Perhaps this topic seems self-evident with the answer being “any offer in a down real estate market is a good offer.” However, real estate has a very emotional attachment to its owners and, despite what the real estate market indicates, vendors will fight you tooth and nail on price because they think their house is different and the normal laws of supply and demand do not count. I am not going to address buying houses on foreclosure; this is another topic altogether. But, real estate and reality sometimes don’t go hand and hand so a few things to remember if you are shopping for real estate in down markets.

• Get your own real estate agent. Don’t let the vendor’s agent talk you into representing both of you with the lure of a lower commission rate. This is a penny wise, pound foolish philosophy. A real estate’s agent primary motivation is to make as much commission as possible- its not a judgment against the industry, it is just part of the business model and nothing personal. Thus, any agent representing both sides will not want you to drive a hard bargain and get the best price on real estate.
• Forget comparables, its all about the absorption rate. Real estate comparables really don’t mean much if the fundamental assumptions underlying the comparables have shifted dramatically. In real estate markets in parts of California or Florida, a comparable from 6 months ago has just as much use as one from 1989; the market has changed so much you have to rely on absorption rates. An absorption rate is a metric real estate developers like to focus on but a real estate purchaser can use in a down market. Quite simply, an absorption rate measures how long it takes to sell off excess real estate inventory. If, in the last 3 months, the local market sold on average 100 home/month and there are 1000 listings on MLS, your absorption rate is 10 months (1,000 listings/100 homes sold a month) or it will take 10 months to sell off excess inventory. 6 months is generally a balanced market. The higher your absorption rate, the better off you are as a purchaser since this indicates that supply outstrips demand and the negotiations on price become easier (“there’s 10 months supply of housing on the market. I don’t have to pay a premium for your home. There’s a lot just like it on the market…”). If you hired a real estate agent who has been through some down markets, they know how to shift the analysis from comparables to absorption rates and negotiate accordingly.
• Have your financing pre-approved. The fall-out from the sub-prime/ABCP debacle is that it is tough to get financing now so even if someone outbids you, they may not get financing. Waiving your financing condition knowing you have it in hand makes your bargaining position stronger even if you come in with a lower price (“…sure the other offer is for $5,000 more but I have no financing condition and they don’t. If you take their offer than I am walking away and if their financing fails, I am not coming back so take the bird in the hand…”)
• Patience is key. It takes a long time for people to acknowledge their home isn’t worth as much as they thought. The first listing price may take a while to lower as reality sets in. Have your real estate tag a few desirable but over-priced homes. Inspect them and visit them but don’t make an offer. If your real estate thinks it is over-priced, other real estate agents have advised their client of the same thing. When the price get down to a desirable level, pounce. Since you have already seen and inspected the home, you have done the majority of your due diligence already.
• Be realistic. Certain types of real estate will always hold their value: homes in University towns, upscale enclaves and starter homes in the central city (as opposed to in the boons). The prices tend to hold up and the price decrease is not going to be that great. The great bargains are in cookie-cutter condos, large homes in the boons, over-developed subdivisions (look for lots of for sale signs). Make sure you apply a contextual analysis if you are bargain hunting.

Best of luck.