According
to wikipidia ‘The endowment effect is the hypothesis that a person’s willingness to
accept compensation for a good is greater than their willing to pay for it once
their property right has been established.’ In the world of real estate
this means we all think our home is worth more than it really is.
Given
that I have been selling real estate for well over a decade, I expected that I
would be immune to this phenomenon. However, as the last coat of paint is
rolled onto the walls of my own home, I find myself day dreaming at what the
property may now be worth (despite the fact it was bought at the height of the
boom and our original renovation budget has doubled).
When
it comes to our homes, the endowment effect costs average Australians millions
of dollars a year in squandered opportunities. Our homes are normally our biggest
assets and we are emotionally attached to them. It’s impossible to be objective
about the market value of a place where you watch your children take their
first steps or where you bowled Dad out in that legendary game of back yard
cricket.
Combine
this with a market where more and more real estate agents than ever are
competing for less and less sales, and you have a recipe for disaster.
Most
people call in three agents and ask one simple question: ‘what is it worth?’ Knowing
their answer will affect their chance of getting the listing, the agents normally
give the owners an ‘optimistic assessment’, ham up how many perfect buyers they
have on their books, and before the house even hits the market they’ve painted
the scene for a fever pitch auction.
At
this stage most people go on the market and their ability to recognize a good
offer is all but gone – and who can blame them? But the worst is yet to come…
Your
property is likely to be worth the most the first day it is put on the market.
The best buyers spot it quickly and turn up immediately – these buyers are
ready and if it’s what they are looking for, they will pounce. As the seller,
you are in a very strong negotiating position – you own the product and it’s
brand new to the market.
This
is where the disaster normally unfolds – the overconfident seller meets the
best buyers in the market and rejects their early offers. The expectation is
that next week there will be even more but in most cases the next week there
are less. Ask friends and you will find this happens all the time.
The
greatest challenge that home sellers across the globe face is finding out how
much their beloved home is worth before putting it on the public
market.
So
how do you find out? Either call an independent valuer before you select an
agent, or when interviewing agents ask them to propose a sliding scale
on their commission – going from best case to worst case.
A
sliding scale will reveal to you where the agent really thinks the house will
sell and this is exactly what you need to know before you start.
