, will be willing to place on a property and bring to the table. The property's actual tax assessment may also be a major influencing factor regarding your potential purchase offer. If the government states a property has a valuation of $300K for tax purposes and a historical price check reveals comp houses selling between the range of $275K - $375K, you may want to bring your offer generally in line with the tax valuation, say $280K - $320K. Homes tend to appraise a bit more than their tax assessment, so only you are going to be able to decide what range above and below a median point you are going to be willing to work within. Consulting with a tax professional or financial planner may be useful while you are working with a real estate agent to find your home. Good luck with your project.

Regards, C.
Web Reference:  http://www.TannStarr.com
1 vote
J R, , New York, NY
Fri Apr 18, 2008
Davis family, wondering why you are cutting and pasting people's posts and repeating them.
0 votes
Davis family, Home Buyer, 63139
Fri Apr 18, 2008
I took that average right from my MLS so it was accurate as an average for my area. I agree that it is skewed in that not all houses will sell within that ratio; some may sell for 20% under list price and some sell for over full price, but in my opinion what that really means is that if it is priced right it should sell within 5% of list price, if it doesn't then it was because it was over or under priced. So the only real answer to your question is again that it depends. In my market, because of these statistics, I tell my buyers that in a normal sale that we feel is priced right, then if you offer within 3-5% of list price the seller will probably take it, if you offer under 5% be prepared for a counter, anything beyond 10% is usually ridiculous.... again only if you know it is priced right.... so you really need to look at the house as an individual. To go in and say that the entire area is overpriced can't be correct unless absolutely nothing is selling. If you have people buying then it means the houses are worth that. Any product is worth (and only worth) what a buyer is willing to pay.
Web Reference:  http://stlouis.missouri.org/
0 votes
Davis family, Home Buyer, 63139
Fri Apr 18, 2008
I just closed on another house that was listed for $69,900. The buyers offered $64,000 but found out there was another offer, so upped their offer to $68,000. Did they pay too much, again, no because it was worth it to them. and the house was priced right so it sold within 3% of list price
0 votes
J R, , New York, NY
Thu Apr 17, 2008
Davis, you repeated BS's original post and gave me a thumbs down?
0 votes
Davis family, Home Buyer, 63139
Thu Apr 17, 2008
While I appreciate your candor, I don’t appreciate your projections regarding my motivation. No, I didn’t get the answers I was expecting. In my last post, I was quite clear about that. I was expecting some more real life examples, and much less deflective conjecture. I’m not looking for affirmation. I asked the question that I did because I’m interested in quality responses. Thank you for the examples you gave. However, I find it a bit alarming that you don’t understand how the economic landscape of a region should be a factor? As with any market, the price today is always going to be impacted by the perceived value tomorrow. It’s the point of pricing in a discount. It’s at the very heart of my question. At what level does it become too severe? If offered examples (as you have now), we can then have a dialogue about details, so while understanding that each situation is different, I can draw upon the relativity of the situation and apply it to my own. I thought that was where I could derive real value from threads like these. I didn’t realize how many agents want to simply use this as a marketing platform.
0 votes
J R, , New York, NY
Thu Apr 17, 2008
BJ, are you saying that you think you can make a bid of, say 30% off the listed price of a home that is priced CORRECTLY and have that result in an acccepted offer of 80% of if the list price? Perhaps we are not understanding each other.

You seem to be at the beginning of your search. I would try to develop a relationship with a buyer's agent in the area you want to move to. A buyer's agent will be allowed to share information such as the price the owner bought the house at, how much they owe, and their motivation. They can also give you numbers for closed sales in the area. If, for example, there are 50 almost identical homes in a subdivision and 5 sold recently for 400,000, and the house you are interested in is 500,000, you know where to make your offer. If you find out that 500,000 homeowner OWES 480,000, you have a pretty good idea what he's going to do with a 375,000 offer: not counter it. If your agent finds out further that he is a policeman or teacher in the same town and has no plans to transfer, you have a pretty good idea of his motivation.

If, in the same are, where 5 homes recently sold for 400,000, you find one listed at 365,000, it's pretty safe to say that it's priced pretty close to what it should sell for, and the owner is motivated, don'tyou think? If the market is still going down, you can wait and see where it goes, but if you want to buy now, it's probably going to sell for close to list price.

Does that make sense?
0 votes
J R, , New York, NY
Thu Apr 17, 2008
I was hoping to see some examples, as buyer’s agents, at levels you have seen success and/or failure. “It just depends,” is NOT a good answer.
~~~~~~~~~~~
I'm sorry you are disappointed by the answers, but it DOES depend. It depends on the asking price! If the asking price is close to market value, offering 20% below is not going to do it. On the other hand if the house is overpriced by 40% and you make a 20% off bid that is accepted, you aren't getting much of a bargain are you? I don't see how the basic causes of this current downward trend factor in. There is no rule of thumb when making offers. You're asking about depths of discounting, and you haven't gotten the answer you expected so it must be "the shallow talent pool of buyer's agents"?

Here's a real life example. Last June there was a home listed at 595,000. I brought a buyer there 3 days after it was listed. Too late! They'd accepted another buyer's offer. A month later the contract was cancelled (due to the sale of the buyer's home falling thru). My buyer came to see it---there was another buyer leaving as we walked in the door, and another walked in the door as we were leaving. My folks put in a full price offer on the spot, which was expected. There were two other offers. Now, almost a year later, I still think my folks could resell the house for over 600,000. The house was priced to sell fast. If you'd put in a 20% off bid, you wouldn't have even been countered.

Another house I know I turned down the listing 3 years ago because the owner wanted to list for 725,000. I said no way I wanted to list for 539,000. It's been thru 4 agents and been FSBO since, and is now listed for 540,000, which unfortunately is now too high. So BJ, if you had offered them 20% off you would be screwed.

Hope that's a clear enough example. :)
0 votes
BJ, Home Buyer, Oxford, MI
Thu Apr 17, 2008
I’m sorry. I guess I should have been more specific with how I asked the question. I was hoping to see some examples, as buyer’s agents, at levels you have seen success and/or failure. “It just depends,” is NOT a good answer. I realize every market is going to be different and every seller is different. I wasn’t looking for so much conjecture, but rather real life scenarios. I don’t expect that real estate agents double as economist on the side. It’s hard to say without seeing the data, but I find it rather unlikely that from list to sale, prices in Kori’s area vary by only 5.5%. However, she did say “average” which may be skewed. Or there may be a greater prevailing problem of a shallow talent pool in terms of buyer’s agents in that area? It’s too easy to blame it on the media and the inexperienced public. However, the facts are what they are. MI has been leading the charge first in terms of price deceleration, then depreciation, staying well ahead of national averages. While much of the impact throughout the country may have been caused by a price run-up, and we’ve seen some of that, it’s been more about our economic distress than it has been about the market itself. So therefore, if the slide is going to continue because the basic causes of this current downward trend have not been addressed, why would even recent comparables be my best indicator? Sure, it helps stabilize the descent somewhat, but who does that most benefit? Sellers and agents. Not buyers. I’m looking at this with a buyer’s vantage.

Patrick, thank you very much I hadn’t considered that approach. There’s definitely some logic to it. At least you didn’t tell me to call someone locally, or that “it just depends.” Can anyone else offer something thoughtful and/or insightful based on their experience, not just a deflecting opinion?
0 votes
Don Bush Team, , Columbus, OH
Sun Apr 13, 2008
It is probably too discounted if it is not countered.
0 votes
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