Tough market redefines lowball offer logic

Homebuyers are looking for a steal; home sellers are looking for an out, and homebuilders and banks are selling homes at cut-rate prices. Combined, these conditions have triggered a wave of lowball offers to buy homes in distressed U.S. housing markets.

Conventional wisdom claims that lowball offers don't work. Homebuyers are warned not to "insult" sellers, who are counseled not to counter offers from "disrespectful" buyers. Real estate salespeople are stuck in middle, oftentimes unwilling to engage in prolonged negotiations that might not earn commissions.

But conventional wisdom doesn't always hold true. With a severe slowdown in sales, some experts now offer new advice.

What is a lowball offer?

The term "lowball" doesn't have a formal definition in real estate, though some salespeople suggest that any offer that's less than some large percentage of either the fair market value or asking price of the property is a lowball.

Karen Monsour, a Realtor with Exit Realty Properties in Coral Springs, Fla., says any offer that's 25 percent less than the asking price falls into the lowball category. By this definition, an offer of $220,000 to buy a house priced at $300,000 would fit the bill, as would an offer of $1.5 million to purchase a house priced at $2.1 million. If an offer is that low, the sellers "aren't going to be very happy, and most of the time, they aren't going to take it," Monsour says.

Others say the term "lowball" is more subjective. Miriam Bernstein, an associate broker with RE/MAX Prime Properties in Scarsdale, N.Y., suggests that just about any offer could be labeled as "lowball" if it provokes the seller to outrage or anger.

"The best definition I've ever heard is that 'lowball' is an offer that's so low the sellers can't contain themselves. They get angry," she says.

Monsour says she encourages buyers to offer at least 85 percent of the asking price because anything lower than that is "an insult to the seller."

Yet her disdain of lowball offers doesn't preclude a little pre-negotiation negotiation between herself and the seller's representative in lieu of a formal written offer. The agents verbally agree on a price that's close enough to open a formal negotiation with the proviso that that price may be adjusted as the terms of deal, which Monsour calls, "bargaining tools," are discussed. This approach can move a lowball offer into a price range that's acceptable to the buyer and seller. The strategy works in part because Monsour, like most real estate agents in Florida, acts as a transaction broker who has no fiduciary duty to either the buyer or seller, but instead aims to bring the transaction to fruition.

Bernstein takes a different tact, but one that also can turn a lowball offer into an acceptable deal. Rather than discourage lowball offers, she believes buyers "should be able to put in whatever offer they want and provoke a discussion." After that, it's up to the broker to present the low offer in a manner that's friendly and nonconfrontational.

If the seller is a financial institution, rather than a private homeowner, the risk of insult may be lessened, according to Ian Maker, an REO specialist with RE/MAX Gold in Rancho Cordova, Calif. (REO, or real estate owned, refers to homes that have gone through foreclosure and are owned and sold by lenders.)

"My job is to get offers on their desk. I present them with the facts, and it's their choice to decide what they want to take," he says.

Homebuilders and investors also may be less emotional than homeowner sellers -- but not always. Some builders "put their heart and soul" into each home they build and "become emotional" about lowball offers, Bernstein says. Other builders "can afford to wait until they get" the price they want, she adds.

The new thinking for sellers is similar. While a lowball offer may be unwelcome, it could be an opportunity to open a dialogue with a buyer who "ultimately may give (the sellers) what they want," Bernstein suggests. A seller who has "a bad reaction" to a low offer, "may lose a good buyer who could make a deal," she says.

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Mortgage rates largely stayed put this week, with the notable exception of the one-year adjustable-rate mortgage.

The average 30-year fixed-rate mortgage moved up a modest 5 basis points, to 6.16 percent. A basis point is one-hundredth of a percentage point.

The average 15-year fixed -- a popular option for refinancing -- ticked up 1 basis point, to 5.71 percent. The average jumbo 30-year fixed also moved up 1 basis point, to 7.35 percent.

The one-year adjustable-rate mortgage surged 41 basis points, to 6.96 percent. On the other hand, the popular 5/1 ARM rose a more modest 4 basis points, to 5.96 percent.

(Distributed by Scripps Howard News Service. E-mail Holden Lewis at hlewis(at)bankrate.com)