You Are Biased. That Costs You.
“A year from now you may have wished you started today.” – Karen Lamb
A favorite tale: Coach Al McGuire visited a player in the player’s dorm room. The player asked, “Coach, How do I become a success?” McGuire responded, “The first thing you have to do is get out of bed.”
In housing, investing and other aspects of life it’s good to have goals, but goals are not enough. You also need to recognize your biases.
If your goal is homeownership understand that cognitive biases are at play – biases that can cost you money. Let’s look at a few.
Anchoring Bias
The first price you see in real estate (the asking price) is the anchor price, it’s the number you remember and the number from which you negotiate. If the asking price is $275,000 you begin to think, “what if I can get it for $265,000?” You are making value decisions on what may be a false price (there are many reasons for this, contact me if you want detail).
Smart real estate agents are aware of anchor pricing and use it to the seller’s advantage, which by implication means it’s to your disadvantage.
We tell clients, “It’s America so a seller can ask whatever they want… but we want to know what it’s worth?”
By looking at comparable sales as part of our value analysis, the anchor doesn’t drag down our clients. Their real estate decision doesn’t cause them to drown.
Overconfidence
If I connect on a few good tennis shots I’m sometimes inclined to move away from my game. I attempt shots I’m not capable. I’m attempting shots that I will miss. I then have to remind myself of the level of my game.
If you spend time on Zillow or HGTV it’s possible you think you are better at or know more about real estate than you do. You are overconfident and are unknowingly putting your money at risk.
Steven Dubner, one author of Freakonomics, says the most important thing for investors to do (homebuyers in our case) is “acknowledge what you don’t know.”
I sometimes watch real estate transactions from afar – maybe someone who chose not to use us because we aren’t a national brand. I think to myself, “you just spent $10,000 you didn’t have to spend.” This doesn’t always happen but…it happens. It’s a bit like watching HGTV and that’s not a good thing.
Acknowledge what you don’t know and search out information from those who do. Think of Homebuyer Associates as your personal real estate search engine.
Fear
You’ve seen it and we’ve seen it. You may believe it, we don’t. “Coming to market”, “All offers to be opened on Wednesday at 5:00 p.m.”, “This one won’t be around long.” These tried and true real estate fear tactics work because people are afraid of missing out (FOMO). Fear sells.
This is an irrational fear and can lead to a bad home purchase. I’m not suggesting that some homes don’t sell quickly rather I’m suggesting you understand Anchoring, Overconfidence and Fear are being used against you, then listen to Sun Tzu:
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
If you are thinking about purchasing a home give some thought to Sun and and Homebuyer Associates. The reasons are obvious – we want you to know the selling side and yourself and then make a good housing choice.
It’s worth a cup of coffee with Seamus, Mike or me so that “A year from now you don’t wish you started – today.”
Thanks for reading,
Michael D. Holloway
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