If you're new here, you may want to subscribe to my RSS feed or Subscribe by Email. Thanks for visiting!
It always amazed me how when you meet with a prospective seller, they feel that their property is worth multitudes more than the comparables.Often, it comes down to how they have a hot tub, and their neighbor does not. They just re-did the flooring - themselves - and their neighbors didn't. All this, compounded with their personal history and memories of the property inflate the price artificially.
I'll never forget a property that Sheila and I were looking at where the seller had done some work to the property before selling it, raised the price, and when it didn't sell, they sunk more money into the property, raised the price again to cover their costs, and were once again surprised that it didn't sell. They continued to do this, until they had built an in-law suite on top of the garage, put in another dining room behind the garage, added a hot tub, added a second story and more.
Interestingly, one of the least appealing attributes of the house was that it was sideways on the lot, facing the driveway on the side. The side of the house that faced the street had no windows and was just two stories of siding and a roof line.
So why is it that a sellers demand a king's ransom for their property?
I recently finished reading Dan Ariely's Predictably Irrational, a must
read if you do any kind of marketing, sales, or buying - and we all do.In chapter 7, "The High Price of Ownership: Why We Overvalue What We Have," Ariely talks about a study that was done at Duke University involving the value that buyers and sellers place on the same item, in this case, tickets to the Final Four basketball game in Duke's Cameron Indoor Stadium.
Getting tickets to the game involves a complex process of setting up a tent on the grass outside the stadium with your buddies for days on end, and whenever the air horn blows, sending every member of the tent to an occupancy check, and even then, if every person in your tent makes it to every occupancy call during all hours of the day and night, perhaps being lucky enough to get a lottery number, and lastly, checking a posted list of winning lottery numbers to see if you got the tickets.
Yes. All this hassle for tickets to a Blue Devil's Final Four game.
So what about the students who waited in the tents, responded to every occupancy check during the day and night, and were lucky enough to get a lottery ticket but did NOT win the tickets? Certainly these students are highly motivated BUYERS and would do anything to get tickets to the game.
In fact, these students went through exactly the same ordeal as the students who did get the tickets.
Now we have a fixed number of tickets, with known motivated buyers and known unmotivated sellers.
How far apart would you imagine the buyers and seller were on the value of the tickets?
Dan and Ziv Camron decided to put together a study to answer just that question. They called students who had won and who had not won the tickets, and asked the students who didn't get the tickets:
"I understand you didn't get one of the tickets for the final four. We may be able to sell you a ticket. How much would you be willing to pay for one? What's the highest price you'll pay?"The students who did get tickets were asked:
"We may have an opportunity for you-to sell your ticket. What is your minimum price?"The book goes more in depth on the line of questions, but the above is the basic idea and a decent summary of the conversation.
What they found may not surprise you - that buyers and sellers have different ideas of value - but the scale of the difference is astounding.
On average, the seller's price was $2,400.
On average, the buyer's price was $175.
This gigantic difference isn't a matter of a percentage - it's better measured as a multiple. On average, the seller was looking for a minimum price 14 times the maximum price a buyer was willing to pay.
Dan and Ziv wondered why our decisions are so impacting by ownership, and narrowed it down to three irrational quirks in our human nature.
We already love what we already have and the more work and time we put into something, the stronger our sense of ownership grows.
When we look at our own home, we see all the hard work we put into it. We think of all the fond memories and the history during our ownership. We think of all the improvements that we made and that we're so proud of.
When a buyer looks at the exact same home, they see the spot of mold in the corner of the ceiling. They see an unfinished basement. They see the scratch marks on the banister. They see the projects you never got around to doing.
This is one of the reasons why when you meet with a seller, they're looking for so much more than what you're willing to pay, and why they have a hard time grasping why it is that you value it so much lower than they do.
For further reading, pick up a copy of Predictably Irrational. It's an insightful, helpful and practical read with ideas you'll be able to take away and apply to your sales and marketing right away.
This is exactly why the take away, or puppy dog works so well.
We value what we own or perceive to own. Take it away or perceptively take it away and voila, you just ramped up the value in the prospects heads.
How true. I think sentimentality plays a huge role. Particularly when someone has lived in the house 30+ years and raised a family, or when they have put a lot of hard work, "sweat equity" into the home. Very real emotions that can get in the way of recognizing market drivers. I will pick up the book as I love reading information like this. Thanks!
outstanding article. Which explains a lot about the mess we're in.
How much IS a property worth anyway? Ask 10 people, get 10 different answers...but will they be relatively close?
This is known as the endowment effect:
http://en.wikipedia.org/wiki/Endowment_effect
Matt, this goes back to the "value" being defined as the most a buyer is willing to pay for something. If a seller has an inflated value in their head, and nobody is willing to pay that much, then is that really the value?
As a real estate agent, you're often faced with the situation where a seller wants to sell a property for a higher than reasonable amount. At that point you have a few options.
You can take the listing anyway, know it'll never sell at that price, but at least get a yard sign up and hope to get some calls from the sign that turn into other buyers or sellers. Maybe, if you were lucky, you could work the seller down on the price and do a price reduction to a more reasonable price later on, but either way, your Days on Market (DOM) for that property would be higher than normal and the seller wouldn't be pleased at how long it was taking to sell.
Another option is to only accept the listing at a price with which you know you can sell the property. You risk another agent promising a higher price and the seller going with that agent, but at least you're only working with properties you can actually sell, and you keep your DOM down.
This, by the way, is half the secret behind agents who promise to sell your property in X days guaranteed. They price the property competitively so it'll sell.
Good article, Jeremy, and good points. Holds true for any product or service, of course, not only real estate.
Interesting study. The price difference doesn't strike me as all that insane, though.
Here's the reason: the sellers want to be properly compensated for the ENTIRE process through which they went to get the tickets. The fact that buyers went through the same process is irrelevant - this doesn't do anything for the seller.
On the buyer side, they've already invested the time, so $175 could well be the maximum premium they're willing to pay.