Beware the Anchor

Sometimes pearls of housing wisdom are found in advice about money. Too many home buyers don’t tie the two together – money and housing. That’s a mistake. The following tale is attributed to John Bogle (founder of the Vanguard fund) and has application to housing.

In Mr. Bogle’s book called, simply, “Enough” he tells a story of Joseph Heller (of Catch 22 fame) attending a high-end party hosted by a Hedge Fund manager. The author Kurt Vonnegut was kidding Heller, noting the host “made more money in one day than all the money Heller earned from his book.” Heller responded, “But I have something he can never have, I have enough.”

When you begin your home search it will be worth your while to define what you need as opposed to what you want and move forward from need. By defining the size of home you need and where you want to live, you will be defining your price point. Your price point should be a comfortable, yet realistic, payment that is affordable to you.

If your price point does not allow you to live where you want or purchase the size of home you want, then you must either increase your price point, change location or downsize the amount of square footage. To paraphrase Mr. Heller, figure out what your “enough” is.

Homebuyer Associates advocates the boring methodical approach to finding and buying a home. That involves (yes, that infamous cup of coffee and housing discussion) defining wants and needs. Skipping ahead to the buying part, after Homebuyer Associates helps locate a home of interest for a client, the buying part begins with a written market analysis.

Long before I knew anything about the concept of anchoring, I would say to clients, “The asking price is irrelevant, what’s important is what is the home worth?” Our written market analysis is what helps blunt the force of anchoring. What’s anchoring?

To quote Richard Thaler, author of the book “Nudge,” anchors serve as nudges. In terms of housing, the figure you choose to make an Offer to Purchase can be influenced by the starting point for your thought process. In the case of real estate, the asking price is the anchor.

Negotiating from the anchor point can cost you tens of thousands of dollars. It’s why we provide a written analysis for our clients as to the value of the home before making the Offer to Purchase. The analysis, irrespective of the asking price, helps to point the way to value absent anchoring. The analysis is an art not a science, yet is a far superior process to buy a home than – “Let’s offer $10,000 less than asking price.” See, the asking price is just that. It may be the correct price but most often it is not. If it is not the correct price, it’s not good enough to buy it for $10,000 less.

If I could get buyers to begin to think differently about one aspect of real estate, at the very top of my list would be to stop asking “What can we get it for?” and begin to ask the question, “What is it worth?”.

Asking and defining “What is it worth” is important and invaluable and, figuratively speaking, the buoy to counter the weight of the anchor. Next, real life examples on how to ignore the anchor.