Recently, a Trulia Voices user asked the question:
How much less than the offer price can you offer on a foreclosed home?
This seems like something any Phoenix area real estate agent should easily be able to answer with something straight-forward, like 90% or 95% or 80% or <insert your preferred answer>. But here’s the thing, banks and many foreclosure listing agents can be just as bad at pricing foreclosed homes as the neighbor down the street with a home listed 25% above fair market value that refuses to lower the list price, because “that’s our break-even price”.
The simple answer to what price a buyer should offer is: Offer what you think the property is worth. That might be 75% of the list price or it might be 110% of the list price or it might even be the prevailing 90% of the list price. Whatever the case, having a strong grasp of the property’s true market value is what is key. Then, with your offer, you will want to demonstrate/substantiate your offer price with comparables and estimates for repairs/updates. This will lead to a far greater success rate than a blanket, “just offer 90% of the list price and see what happens”.
Let’s look at a simple example for a home that has a true market value of $150,000. Let’s say a savvy agent prices the home at 115% above market value, because of the tendency for buyers to offer 90% of the list price. Thus the home is listed at $172,500 and an offer comes in for $155,250. Ooops…the 90% rule may have baited someone into paying $5,250 above fair market value, and the savvy agent looks like a hero in the eyes of the bank.
Another scenario that is happening with more and more frequency, is the savvy agent that lists the home below fair market value…perhaps at 95% of fair market value. Going back to the $150,000 house, the home gets listed at $142,500. This agent knows the home is priced hyper-aggressively, and is looking to get above asking price. Low ball offers of $128,250 (90% of the list price) are flat rejected, while knowledgeable buyers agents bring offers above the asking price. Again, the savvy listing agent looks like a hero to the bank, for securing an above list price offer.
I might add, that for years I have had a personal guideline with regard to list prices and offer prices. I find it unusual that a buyer and seller will agree on a price that is more than 5% away from each other. I’ve called this the 5% rule. Buyers and sellers do agree on deals that are wider than 5%, but those deals were quite rare. More recently, this range is getting a little wider than 5%. Running stats for the 42,000+ single family home sales in Maricopa County for the last year, the average price paid was 95% of the list price, which means there are about as many deals done wider than 5% as there are narrower than 5%, and that’s also why the prevailing advice tends to be, “offer 10% less”.
Getting back to the headline, I’ll repeat my advice that as a home buyer you educate yourself as to a home’s true value, and that you always offer a price near, but never over that value. Also, with the pace of activity in parts of the foreclosure market, a strategy of “leaving some wiggle room” in your offer price may result in your highest and best offer never being considered, because a better offer was initially present by a different buyer. That wiggle room lessen can be an emotionally painful lessen to learn. I hope it never happens to you.