Priceless psychology- pricing your home

marvelousmarvinOctober 29, 2013

I'm reading this book, Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone, and it had an interesting idea about how one could price a home to maximize the value of it- list a property for a short time like a few days at a very high price, and then cut it to a more reasonable asking price. Thus, the listing can honestly mention the original price, with that original listing price acting as an anchor.

The book explains how anchoring, where the first information or number you hear biases your subsequent judgments- even if you adjust away your the anchor, your judgement is still biased around that anchor.

The book delves into and explains the latest research on the topic of pricing, showing how people are unable to estimate 'fair' prices accurately. Instead, people are strongly influenced by the unconscious, irrational, and politically incorrect. Even when people are aware of these tricks, they're still biased by them.

In a chapter about real estate prices, the book talks about a real estate study that examined whether anchoring could affect the perceived number of actual houses on the market.

They had lay people and real estate agents go into the same house that was for sale, and were given all the info you'd have when trying to determine the value of a home- a list of comps for nearby homes that sold, MLS sheet for house and nearby homes for sale, etc..

But, they varied the listing price they told the lay people and agents, and that affected the perceived value and estimated purchasing price for the exact same home.

Listing Price Estimated Purchase Price(average)
$119,900 $107,916
$129,000 $120,457
$139,000 $123, 785
$149,000 $138,885

The higher the listing price for the same house, the higher the perceived value for the home even though everybody had the same comps and sales information.

By listing a home at an artificially higher listing price, you've increased the perceived value for that home. One of the experimenters explained, "when the price was higher, we tended to focus on the things that made it a high priced house, and if it was lower, we tended to foucs on the things that explained why the price was lower."

And, by then slashing the price to the price you really wanted after a few days, it also takes advantage of how people love 'deals' and 'sales' even if the price isn't really any lower.

The book also talks about studies where catalogs sold the exact same item, where a item that supposedly retailed for $50 but was on 'sale' for $42 outsold the exact same item that was priced for $40 but wasn't on 'sale'.

Since this pricing idea theoretically seems it'd work, are there any practical reasons why sellers don't do something like that more often? I understand that there's a trade-off between asking price and time on the market, but you'd only...

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marvelousmarvin

Another devious trick the book gives is for seller A to put his house on the market and persuade neighbor B to post her house as an FSBO on some websites.

Seller B lists her house at absurdly high price because neighbor B really doesn't want to sell. The whole point is to make A's house look like a 'deal'. According to the book, restaurants and luxury stores use this trick quite often.

Restaurants like Daniel Bouloud use this contrast trick when they serve a truffle and kobe steak burger for $100. They rarely sell that burger, but the point of the burger isn't to make a lot of money selling burgers. Instead, the point is the make everything else on the menu like a $50 steak seem cheaper in comparison.

Coach will allot only 1 or 2 very, very expensive bags to a flag ship store to be displayed prominently with the price in large, legible typeface. Coach doesn't sell many of those bags, and that's not the point of those bags. Its to make their other bags seem less expensive. Without that contrast, the Coach bags they sell might otherwise be deemed too expensive.

    Bookmark   October 29, 2013 at 3:27AM
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otterkill

You can ask whatever you want, but the bottom line is the appraisal. I'm in the process of buying a small house in the best neighborhood in my county. I looked for months and was the first to look at this one when it came on the market. At the time it was the least expensive house in the best neighborhood (also the smallest). That was a problem. They had to go to adjacent neighborhoods for comps. So the house came in 6K under my accepted offer. I'm putting down 20%, but the bank will only lend 80% of the appraised value. We fought the appraisal but they wouldn't budge. So I renegotiated and they met me in the middle. But I still have to come up with an extra 3k. Hopefully we close Friday. Like I said you can ask whatever you want.

    Bookmark   October 29, 2013 at 8:08AM
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ncrealestateguy

IMO,buyers become mini experts of the market place after viewing similar homes one after another. So, no matter what the price was originally, or what it is currently, they pretty much know what a home is worth after walking through it.

