The answer is entirely dependent on YOUR goals. If your goal has more to do with getting a low price than finding the home of your dreams, go as low as you want. If the Seller doesn't counter you, you move on. Of course you may end up submitting 100 offers before one is accepted. Personally I see no "art", no strategy, and no sense to this method. There are better ways.
If your goal is to buy a property that you really do want, and have studied the market and feel you KNOW it's "real" worth, my suggestion is to write up the offer at that price, AND submit your offer with your research or at least an explanation of HOW you came up with your offer price.
The wrong way, and the way I so often see unsophisticated Buyers and their agents do it, is to submit an offer below even what they think the property is worth. Then provide no reasoning or logic for how they came up with their absurdly low number. Of course they have no reasoning or logic, so how can they provide any? And how does the Seller react? They are confused, confounded, and often insulted. However, with reasoning and logic to support the offer, they'll at least give the offer some thought and consideration.
So how low can you go? If you believe the market is in a downward spiral, so much so that while your research shows that the fair market value is $xxx,xxx, but in 6 months it will be 10% lower, you can and should submit an offer 10% lower than your research. But again, you must provide your reasoning to the Seller. Of course the Seller may think the market will be up 10% in 6 months, but at least they understand why you submitted the offer you submitted.
Should you go that low? Frankly, if you think the market will be 10% lower in 6 months, and you are sure of it, then you should wait 6 months. This is a San Francisco blog, and I discuss only the San Francisco market, and I know many Buyers who think the City will be down 10% in 6 months. But I have yet to meet a Seller who believes that. So Sellers are not accepting offers that are 10% below what they believe the current bottom is right now. So you are wasting their time and your own.
For that reason, the last time I checked, sales were at a run rate of about 1/3 of what they were last year because there is a stand off between Buyers and Sellers. Buyers only seem to be offering absurdly low amounts, many with no rhyme or reason, and so the Buyers are not even getting responses. Isn't that a waste of time? In my book it is
Meanwhile, in San Francisco, prices had held up, and even risen... until September. I've been referring to this time period as the "financial crisis market". The well off still have plenty of money, but they are also the most educated about the financial markets, and they've never, ever, seen anything like what's happening now and it's given them pause.
Pausing has lasted 2 months now, and 2 months of very low sales has put downward price pressure on homes and condos alike throughout San Francisco. It's had about a 5% impact on the "better" neighborhoods, and at least 10% and arguably 15% in over-supplied areas like SOMA and South Beach. In fact, some are saying the One Rincon and the Infinity, along with SOMA Grand, are offering up to 25% off... but then again they were over priced... I'm referring to 10% to 15% off what it was really worth, not off of unrealistic prices.
So... will San Francisco real estate go any lower? I don't think it will... or at least it won't be more than a couple more percentage points... and here's why:
Buyers have come out of the wood works in the past month. Bargain hunters, first time home buyers, and investors have started to show up at Open Houses in droves. They smell blood in the water, and they all want to pounce. But this is the perfect storm... they think the market is going to go lower, so many aren't offering yet. Many others are putting in outrageously low offers that are being rejected by Sellers. And many of the first time home buyers are in the education phase... they are afraid of making a mistake with the biggest purchase of their entire lives, and it often takes months of research and looking before they'll pull the trigger.
The perfect storm has led to this 5% to 15% drop (depending on the neighborhood) and it's my feeling that they are all going to start writing offers all around the same time... and that will start prices upward again.
Many Sellers are also responding by removing their properties from the market and renting them out, or staying there and waiting until Spring. Many who want to sell now aren't even bringing them onto the market. So it's a stand off, and once the Buyers realize it's not going any lower, and the newbies are then educated, offers will start coming.
Meanwhile there are great deals right now... many of the Short Sales and Bank Owned REO's are priced incredibly low... and they are getting offers. Offers means a bottom. If the Short Sales and REO's were not getting offers, we'd have further to drop. And if Buyers were not flooding Open Houses, we'd have further to drop. If more Sellers had to sell now and didn't have other alternatives, we'd have further to drop.
Finally, you add the increasing interest of Banks and the government to provide loan work outs with their borrowers, and that will reduce the number of Short sales and REO's. Plus the LIBOR is incredibly low right now... so those with their mortgages re-setting right now are actually getting LOWER PAYMENTS... not higher. So their homes are becoming more affordable, not less.
Add it all up... and if you are a Buyer... recognize that now is the perfect storm. Conditions will continue to improve next year as lending eases, as rates stay down or continue to drop, as new construction is totally stopped in San Francisco so the current over supply gets reduced. Now you may argue that layoffs are yet to come and that will produce more distressed sellers... but I'd argue that smart resilient San Franciscans who are property owners will largely be able to weather that storm in ways that mid-west auto workers can't.
If you disagree.... please share your comments. If you agree and are ready to start house hunting, start with www.Automated-HomeFinder.com or CleanOffer.com, or read some of the below articles.
REO search on the San Francisco MLS
Short Sales in San Francisco
First Time Home Buyer - where do I start?
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