Should I Offer At List Price, Below List Price, or Above List Price?

By Shayne Bowen

My clients frequently ask me the following question:

"Once I've determined the fair market value of the home I want to buy, how should I structure my offer? Should I make the offer at the fair market value price, near the fair market value price, below the fair market value price, or well below the fair market value price?"

(Note: to read an article that I have written on determining the fair market value of the property you'd like to purchase, please click here.)

The difficulty with answering the above question is that it is almost always asked in a vacuum. A vacuum? Yes.

It's not possible to professionally answer the question above without FIRST determining the fair market value of the home that you wish to own, and without knowing the type of market you are in, or whether multiple offers are likely.

Let me give some examples:

If my client has located a home that they wish to purchase, and if we determine that the home is priced below fair market value (yes, this does happen on occasion), and we are in a hot market, offering a price below, or way below the list price is a quick path to failure.

If the property is priced below fair market value, whether the real estate market is cold or hot, other people will also recognize this fact, and there will be considerable demand for this particular property. A more direct way of putting this is: a seller that prices their property below fair market value will almost certainly obtain multiple offers, whether the market is cold or hot! If one offers below fair market value with this type of property, one will fail.

Let's look at another example.

Let us say that the property is priced at fair market value. How should the offer be structured, price-wise?

The answer to this question depends on the type of market one is in.

In a hot market, a property priced at conservative fair market value will generate offers at the seller's list price quickly -- or, likely, above the seller's list price. In this situation, offering below  fair market value will almost certainly result in failure.  

If this same property is being sold in a cold real estate market, the advisable strategy is quite different. In a cold market, and in a situation in which no multiple offers are present, it is advisable to write an offer somewhat below list price, but not so far below list price as to offend or infuriate the seller. Offending or infuriating the seller will not lead to getting the property. Quite the contrary!

Back to a classic question in real estate: "Should one make one's offer at the list price, a bit below it, or far below it?"

It is crucial to remember that the answer to this question depends upon how close to fair market value the property is priced, whether the market is hot or cold, and whether multiple offers are possibly present. Varying the answers to any one of these parameters dictates significantly different methods of optimally structuring an offer.

Oh, and not to forget . . . There is a debate as old as real estate -- over so called "low balling." This question is: "Should one offer well below the list price?"

My advice on this question echoes the themes above: It's simply not possible to professionally answer this question unless one knows:

• a) What the fair market price is for that property
• b) What type of market one is in (hot or cold)
• c) How long the property has been on the market
• d) Whether multiple offers (or the potential of them) are present.

IF the property is priced way above fair market value, then the only financially sound decision is to offer a price well below their out-of-line list price.

But please note: sellers who price their property way above fair market value rarely ever come to reality. In most cases, if the property is priced way above fair market value, the buyer is likely wasting their time making an offer.

Yes, their are exceptions, but I've repeatedly found that sellers who price way above fair market value rarely adjust to a real world price. The buyer usually has to "walk" in this situation, and they have usually wasted their time making an offer on this type of property.

IF the property is priced at fair market value, an offer way below the seller's list price (a so called "low-ball" offer) will, in almost all circumstances, offend and infuriate the seller.

In almost 25 years in this industry, when the property was listed at fair market value and the buyer wrote a low-ball offer, the transaction virtually never came together.

In the final analysis, in order to structure the client's offer to achieve the best possible price in that specific market, the following items must be known -- or at least considered:

1. What is fair market value for the property?

2. How long has the property been on the market?

3. Are multiple offers likely?

4. Is it a hold or cold real estate market?

The old adage, often repeated in the press, is "Write your offer "x" percent below list price, no matter what" ("x" representing whatever the average difference is in that market between list price and final sales price.)

This is the single most misunderstood area in terms of structuring an offer properly!

The classic problem with averages is that they mask the highs and lows, and they don't address why some properties sell above list price, some sell at list price, and some sell below list price.

At the risk of saying this too many times, none of the questions above regarding how to structure one's offer can be adequately or correctly answered without first obtaining answers to the following:

1. What is fair market value for the property?

2. How long has the property been on the market?

3. Are multiple offers probable?

4. Is it a hot or cold real estate market?

Obtaining answers to these questions is the only way to obtain the best possible price on any given property.

When I purchase properties of my own, I ask these same questions.

The most experienced purchasers ask these questions.

The wise purchaser asks these same questions.