    Bookmark   October 29, 2013 at 9:29AM
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hayden2

I've seen homes once in a while that start with a high number then show a steep price drop a few days later. My first thought is not that I'm getting a deal, but that the seller is unrealistic and would be hard to work with. We're looking now, and that's a turn off for me. I'd still look at the house, but I'd be wary of negotiating with a seller who appeared to have an off the wall perception if the home's value.

    Bookmark   October 29, 2013 at 9:50AM
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lazy_gardens

it had an interesting idea about how one could price a home to maximize the value of it- list a property for a short time like a few days at a very high price, and then cut it to a more reasonable asking price.

Thereby establishing yourself, and your agent, as persons who either don't know what they are doing or who are trying to pull a fast on. That would like so totally unimpress me.

It's like the stores whose price is always XX% OFF a totally imaginary MSRP, and being in the same category as Dandy Dan the Used Car Man probably won't owrk the way the book's author implies. (he's selling books, not houses).

    Bookmark   October 29, 2013 at 10:35AM
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robo (z6a)

I think some people in my neighborhood are playing this game. As a result, their stinky houses are sitting a loooooong time on the market with numerous bad-looking price drops in the sales history. It's making my neighborhood look bad! I would think that no one thinks they're getting a bargain when there's a steep price drop, instead they think there's something wrong with the house -- or, more likely, with the sellers.

    Bookmark   October 29, 2013 at 10:43AM
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sas95

The fewer games people play with pricing the better. I love when I get an email about a "price drop" in an area listing from $1,000,000 to $999,999. Who do these sellers think they are fooling?

I'm with those that would assume that those who play pricing games are difficult sellers that I'd rather not deal with.

    Bookmark   October 29, 2013 at 10:57AM
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palimpsest

My agents firm will no longer consider a price reduction that is a negligible amount just to be able to list it as "reduced", and any house that is taken off the market must be kept off for a minimum period to qualify as "new listing".

I made an unaccepted offer on a house in my neighborhood that I subsequently tracked. It was on the MLS but through a different firm than my Realtor's.

I watched the price on that house drop as little as $25 or 50 dollars a number of times and disappear for a day or two and show up as a "new listing".

This isn't fair because it bumps legitimate new listings and legitimate reductions down on the list and many website followers only scan the first page of listings to watch properties.

There were actually houses that I wanted to look at but passed on because I did not like this other agent's tactics and he was the listing agent. That house sold a year later and for less than I had offered, btw. Despite being a new listing every other week and having about 25 "price reductions".

I think any of the tactics suggested about trying to play mind games with a potential buyer at the Very least make you look like you have unrealistic expectations or don't know what you are doing, but even more, make you look like a slimeball.

    Bookmark   October 29, 2013 at 12:33PM
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Mmmbeeer

It seems to mirror the old JC Penney mentality which caused the new pricing model for them to fail, which was: "Don't give us 'every day low pricing' (fair market value), give us overinflated pricing so that when you tell us that you've slashed 40% off, we can feel like we got a deal." And it seems to work with many people.

Housing, however, appears to be a different animal, mainly because of the investment of not only a substantially larger amount of money but there is the emotional aspect as well. People determine fair market value based on price, location, and the economy. I agree with NC, once you see a number of homes in a target location, it becomes quite clear who has priced their home realistically and who is out of touch with the market. Games like this (in my humble opinion) waste everyone's time. Not to mention, as stated above, this tactic tends to tarnish reputations because it erodes trust, which is a key factor when buyers and sellers feel they must rely on professional expertise and/or guidance. Interesting post and discussion, though--glad you shared.

    Bookmark   October 29, 2013 at 12:53PM
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Mmmbeeer

Oh, and I wanted to add, that there is a flaw in the validity of the study (if I understood it correctly) if the participants were not actual home buyers. It's one thing to get a group of people together to calculate the market value and worth of a home but it's another thing entirely to ask those same people to shell out that exact same amount when it comes time to purchase it.

    Bookmark   October 29, 2013 at 1:04PM
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weedyacres

I think housing is different than retail. Probably because it's not an impulse purchase, people shop around. Not many people check prices on a shirt a JC Penney and then run over to Kohl's to compare what they charge for the same thing.

And I wouldn't always blame stupid sellers for trying such a tactic. In my experience, it is often the agents that suggest such gimmicks.

