When you’re trying to understand or influence human behavior—as you might do when, say, listing and marketing a home for sale—it’s important to respect the distinction between what people should do, and what they actually do do.
This is the difference between economics and behavioral economics. Classical economics theory is based on the belief that people will behave rationally and that we can use reason and logic to predict the movements of the market. But the fields of behavioral economics and behavioral finance were created in the hopes of gaining a better understanding of how real people actually make real financial decisions in real life.
Here are a handful behavioral finance must-knows for sellers to help manage mindsets and to understand why and how we market our client’s homes to buyers.
1. Don’t let overconfidence lead to overpricing.
Real estate agents are one of the few commissioned salespeople I know of who find themselves trying to talk their clients down in pricing their product. Why? Because we understand the dynamics of selling a home and the critical importance of pricing a property appropriately right from the start. Buyer demand is highest when a property first hits the market and when buyers are most concerned about losing the property to another buyer. This perceived risk is diminished the longer a home sits on the market, as is the buyer’s perception of value due to the markets failure to produce a buyer and thus to confirm the list price. Thus agents understand that there is an inverse relationship between the time a home spends on the market and the price at which a home ultimately sells. Listing a home at too high a price not only causes unnecessary woe, and frustration but ultimately it leads to a lower sales price! Set the listing price too high and a home will lag on the market, attracting lowball offers. The end result is often a price reduction and a lower sales price, or in the worst case the home not selling at all.
Overpricing can result from the same overconfidence and overoptimism that causes buyers to make lowball offers on great homes in a hot market. It’s the same overconfidence and overoptimism that inspires investors to day trade, erroneously thinking they have superhuman stock picking skills. In fact, when you study up on successful amateur day traders, it becomes clear that what they have is less innate skill and more the willingness to voraciously, constantly research the companies and the markets—many, for hours every single day. Many have also placed rules on themselves and their trades specifically to counter their own human emotions and irrational tendencies.
That’s precisely how home sellers can and should deactivate overconfidence when it comes to pricing. Sellers should commit to sitting down and poring over local market data, recently sold homes in the area, average days on market, and the local price-to-sale price ratios. While looking through the comps, consider the potential rewards of a disciplined, data-driven approach to pricing, as well as the costs of overpricing the home.
2. Understand the endowment effect.
Many sellers think the above is just for those other, clueless sellers—but that it in no way applies to their own innate, uncanny eye for knowing what homes are truly worth. These sellers who think they are the exception to the rule need to know about a little something called the endowment effect.
Behavioral economist Dan Ariely explains it as follows:
“Simply put, the endowment effect shows that we value the things we own more than identical products that we don’t own. This causes a mismatch between buyers and sellers, where buyers are often willing to spend less than the seller deems an acceptable price.”
Sellers should focus on data as the key driver of their pricing considerations and understanding this thought fallacy should prove beneficial in helping you to accomplish this.
3. Tell prospective buyers a story.
A while back, The Atlantic did a deep dive into consumer implications of behavioral economics. The article revealed that buyers are more inclined to make purchases where the circumstances of the marketing actually tell the buyers a story that makes them feel like they are getting a bargain, as happened when Williams-Sonoma put a $500 bread maker next to a $300 one and realized that no one bought the expensive one, but sales of the lower-priced machine doubled because of the deal people thought they were getting.
Don’t try to tell a story to make buyers feel like they are getting a good deal when they’re not, but do provide materials to tell buyers the story of the deal they are getting. Keep a binder in the property with the competitive comparables that you believe your listing is priced well against. Market your listings with photos and descriptions that surface the value it presents compared to the competition.
You may want to consider having your sellers write a love letter about their home and their neighborhood, telling buyers the story of how well loved the home was, and creating a compelling sense of well-being around it.
4. Sell a lifestyle
It’s important to remember that the way you live in a home, and the way you market and sell a home are two different things. When you put your home on the market it becomes a product – one that should be thoughtfully packaged and marketed.
People buy more than the features and physical specifications of your home, they buy how they think they will feel in your home… and the lifestyle they perceive the home and the community in which it is located will offer them. In preparing your home for sale (and it’s marketing), the goal is to create an inviting environment that appeals to the buyer’s senses, it is warm, relaxing and evokes an emotional response. Seek to demonstrate that your neighborhood is one where buyers can build new relationships and become part of a thriving community offering numerous amenities and conveniences that will positively impact their lives. An effectively prepared home becomes an aspirational purchase, this is it is one which possesses or implies positive characteristics to prospective buyers (luxurious, stylish, energy efficient home offering numerous amenities in a sought after community ‘or up and coming’ offering exceptionally schools ‘or other desirable amenities to buyers in the price point’) and is seen as superior and unique. Aspirational products can and do command price premiums.
Call or email us at firstname.lastname@example.org to request a copy of our Seller Guide – How to Sell Your Home Fast and For Top Dollar for more great tips!
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
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