Ignore the price the squatter quotes (Score 1)

If you really want to buy a domain off a scummy squatter -- you must have it --

The squatter paid very little for the domain, $10 or so per year. He is also probably making some minimal ad revenue, which you can estimate by digging up page view stats or other similar metrics on the internet. Domain registration sites are particularly helpful in estimating domain traffic and value.

From these, you can construct what you think is his minimum acceptable value, which is low. The value of the domain to you, of course, is much higher. You need to arrive at a number somewhere in between, preferably close to the low end.

Typical negotiating tactics apply. He knows the domain is much more valuable to you. Your goal is to pretend you can't pay much of course to bring the price down. That is, if you would really pay $2000, do not start anywhere near $2000.

I would begin by emailing the owner, asking simply if he might be interested in selling the domain? He'll write back with some ridiculous value, probably ten times what he estimates it might be worth to an interested buyer. Say it's $10,000. Ignore this number. Write back saying, gosh, that's really high! And it's for a personal project, and you might be able to pay a couple hundred dollars. This will not offend the owner; after all, even a couple hundred dollars is a good price for him. He'll write back with a much 'better' offer, as much lower as possible without being comical, like $4,000. Tell him thanks, you thought hard, and can cough up maybe $350 but that's all you can afford. He'll write back with an offer like $1,500.

Then I'd kindly point out that you know the domain is probably earning him about $50 per year at best, and so your offer is really a nice win-win for both of you, and to show you're really interested in doing the deal, you'll offer $400. Tell him you're ready to finish the deal.

At that point the squatter will not walk away from $400 being held out to him -- which is, in reality, a great deal for him, and not so bad, I guess, for you. You paid $400 for what's worth $2000. Don't feel bad, the punk does not deserve the profit anyway. :) ... and yes this is about how real negotiations I have been involved in do go down!