    Bookmark   October 29, 2013 at 1:06PM
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Mmmbeeer

My point, exactly. I'm not saying the psychology behind it is invalid, just that I don't believe one can extrapolate it to manipulate the housing market as easily.

    Bookmark   October 29, 2013 at 1:14PM
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mpagmom

Real buyers have so much more information at their disposal than what was given in the study that I don't think it could possibly work.

I have seen at times that if a house is priced too low people think there must be something wrong with it.

    Bookmark   October 29, 2013 at 2:43PM
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debrak2008

Unfortunately I think many of us do fall for the "Don't give us 'every day low pricing' (fair market value), give us overinflated pricing so that when you tell us that you've slashed 40% off, we can feel like we got a deal."

I used to shop at jcp when there were coupons. When they changed to every low prices I thought the idea was great! But in reality I forgot about jcp. When I needed to purchase something that jcp would have I went somewhere else. I just didn't think about jcp anymore without the constant coupons and flyers in the mail. Now that the coupons are back I have been there to shop.

Out of site, out of mind.

    Bookmark   October 29, 2013 at 4:46PM
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nosoccermom

There are some interesting studies with respect to pricing, and I wonder to what extent they also apply to real estate, e.g.:
1. Most obvious: the two left digit count most in people's mind, i.e. 199,900 vs 200,000. Also, because searches and potential buyers stay in a certain range, e.g. below 200K. Still, it works when making an offer to go one digit up.
2. People think something ending in 9 is a bargain, even when it's not. Studies have shown that they are more willing to pay 39.00 for the same item than 37.00 or even 34.00 (sales for the item at 39.00 were 24% higher).

    Bookmark   October 29, 2013 at 6:06PM
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mpagmom

Hate to get off topic, but I once had a RE agent accidentally put our price in the MLS as $329,933 instead of $329,900. We sold it the first day, so I never had him change it. Then when the deal fell through I was left wondering if we should look like idiots for pricing it at $329,933 or if we should look like idiots for lowering the price $33.

    Bookmark   October 30, 2013 at 12:22PM
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nosoccermom

Haha.
There are other studies that say that a very precise price is taken as being more based on "facts" but also that the person is less likely to negotiate.

    Bookmark   October 30, 2013 at 2:00PM
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marvelousmarvin

With Black Friday, I thought this was an interesting article in the Wall Street Journal about all the pricing games retailers played to get customers to buy:

http://online.wsj.com/news/articles/SB10001424052702304281004579217863262940166

"retail-industry veterans acknowledge..those bargains will be a carefully engineered illusion. The common assumption is that retailers stock up on goods and then mark down the ones that don't sell, taking a hit to their profits. But that isn't typically how it plays out. Instead, big retailers work backward with their suppliers to set starting prices that, after all the markdowns, will yield the profit margins they want."

And, even as the discount customers increased significantly over a decade, the profit margins on the items, even with increased discount, didn't really change for the stores.

    Bookmark   November 30, 2013 at 3:06AM
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sheilaaus122

Very interesting topic- and I agree that retail is not like real estate. I think there is validity to the price target set= ie the uber expensive item on a menu or the $$$$$coach bag which then makes anything even slightly less money seem reasonable. In that line, I could see potentially that it might work to have a neighbor with a comparable house put theirs on the market at an inflated price with no intention of selling- to make yours seem reasonably priced. However, I also agree that when home prices are reduced, emotionally, to me, it signals a warning or trouble sign to me that it was overpriced to begin with, or there was something wrong with the home.
Interesting topic.

    Bookmark   December 7, 2013 at 7:31PM
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azmom

Some price reduction is caused by owner's situation when they cannot wait any longer and need to sell. It has nothing to do with over priced or quality of the house or merchandise.

Some sellers have no idea regarding the worth of the items they sell. I collect vintage jewelry made of precious metal; I have paid full asking price for incredible valuable items at 1/5-1/10 of the intrinsic value.

Bottom line is we have to do homework either as a buyer or a seller.

This post was edited by azmom on Sun, Dec 8, 13 at 11:59

    Bookmark   December 8, 2013 at 11:53AM
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