Anchoring Effect

Wed, 28 Jul 2010 08:18:06 -0500

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions. from Wikipedia
I noticed an article recently on a blog talking about the anchoring effect and it’s effect on buyers’ purchasing and estimation decisions. For example the never ending sale going on at a large clothing store where you are getting $7 shirts priced at $10 marked down to $7, and people rush to buy thinking it is 30% off because the store has set the “anchor” at $10, when in reality the shirt is priced at $7 for most of the year.

So how does this pertain to real estate? For example, during the high point of the market there was a land buyer that always sent out an offer on new land for 50% of the list price, it was automated. They used the list price as their anchor without actually valuing the property independently of the list price. So they would assume 50% of the list would be an incredible deal. So I listed our next property at double of what we wanted to get and sure enough an offer came at 50% of list.

Does this mean that you can just list your property extremely high with the expectation that people will anchor to the list price? NO. The previous example was an extreme outlier that would not work with a well informed buyer. Vacant land is easy to appraise on a strict sqft basis to arrive at a more exact price. This happened because someone was not taking the time to do the calculation.

In the home market there is not an exact price, there is a fuzzy value that people put together, based on their opinions that are highly subjective. So you can price things 10% over value or maybe 15% because the spread in sqft values varies depending on subjective criteria. In an area like Lincoln Park prices on condos may be 94% of list price on average. They MLS has made this real easy for people to see by including a market statistics tab that calculates this automatically when you pull up a list of closed properties, this can then influence buyers decision on where they offer. How many times has it been where someone offers 90% of list expecting to meet in the middle? It happens often.

So what can you do as a home seller with this information. You can price accordingly, so say that $400,000 condo might be listed at $438,000 which is almost 10% over actual value. If a buyer were to place an offer at 90% and then expect to meet at 94% which was the area average you would start with a $394,000 offer and end up at $412,000, or $12,000 more than the place is worth. Many agents will try to convince you to put it on at $400,000 to be competitive. In this scenario you may end up listed at $400k first offer at $360,000 and ending up at $376,000 based on 94% of list for a difference of $36,000. Is this an exact science, no. Is it based on subjective decisions on part of the buyer, yes. So make sure your home shows as nice as possible by following all the cliches, spruce up, clean out, decorate, stage, and create a great first impression.

Call us to talk with us about pricing strategies for your home. Shannon (312) 593-5111.

Links:
Staging Tips: http://www.realtor.org/library/library/fg303
Anchoring: http://en.wikipedia.org/wiki/Anchoring

Click now for detailed information.

New homes downsize

Wed, 25 Nov 2009 08:23:10 -0600

The Wall Street Journal is reporting that new home builders are starting to trend off of the McMansion craze. Dropping from homes as large as the Super Big Gulp sized ≈5,000 sqft foots homes of yesterday to a smaller but still XXL of 2,500 sqft, more than twice the size of the average home in 1950. I am curious as to how long this trend will last and how much it echoes the DJIA.

from [WSJ]
check out [NPR] as well

Dow Solar Shingles

Wed, 7 Oct 2009 08:29:23 -0500

Dow is releasing a thin film solar shingle as an alternative to asphalt shingles. While they are planning on competing with existing solar arrays by offering a less expensive solution, the solution tends to be too expensive still to have a monetary return on investment without the use of tax credits.

from [NY Times]

Mode Realty

Anchoring Effect

New homes downsize

Dow Solar Shingles