Buyers' and sellers' worst enemy? Themselves
Your brain may react to many things in a real-estate deal, including the attractiveness of the real-estate agent and a house's wall color. Your brain may betray you.
If you have hunted for a house, you probably got a sense that real-estate purchases don't represent consumers at their most rational. Did you like a house or apartment more or less depending on whether you saw it on a sunny day? Chances are, you did.
Buying a house isn't the same as buying a stock, an air conditioner or even a car. It's not just a product with pluses and minuses — good school system versus a small kitchen, a new roof versus a longer commute. A house represents the kind of life you want to live. And given its cost, a house and the value it gains or loses represent concretely the life you could live. (Bing: Has housing hit the double dip?)
Thus, it can be disturbing — though perhaps not surprising — to realize that people's judgment about real estate is susceptible to many of the foolish forces that affect so many other consumer decisions. In some ways, it may be affected even more.
Research by Michael Seiler, a professor at Old Dominion University in Norfolk, Va., has found that men and women — particularly men — are susceptible to the attractiveness of a female real-estate agent. The more attractive the agent, the more the buyer is willing to pay.
Superficial things such as a room painted an ugly color can make people less likely to buy a house, even though fixing that problem is as cheap as a couple of cans of paint.
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What's more troublesome, though, is how attached our minds get to the perceived value of our house. In one study, economists David Genesove and Christopher Mayer looked at the spectacular bust in condominium prices in the early 1990s in Boston. When a market goes south, as the housing market did recently, standard economics tell us that sellers should recalibrate their expectations and behavior, knowing they must sell for less.
Of course, this isn't how our brains work. Instead, we're susceptible to loss aversion, the mental quirk by which we feel losses much more sharply than we feel gains. Instead of setting the price of our property by what the market will bear, we set it by what we paid and what we think we "have to" get.
- On our blog, 'Listed': New-home sales plunge to lowest on record
People who bought at or near the peak of the Boston condo boom listed their properties for around 35% more than others. Consequently, those overpriced properties sat on the market; fewer than 30% sold after 180 days. Another wrinkle: Owners who lived in the units showed about twice as much loss aversion as people who had bought them as investment properties. A home, it seems, makes us more irrational than a house.
- MSN Money: 20% of homebuyers are single women
It doesn't take a boom or bust to trigger this phenomenon: A more recent study says that homeowners consistently overestimate the value of their homes by 5% to 10%. The only cure for this seems to be buying a home during a slump; these buyers may underestimate their home's value.
Buyers getting in now, then, may be at a cognitive advantage for years to come. Boom buyers, meanwhile, must come to terms not only with economic losses but also psychological losses and regret.
First time home buyers don't understand the value of what they are buying today..Who does? The appraiser. broker, and/or agent who just 3 years ago told you that 2 2 in Watts was worth 575k? The bank writing the loan? The securitizer guys on wall street?
hemiguy, 100 year flood means every year you have a one in 100 chance of being flooded. It doesn’t mean that having a 100 year flood 20 years ago buys you 80 years without a flood. You knowingly bought in a flood plain. You shouldn’t have to rely on your gut because your brain & common sense should have kept you from buying a house in that location.
rrjean wrote "Getting a lawyer could be way more costly than sticking with a realtor." What state do you live in where that is true? On any home over $83k spending $2500 for a good real estate lawyer + 3% to the other agent is cheaper than the full 6%. In more expensive cities where lawyers cost more the homes also cost more making $5k or even $10k for a lawyer more affordable than 3% in commissions.
In any home purchase you still need to get home inspections, pest inspections, title insurance and all the other things that are normally tacked onto a home transaction. But those are added even if you have a RE agent. A lawyer to do the paperwork is much more affordable. And in many cases a real estate lawyer can cover your purchase better since a lawyer can add things to a contract that are legally binding while a RE agent just knows how to fill out cookie cutter forms. I have yet to meet a RE agent that knows more about RE transactions than a good real estate lawyer - one who specializes in RE legal matters. Those lawyers are the same ones your agent goes to when he/she gets into trouble not filling out their cookie cutter forms correctly.
