Yesterday on the CTMLS Facebook page I posted this article and asked “How does this relate to your dealings with your clients?” While the article doesn’t speak directly to Connecticut real estate I had my own ideas as to how it applied, but I wanted to get your feedback on it.
Now, I’d like to share my thoughts on how the so-called “Planning Fallacy” relates to you and your clients.
As a Connecticut REALTOR® you understand the importance of pricing a property right. You know that a price that is too high could leave a home on the market for months if not years, especially when inventory is high. The problem is, as you know, your clients don’t always agree with you. Your clients will often be emotionally attached to their home that they’ve lived in for years and think that they should list it well above market value. This can be a huge detriment to your efforts to sell the property.
How do you convince them otherwise?
You’ll do a CMA to show them what other similar houses are selling for in their neighborhood. That might convince them. You’ll show them foreclosures pulled from Realist to demonstrate the state of the market. That might convince them. You might even give in to their price and agree that after a month you’ll review the price again and allow them to come to this realization on their own.
What if none of these things work?
I would suggest you START with explaining this “Planning Fallacy” theory. The theory goes that,
The basic concept, first presented by Nobel Laureate Daniel Kahneman and his partner Amos Tversky in an influential 1979 paper, is that human beings are astonishingly bad at estimating how long it will take to complete tasks. As recounted in Kahneman’s recent book, Thinking, Fast and Slow, one study found that the typical homeowner expected their home improvement projects to cost about $19,000. The average actual cost? $39,000.
So if human beings are bad at estimating the length of time things will take and in turn the costs associated with these things, wouldn’t it stand to reason that has a professional you are much better equipped to help them decide what their property is actually valued at?
How would this work in practice?
When you’re sitting down with your client discussing what price to list the property at, hear them out on their thoughts and then jump into explaining the “Planning Fallacy.” Gently talk about the study and it’s findings and then spell out the potential downsides to listing their property at the price that they were thinking. If the average homeowner is typically $20,000 off on pricing out a home improvement project, imagine what that translates into when they are estimating the price of their home.
After you’ve spelled out this theory, you can explain how many people/companies work around this difficulty that humans have,
One way to avoid planning fallacy is to get — and use — data from comparable efforts. A simple starting point can be historical projects.
Ahhhhhhhh a CMA, now we’re on the right track. Let’s look at some historical data from your neighborhood with similar properties that will help put the pricing of your home in perspective.
Using this technique will help set yourself and your client up for success in selling their piece of Connecticut real estate.
Do you think this strategy would work with your clients? Share your comments below.