Buying a home is probably the largest financial transaction you will ever make, and you are clearly at a disadvantage. You are an amateur competing against professionals – realtors – skilled in psychological tricks to get you excited about owning a property and paying more than you planned.
These tricks start with relatively simple things like making rooms appear larger in ads by using wide-angle photography. They extend to the point of sale.
None of these tactics necessarily involve outright lying – there are laws against false and deceptive behavior. But they are manipulative and take advantage of the fact that humans are emotional beings with many “cognitive biases” – a perception of reality that is emotional rather than rational.
The three most common tactics come down to manipulating your confidence in your own decisions. Close to 80 studies suggest that overconfidence is one of the main cognitive biases that influence behavior in the real estate market.
1. Underquote, seduce the bargain hunters
You will see a property in your price range that is everything you are looking for. You call the broker, inspect the property and then prepare for the auction. It sells for $200,000 more.
Underquoting means that a home is deliberately advertised for a price that is considerably lower than the likely selling price. While the prevalence of the practice is disputed, with industry representatives saying most agents are doing the right thing, anecdotal evidence points out that underquoting is very common.
Underquoting is effective because it attracts more interested buyers and increases the number and intensity of bids. It exploits two of the most pervasive cognitive biases: herd behavior and irrational exuberance.
More interest not only increases competition. A real estate agent will pass that interest on to us, confirming that our desire in the property is justified.
This tendency to “follow the herd” and imitate others, as American economist Robert Shiller noted in an influential 1995 paperis based on the assumption that others have information that justifies their actions.
This explains pretty much every stock market bubble since the tulip mania in the 17th century, including the Global financial crisis of 2007-8 And speculation on cryptocurrency. We are emotionally influenced by the decisions of others, assuming that their decisions are rational, even when they are not. This is fertile ground for manipulating our own decisions.
Read more: From tulips and scrips to bitcoin and meme stocks – how speculating became a financial mania
2. Hide reality, inflate expectations
Real estate agents generally prefer auctions for the maximum selling pricefor the reasons set out above and the prospect of auction fever – when carefully defined limits are forgotten in the tension of the moment.
But that’s not always the case. In a soft market with few buyers, brokers may instead opt for a private sale, also known as a “silent auction”. The goal here is to get you to overestimate the level of competition and thus make a bigger bid.
Shaney Balcombe/AAP
A real estate agent can help this perception by instead providing you with information from previous public auctions of similar properties that are more favorable to their preferred story.
The value of hiding information also explains why you may come across so many sold listings labels such as “price not disclosed” or “price withheld”. The reason for this may very well be that the property was sold for less than hoped.
Hiding information that the agent doesn’t want you to think about depends primarily on exploiting our cognitive biases overconfidence – assuming we are smarter, more informed, or more skilled than we actually are.
Instead of that negative information, you are more likely to focus on the available information, especially if it matches what you want to believe.
Read more: If your home has a (disturbing) history, what should buyers tell you about the ‘past’?
3. Talk about nominal profits
You may have heard of the old saying that the value of real estate doubles every 10 years. Emphasizes what a property will likely be worth ten years from now based on what it was worth ten years ago can be a powerful motivator to offer more.
As Robert Shiller pointed out in his 2013 book The subprime solution (about the mania of buying real estate that led to the global financial crisis), houses are such important investments that we tend to remember their prices from the distant past (unlike, say, a loaf of bread or a bottle of milk) .
This tendency results in an unconscious focus on nominal values rather than real (inflation-adjusted) values. This cognitive bias is known as the money illusiona mental miscalculation that can increase your willingness to pay more for the property.
Finally…
There is reason for laws increase transparency and the accuracy of information available on the real estate market.
But if you’re buying a house in the meantime, it’s wise to recognize your limitations. Do your homework, get independent advice, and even consider hiring a professional lawyer with the knowledge and experience to balance emotional and rational thoughts.