rrjeans argument that RE agents only keep a portion of the 6% paid in commissions doesn’t matter... the buyer still paid out 6% in commissions no matter how they cut up that 6% after it leaves the buyers pocket. Just because an RE agent keeps a small portion doesn’t mean they don’t get desperate for money. RE agents try to convince clients to buy all the time to collect their commission and move on. The RE agent doesn’t want to spend any more time, gas money, mileage on the car in order to maximize what little profit they will make from the transaction. If a buyer looks for too long the RE agents commission is eaten up in expenses. So it benefits a RE agent to close a deal as fast as possible rather than look for months only to close a similar sized deal later. Its also in the RE's best interest to make a sale but at the highest possible amount so their commission is higher. As long as it doesn’t ruin the sale agents on both sides want a high sales price.
The worst advice you can give/get is to “ignore your Realtor”. Would you ignore your Doctor, Attorney or Accountant? The trick is to ask your potential Realtor several questions. One important question to ask is “Do you have a problem working with a client for a long time, say up to 12 months?” Then listen to their response AND watch their body language. If they squirm, they are probably looking for quick close. The right agent will tell you they enjoy working with clients no matter how long it takes, and their main goal is finding the perfect home no matter how long it takes. Another important question is “are you a part time or full time agent?” This question is important because you want someone actively working for you 24/7, not only ½ the time. Again, would you feel comfortable going to a part time Doctor who works at Home Depot the other ½ of his day to help pay the bills?
A good agent won’t pressure you to buy buy buy, but will stay the course, point out all the good and BAD things they see with the property, and help you find the perfect home. This in turn will create a return client for the career agent.
As a home buyer and seller you have the right to ask up front and probing questions so when you finally choose your Realtor you know you found the right one. But once you find that Realtor, stay loyal to that agent as long as you’re getting the service they promised. Realtors are 100% commission and don’t get paid until the deal is done. And just like any other profession, it may look simple from the outside, but it’s not. A good agent is worth every penny.
Dave Pries, Realtor, Realty Executives-Paradise Valley, AZ.
First time home buyers don't understand the value of what they are buying today. They have heard so many stories about depressed housing markets and ways to save money that all too many are being unrealistic about prices.
I live in an area that has been hard hit, house values down about 60%. The listings reflect this, but still buyers want to negotiate less. They don't understand that the houses that are driving down the market have been stripped or in such dis-repair that what money they 'save' they will have to plow back into getting it livable.
One house on the block didn't have any cupboards, sinks or bathroom fixtures, the furnace and air-conditioning had been stolen and had been empty so long moisture had ruined the floor boards which all had to be replaced. It sold for 80K and set the price for the other homes in the area. Now, trying to sell for anything above that is impossible. Buyers have access to the sales price, but not the condition.
To me the assumption that all sellers overestimate the value of their home is rather old school. Today, home buyers have already discounted as much as the can, and to offer less, at least in my area, is a sure way of having your offer turned down.
Getting a lawyer could be way more costly than sticking with a realtor. What most people don't understand is that the 6% is split 50/50 with the buyers agent and selling agent. Then leaving 3% for each agent, however if the agent works for a well known company there are usually broker splits and franchise fees, many times leaving the buyers agent with any where from 1 to 2 %. Then take that amount from the sales price of you home and take out federal and state taxes. We don't make as much as you think and are not driven by a 6% payday dangling over our heads. I do it because I love to help people and see the happy result at the end... So please don't think we are out for a big commission, not to mention no one pays us to drive you around and look at homes, or preview properties on our own time. Don't forget the market is flooded with bank owned and short sales which many time offer a way less commission. Just make sure you have a realtor with your best interest at heart and you will be very pleased, most of us have nothing but the best intentions for our buyers.
you best friend when buying a house is your gut. if it don't feel right don't do it. also don't let personal/family situations get in the way of making a sound decision. you may find yourself in a situation, like myself, that you cannot get out of. didn't listen to my gut when disolving a bad marriage, bought a house in a flood zone where the 100 year flood was 20 years prior. been flooded 5 times in 18 months with 3 to six feet of water in the basement and no matter what anybody tells you andthing that is below grade is pretty much on you as far as mandatory flood insurance is concerned. they DO NOT cover contents at all except for washer, dryer and freezer.
LISTEN TO YOUR GUT IT WONT LET YOU DOWN