The Endowment Effect or Why won't my home sell??

11 years ago

I'm new to this forum so I'm not sure if this has been discussed before. This is an interesting article on Wikipedia: http://en.wikipedia.org/wiki/Endowment_effect

In behavioral economics, the endowment effect (also known as divestiture aversion) is the hypothesis that a person's willingness to accept (WTA) compensation for a good is greater than their willingness to pay (WTP) for it once their property right to it has been established. People will pay more to retain something they own than to obtain something owned by someone elseÃ¯Â¿Â½"even when there is no cause for attachment, or even if the item was only obtained minutes ago. This is due to the fact that once you own the item, forgoing it feels like a loss, and humans are loss-averse. The endowment effect contradicts the Coase theorem, and was described as inconsistent with standard economic theory which asserts that a person's willingness to pay (WTP) for a good should be equal to their willingness to accept (WTA) compensation to be deprived of the good, a hypothesis which underlies consumer theory and indifference curves.

Basically, it's the idea that we tend to overvalue that which we own (and let's face it, homes are a major financial investment for most home owners AND carry emotional attachment that others don't value when assessing the market price when they purchase a home.

I feel that it's valuable information every realtor and home seller should learn about, understand, and consider BEFORE pricing their home for sale.

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Comments (5)

Tony2Toes
11 years ago
These are key principles taught in professional negotiation and sales courses.

In home sales, it's even MORE relevant for sellers that have invested heavy time/sweat equity in their properties. They labor and toil because they want to beautify the home to their personal standards, and put a "priceless" up charge on the TMV of the property. Many homes with long DOM values and no price drops fit into this category.

Basically, the seller deludes themselves into believing that there sweat equity is worth far more than reality.

Works the other way slightly as well. Buyers convince themselves that their budget should have material impact on the TMV of the property. It obviously has none in any specific case, although a population-wide economic downturn will.
kitykat
11 years ago
WOW... how totally timely! My home gets photographed today, with listing on Wed 5/1. In the last 2 weeks, homes in this neighborhood have been selling within the first 1-2 weeks. However, pricing, sans emotion, is a hurdle I needed to face.

I have found what helped me the most when detaching myself emotionally from this little cottage (that I have so improved and loved over the past 10 years) is studying the MINUTE details from posted photos of my competition.

These are all small, modest 'starter homes'. I made myself view these offerings as if I were considering them for myself, and compared similarities and differences to my home. Eye-opening, for certain! A hardwood floor is a hardwood floor, no matter the stain color. All ranges cook and fridges cool, DW clean, etc. Better, fancier, bells-and-whistles are nice, but... not at some premium price.

Newer roof, clean and uncluttered rooms, furnace/AC in good condition, good windows, updated kitchen and baths appealed to me. A finished basement, large shed outfitted as a workshop, huge kiddie play structure, or a water garden would be major negatives, for my personal needs.

So I stepped back, and mentally erased the personalized improvements to this house, and focused on what I would be willing to pay for the basics. It was a sobering experience... but so worthwhile. I came up with my dollar value for the house.

My agent came yesterday, having done a CMA prior to our meeting. After viewing the house, he decided he needed to re-evaluate his pricing opinion. His comment, "The house is a winner, very nice!" I have no doubt we will easily agree on the asking price.

The minute that sign appears in the front yard on Wednesday, this is no longer my home. It is merely a piece of property that I am offering up and leaving. My emotional attachment can be recalled in all the photos. The cottage will belong to another... I will have moved on.
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brickeyee
11 years ago
Many FSBO sellers seem badly afflicted.
Tony2Toes
11 years ago
FSBO sellers, in general, are typically more self-assured that their perception TMV for their property is the right one or they wouldn't be FSBO'ing in the first place.

Entitlement isn't always the right word to use I think. Self-delusion sometimes comes into play as well.
palimpsest
11 years ago
This unit:

Is currently listed for significantly more than the final listing price of this unit, in the same complex (sale closed in January) They are both 2 BR 1 Ba

Of course many of the differences are cosmetic, but there was also a lot of underlying electrical and plumbing upgrades, and the cosmetics involved historic restoration.