What Will You Wager?
Homebuyer Associates May 2018 E-Note
First things first, Bicycling
If you open and read this newsletter you will be included in the May drawing to win a Fixie bicycle from Fyxation Bicycle courtesy of Homebuyer Associates. We are highlighting Bike week (June 2nd – June 9th). There is no need to tell me you opened the newsletter.
Second things second, real estate
The bridge spanned the Milwaukee River, in the area of 40th and Wisconsin, under the present- day viaduct. Locomotive trains used the bridge. In my youth I thought it a good idea to play “chicken” with my friend Ronald Ricketts. We’d stand on the bridge and wait for the train and the last one to jump into the Milwaukee River won – Pascal’s Wager at play.
Pascal’s Wager was groundbreaking because it charted new territory in probability theory and marked the first formal use of decision theory. Pascal basically said, “People do need to make a decision.”
In some situations, you or I choose between two options, believing one and acting accordingly – or believing in the opposite thing and acting accordingly. Sometimes we can’t know whether one thing or the other thing is right. Faced with a conundrum, Pascal said, “Ask which decision is worse to be wrong about.” You want to avoid that choice.
Today, Pascal’s Wager is the norm for the 4-County Milwaukee area real estate market. Headlines and traditional real estate speak to a market that is difficult to find a value proposition purchase, that is, a home one can buy at value. So the question becomes do you pay value or more than value? If more than value, which decision is worse to be wrong about?
Traditional agents use escalator clauses, emotion and panic to the benefit of home sellers and themselves – not home buyers. I get that. It’s the market we are in. It’s the reason Homebuyer Associates has a business model that works only for homebuyers.
For the first time since Homebuyer Associates was founded, we find ourselves counseling our clients to consider Pascal’s Wager. Which decision will be less bad for you? In the past, prior to making an Offer to Purchase, we would prepare a market analysis. If a home had an asking price of $215,000 and the market value was $200,000 that would be our counsel, pay $200,000.
Today we still provide the analysis but with a bit of Pascal in the mix. If the asking price is $215,000 and the value is $200,000 we will say the value is $200,000. We will then note it may take you $215,000 – $220,000 to buy the home. It becomes your choice but a choice based on information, not salesmanship.
If inflation runs at its historical mark of 3% then it would take roughly 3 years for the buyer to get back to even.
The value of this approach is that we are not recommending an escalator clause – in which you bid against yourself – or saying, “You can’t lose at real estate” or noting you need to make a decision in 10 minutes.
We are presenting the facts supported by information and opinion. You are left with Pascal’s Wager. Is it better to keep renting as interest rates rise and home prices rise, or is it better to pay “X” to get the Offer accepted? You must ask yourself which decision is worse to be wrong about.
It is not our place to sell you. It is our job to present objective information. With that information you can decide to remain on the train track or jump into the river. An option must be chosen.
If you want to discuss real estate or how to determine when to jump off a bridge with a train approaching, let’s have coffee and we will answer your questions
P.S. In a bit of irony my editor (and wife) had a bike accident last week and broke her elbow. Surgery required. It was her left arm so the right arm was able to continue to edit.
Good luck on winning this months “fixie”. The Bike Federation link below will provide information on the upcoming bike week activities.
http://www.bfw.org/
Thanks for reading,
Michael D. Holloway
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