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Anchors Aweigh

Jiab Wasserman

THE DALLAS HOUSING market has recently shown signs of slowing. In our townhome community, I’ve noticed that houses are sitting unsold for longer. Until recently, any place on the market for more than seven days was considered unusually long.

Two weeks ago, we became interested in buying a two bedroom, two bath townhome on our street as a rental property. It was listed at $375,000. Upon a closer look, however, we found the following:

  • The property hasn’t been upgraded since 1988. We also found several structural problems, including a major foundation crack that seemed to cut across the front room. The roof, heating and cooling system, and hot water heater all needed replacing.
  • The county tax appraised value is $305,000, which is based on the assumption the house is in average condition and hence doesn’t factor in the structural problems and the lack of upkeep and updating. That $305,000 works out to $188 per square foot, significantly below the list price of $230 per square foot.

Based on the condition and the expected repairs, we made an offer of $280,000, or $95,000 lower than the list price. Yes, that was a big difference. But considering all the repairs needed and the cooling housing market, we thought it fair. The seller countered with $359,000. We walked away.

It struck me that this was a classic example of anchoring bias—the inordinate influence of the first piece of information encountered. With a home sale, the initial price is typically seen as an anchoring point, whether that price is reasonable or not.

I suspect the owner set the selling price based on market conditions in early spring, and then failed to adjust the price despite sharply higher mortgage rates and a recent high cancellation rate for home-sale contracts. Even our own realtor thought our bid was too low. But I suspect she, too, was measuring our bid relative to the list price, not the house’s actual condition and value.

Anchoring bias typically occurs in situations where folks are dealing with numbers. But it can also occur with qualitative expectations. If children have good grades in elementary school, that anchors the parents’ expectations. Parents declare their child an “A student” and expect subsequent teachers to confirm.

Similarly, athletes who perform well at the junior level are designated forever stars. Donald Young, a U.S. tennis player, was phenomenal in junior tournaments but ranked only as high as 38th as a professional. That’s an incredible achievement—but it’s seen as disappointing compared to our expectations of Young, which are anchored on his early success.

Want to be happier with your achievements? Weigh the anchor of your expectations—and perhaps change it for another if that’s what the facts demand.

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MarkP
MarkP
2 months ago

Denmark is often cited as the happiest country in the world … usually attributed to its high level of social equality and community spirit. My daughter lived there for a while and she thinks it’s because most have moderate expectations…just happy to be average. With the world’s expectation for Danes to be happy, I wonder if they now feel pressure to be so.

Jo Bo
Jo Bo
2 months ago

Anchoring bias sometimes works in favor of the “A” child, too. As an educator for many years, I know that it is all too easy to want to intuit, when grading, what a top student really wanted to say, not what they actually said. That is one reason that higher education has widely adopted grading rubrics to assess students objectively. In an ideal world, property would be evaluated based on a standard, nation-wide rubric prior to listing. Not only would the evaluation objectively assess property condition, but it would also list risk factors (susceptibility to flooding, landslides, earthquakes, etc).

Last edited 2 months ago by Jo Bo
Nate Allen
Nate Allen
2 months ago

Have you had a chance to follow up on the property to see the final sale price?

Jiab Wasserman
Jiab Wasserman
2 months ago
Reply to  Nate Allen

The property has not been sold. I think it will sit a while.

Arnold Hold
Arnold Hold
2 months ago

What? It seems clear the real estate market may be slowing down, but when you make an offer with a twenty-five percent haircut on the asking price you should not be surprised if the deal goes nowhere. Data may back some of this up, but does not feel right, and it is a surprise a counter offer was even made.

johny
johny
2 months ago

If you don’t expect anything, you won’t be disappointed, and then if it works out, you are happy. So here we’ve hit on the formula for happiness in life.

So to go through life without expectations is to be filled with positive surprises.

Buddhists refer to this as having a beginners mind.

To be like a child I believe is the Christian version of the same.

Readers of this blog should do well to remember the familiar phrase:”past performance doesn’t indicate future results”.

Easy to know, but hard to do.

wtfwjtd
wtfwjtd
2 months ago

I’ve ran into this issue in the past with used vehicles, as well as properties. I try and get a sense of what a vehicle (or property) would be worth in the current market–comparable sales are a good starting point, or “anchor”, if you will– and then make deductions from that point, to finally arrive at an offer, regardless of the actual asking price. In learning this process, I’ve offended more than one seller when I tried to explain why I made the seemingly low offer that I had to make. I’ve long since learned that when the “anchor” is too high, it’s usually because much emotion is tying the seller to the item in question, and trying to explain all this is a waste of time. Most sellers assume that their (less than pristine) item should sell for top dollar regardless of its flaws, and admitting to wear and tear, or even a hint that they might have paid too much for the item in question, is deeply insulting to them. When I encounter this emotion-based dynamic, I usually just walk away, as you (wisely) did.
For me, buying and selling is approached much like investing. It’s mostly a rational process, and not one where relying on emotion is likely to result in a favorable long-term outcome.

neyugn
neyugn
2 months ago

I just sold a property and and had to lower the selling price below the county’s appraisal value (I live within the county of the city of Houston). It’s true that I look at the county’s appraisal value of my property but I do not believe it reflects the property’s “true” value. It takes a rational person to realize anchoring bias.

Last edited 2 months ago by neyugn
AnthonyClan
AnthonyClan
2 months ago

The fortitude to walk away from a deal is a superpower. I don’t know if the reason for the low offer was explained to the seller, if so they may have made a lower counter offer. Most likely an uninformed buyer will come along. The realtor will be no help, just out for the commission. If your realtor had supported your offer, then you would have found a real keeper. A realtor looking to develop a long term relationship vs. quick sale.

Olin
Olin
2 months ago

I walked away from purchasing a new home from a national home builder because of cracks in the foundations and footings of several homes that were under construction in a senior development. Cracks are a sign of poor site preparation, and over time foundation settling will show greater issues. They can also create radon concerns.

Rick Connor
Rick Connor
2 months ago

Nice article Jiab. I know I’m susceptible to anchoring. It sounds like a good decision to walk away from that property.

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