Now the question is how to determine if his price is "realistic". There are several factors at play here. First he may see you approaching him about the domain as a chance to make "big" money. His understanding of the market may be minimal and he may have read new stories of people paying top dollar for domains. He may perceive your approaching him as a chance to make his cash. Knowing what his price range is a step for assessing this. Proving exact traffic will be difficult, but you can guesstimate the amount it may potentially receive.
1) Is the domain name currently ranked in Google in the top 10 or 20? If it is in the top 10 it has instant appeal for you and the price just went up. Top 20 still getting a good price, but not as much as in the top 10. 2) Is he monetizing the site currently in any way? If so, you should ask him to provide you with documentation or some kind proof on how much he is making from it. This may be difficult and he may be reluctant to show you. Comes down to power of persuasion here. 3) Is the domain something "catchy" or a high-demand domain name (i.e. 3 letter .com)? 4) If you find yourself making no headway or want an extra negotiating tactic you can always have the domain "appraised" by an independent 3rd party (yes there are companies that do this, I just can't think of their names right now). Just Google domain appraisers or I am sure someone will jump in here and fill in the blanks. You can sell this as a benefit to him as he will now have an outside opinion on the value of his domain. The problem with this method is that you and him may be thinking the domain is worth $100, but the appraiser comes in and says it is worth $1000. Now he is going to want a $1000 when you could have had it for $100. This is where knowing his price thought is beneficial. 5) Put your offer out there. Walk away if necessary if you don't feel him budging. Give him a few days and come back to him. Let his emotions (good and bad) wear down over those days. If this is the first time someone has approached him regarding the domain he may be tempted for a big offer at first, but after a couple days of sitting on his brain you may get a more realistic response.
As for terms, just make sure that all control and ownership of the domain is transferred to you. You could work with an escrow company or third-party for this.
This can backfire if they offer a very high price that they can't come down on without losing face. An alternative strategy is to offer your "maximum plausible position" (forget who coined that phrase, smart guy though) - in this case, the lowest dollar amount that you won't look like you're joking.
To use a high profile real life example, look at Scott Boras, the baseball agent. He'll ask for 7 years and $110 million for a client that eventually gets 5 years and $60 million... but who was arguably worth less than that.
You're right about over-bidding, you need some knowledge about the worth of things to make an offer that isn't ridiculous without risking overpaying. But if he's bidding a on a decent parked 3 letter domain name, for instance, it'd be silly to bid less than low hundreds. For a longer or less memorable phrase, maybe you could open with offering $50. But it's not always a mistake to offer first, it can set the tone and scope of the discussion.
Consider a person who owns unused domain X. X comes up for renewal. Owner is torn about whether it's worth another $10 (or whatever) to own the domain another year. If they say the domain out there for sale for $100, there is no chance this person would buy the domain.
Then a random inquiry comes in from a potential buyer. The owner is suddenly struck with a powerful case of the endowment effect ( http://en.wikipedia.org/wiki/Endowment_effect ), and imagines the buyer is probably a well-funded startup, or maybe a Fortune 500, or perhaps even Google! Or Microsoft! Or maybe a joint venture between Google, Microsoft, and Facebook, which desperately needs this domain! Suddenly the owner treasures this domain. The thought of parting with it is unbearable. The notion of putting a mere price on such a precious domain, unthinkable!
Yet the actual prospective buyer might only find the domain worth a few hundred dollars; so usually no deal is possible.
Parked domain: I would offer no more than $50. Most parked, un-used domains are going to be parked forever. The chances being sold are very low, so you can use this advantage to really push down the price. Also, if the domain name is just the name of one of your project idea, you can always pick something else that its domain is available.
In-used domain. At this part, it really depends. As jeffmould said, try looking up its search engine ranking and determine its value based on SEO.
Monetized domain. Usually the owner of this kind of domains wants to sell at a relative high price. Do a little bit of research and estimate how much the site is making every month. Let's say it's generating $1000 ad revenue per month, anywhere between $5000-$10000 will be acceptable.
To conclude, the golden rule is always offer your lowest expected price. Because the owner is 100% going to raise the price from what you say until you're both satisfied.
You pay escrow.com for the domain, not the owner directly.
Escrow.com notifies the domain owner that they have his money, and he can now transfer the domain to you knowing you're not going to run without paying.
Escrow.com will only release your money after they verify the WHOIS data reflects the transfer to your ownership.
If he didn't really transfer the domain, he doesn't get your money, and escrow.com will return your money. If you do have ownership of the domain, escrow.com already has your money and won't give it back without going through a binding, mediated dispute process.
"Hi, I have a idea for a website I want to make with some friends and your domain looks to fit the part- How much would you want for it?"
Really defuses the high price thing and usually ends up with them asking for something under 500 bucks
ymmv
Professional parkers value a domain based on its current traffic and ad ctr.
"Premium" domains - whole word .com domains generally have the highest value because 1) users sometimes type them into the address bar, 2) they have a better chance of ending up in organic search results and 3) there is usually clear ad targeting for users who visit the site (leading to a higher ad ctr).
If the domain is exclusively parked, one way to get a very rough estimate of the traffic is to use a keyword search tool. Look at the search volume for keywords in the domain and use that as a measure of how valuable it is.
Way to be a dick.
All I asked for was validation or non-validation on the method I mentioned. Is it true or not?
I'm sure they'd look at trademark filing dates, just like prior art is a factor in patent applications. If this approach were possible, I bet someone would have already tried it, and that hole plugged.
http://www.icann.org/en/udrp/udrp-policy-24oct99.htm Section 4b: "Evidence of Registration and Use in Bad Faith"
Seems to indicate some sort of malicious intent in the registration is required before ownership can be tranferred.