Making an Offer on a House Below the Asking Price: A Strategy Guide

Here are the five most important points from this article:

• There is no rule of thumb for offers that applies to all situations.
• Offering less than the asking price can work in certain scenarios.
• But in some cases, it might result in you losing the home.
• Your offer should reflect current market conditions in your area.
• The best approach: use comparable sales to shape your offer.

Some home buying websites and blogs recommend using a certain formula or rule of thumb when deciding how much to offer on a house.

A commonly cited example says that you should offer 5% to 10% below the asking price and then negotiate based on the counteroffer.

But this is a careless approach to home buying that could do more harm than good.

In a hot real estate market with limited inventory, making an offer below the list price could cause the seller to ignore your offer and choose another buyer instead. Ouch.

Beware the 'Rule of Thumb' for Making an Offer

Let's start with the wrong approach before revisiting the best practice introduced above.

A popular real estate blog (that shall remain nameless) offers the following advice regarding the offer amount: "We recommend being aggressive and offering 8% to 10% below asking price."

But in some cases, this kind of blanket approach can lead to failure and frustration for the buyer.

Here's why we recommend against using an arbitrary rule of thumb for the offer:

1. It encourages you to ignore local market conditions.

Every real estate market is different, and they can cover a broad spectrum.

• In some markets, homes stay on the market for a fairly long time, prompting the seller to be more flexible with the sale price and other concessions.
• In other markets, homes sell quickly and sometimes for more than the original list price. Bidding wars often break out, as competing buyers submit offers simultaneously.

In the second scenario (fast-moving competitive market), making an offer below the asking price would be a rookie mistake and most likely result in rejection.

But in a cooler market, where sellers are more willing to negotiate, offering a bit less than the list price might be a good starting point for negotiations.

2. It doesn't consider whether or not the home is priced fairly.

The rule of thumb strategy also fails to consider the fairness or reasonableness of the seller's asking price. And that's an important factor you should account for when making an offer.

Consider the differences between these scenarios:

• Some sellers price their homes realistically, based on comparable sales.
• Some overprice the home based on what they need to pay off their mortgages.
• Some set the price below market value, in order to sell as quickly as possible.

Applying the same offer strategy in all three of these scenarios would be a mistake.

Start by Considering the 'Fair Market Value'

Before you decide how much to offer for a particular home, you'll want to estimate the property's fair market value. This is how real estate agents and professional investors approach this process, and with good reason.

• Knowing the fair market value allows you to make a realistic offer based on local market conditions, increasing your chance for success.
• But if you skip this step, you'll be making an offer in the blind without knowing if it's a reasonable amount, too much, or too little.

There are different ways to estimate the FMV before making an offer. But from a home buyer's perspective, the best method is to use comparable sales data or "comps."

The goal here is to analyze recent home sales in the same area where you're planning to buy, focusing on properties that are similar to the one you're considering.

• If your research shows that the asking price is too high based on local market conditions and comp analysis, you might want to offer less than the list price.
• On the other hand, if your comparative analysis shows that the home is reasonably priced based on recent market activity, a "low-ball" offer might be a mistake.

So we come back to the same two fundamentals. You have to understand (1) local real estate market conditions in your area and (2) how the home compares to recent sales in the area.

A Closer Look at Comparable Sales

We just talked about comparable sales, or comps, and how you can use them to determine the fair market value of a house before making an offer.

By using comps and general market awareness, you can decide if it's wise to offer less than the seller's asking amount, or if you should go all-in by offering full price.

The most important qualities for comparable sales are proximity, similarity and freshness.

1. Proximity refers to the distance between the comps and the house you're considering. Home prices vary from one city to another. They can also vary from one area to the next within the same city. So you want to find sales data for homes that are in the same area where you are trying to buy.
2. Similarity doesn't need much explanation. You want to look at sales data for houses that are similar to the one you're considering. That's what "comparable" means.
3. Freshness means that you want to find the most recent data available. Home sales from six months ago are not useful when evaluating a seller's asking price. Look for sales that occurred within the past month or so.

When you're looking at previous home sales that have all three of these qualities, you've found your comps. Use them to shape your offer and you're on the right track.

Seller's vs. Buyer's Market: Which One Are You In?

You'll also want to consider which way your local real estate market leans and who it favors most. Are you in a buyer's market, a seller's market, or somewhere in between?

• A buyer's market occurs when there are more homes for sale than active buyers. Buyers have more negotiating power and may be able to secure a lower price and better terms.
• A seller's market occurs when there are more buyers than available homes for sale. Sellers have more negotiating leverage and are less likely to reduce their prices.
• A neutral market is where there is a relative balance between the number of buyers and available homes, creating a more level playing field for both parties.

Local real estate markets do not move in synchronicity. It's possible for some cities to experience buyer's market conditions at the same time that others are seeing seller's market conditions. So you have to know what's happening in your area.

Two Different Scenarios, Two Different Offers

We've covered some important concepts here. Now, let's put them into practice, with two realistic (but very different) home buying scenarios.

Scenario #1: Low Offer Is Warranted

You're in a buyer's market. There are plenty of homes for sale, but not enough buyers to absorb them all.

As a result, many homes have been sitting on the market for months without going under contract. Sellers are becoming frustrated and more eager.

You find a house that's listed for $375,000. You pull up a handful of comparable sales from the last month or so, and you find that the average sale price was $355,000.

In this scenario, it might make sense to offer less than the asking price. If the comps were very similar to the target house, you might want to offer somewhere around $350,000.

If the seller shot that down without so much as a counteroffer, they would be foolish. It's a buyer's market after all, so the next offer might not come around for some time.

Scenario #2: Low Offer Is Risky

You're in a seller's market. There are plenty of home buyers seeking properties, but not enough houses to go around.

Most homes are going under contract within a week of being listed. Sellers are getting multiple offers from buyers trying to outbid each other.

You find a house that's listed for $375,000. You do some research and find that the average sale price from a handful of comps is $373,000.

In this situation, it would probably be unwise to offer less than the list price. Recent sales data suggest that the seller is asking a reasonable amount, based on local market conditions.

Additionally, you're in the type of real estate market where people will try to outbid you. So if you don't make a full-price offer on that house, you can be fairly sure somebody else will.

Making an offer is not a one-size-fits-all situation. Every home buying situation is different. Every pricing scenario is different. You need to consider how the home is priced based on current market values in the area. This is how you make a smart offer on a house.