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Normally I wouldnt bother trying to buy it off them but I suspect this domain is not worth much to anyone outside the very niche area its relevant to - so I may be able to get it at a reasonable price.
Does anyone do business with these kind of people, and whats the best way to bargain? Ask the price or offer them $50 for it or what?
My suggestion would be to formulate a reasonable price and then give'em a phone call. You do want to give them something for their troubles as they've got to go through the act of getting it signed over to you. They might be squatting but they're not going to lose time/money on the deal.