Priceless

The myth of fair value--and how to take advantage of it.

Home Won't Sell? Try Two Prices Instead of One

Psychology is key to selling in today's real estate market.

It's not a great time to be selling a house — and to add insult to injury, behavioral economists put the "blame" on sellers. In many cities, it seems that no buyer wants to pay what any seller can bear to accept. This is said to be a classic case of loss aversion. Sellers remember what their house would have sold for, before the bubble burst. Compared to that would-have, should-have price, today's prices feel like losses. When confronted with a probable "loss," people are inclined to take chances, in order to avoid it. This is why racetrack bettors try to erase their losses with a long-shot bet. And it's why today's home sellers set prices too high for the market, in the faint hope that somehow, someday, a buyer will pay their unrealistic price. This leads to frustration on both sides — or make that, on all three sides. Agents are getting slammed, too, as sales slow to a trickle.

Latest postcard from the disaster: A Los Angeles home was recently marked down $4.5 million. It's the Ennis House, a famous Frank Lloyd Wright creation completed in 1924. You may have seen it in Blade Runner or, um, a Ricky Martin video. Listed last year for $15 million, it didn't sell, and it's now been discounted to $10.5 million. Even that price may not qualify as a bargain. It's one of Wright's "textile block" houses, notorious money pits. Severely damaged by the 1994 Northridge earthquake and some monsoon-like rainy seasons, the home was red-tagged by city inspectors in 2005. The foundation that owns it spent $6.5 million on repairs, and it's estimated that the new owner will need to lay out a comparable sum. For what it's worth, Zillow's "Zestimate" for the place is only $2,090,500. That presumably reflects what it would be worth without a starchitect name attached.
There may be a smart psychological tactic for anxious home sellers: List a house with two prices. In Australia, it's been the custom for sellers to do that, giving a minimum and a maximum asking price. The practice has turned up in suburban Long Island, reported Marcelle S. Fischler in The New York Times.

…Ms. Karekinian has joined a small group of pricing pioneers on Long Island: Rather than settling on one number for her five-bedroom colonial, she opted for a “value range price” of $999,000 to $1,194,876. She decided to adopt the tactic in listing the property last fall with Carol Poetsch of Prudential Douglas Elliman’s East Meadow office.

One advantage is obvious: Buyers scanning listings online usually set a minimum and maximum price. These are round numbers (often chosen from a menu on the listing site). In the example above, a buyer whose maximum price was $1 million would see a house listed at "$999,000 to $1,194,876," but not a house listed at a single price higher than a million. (Of course, this depends on listing sites being able to handle price ranges.)

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Another advantage of this trick is simple confusion. Just about everyone knows that a listing price of $X typically signals that the seller is willing to accept a good deal less than $X. In this market, few sane buyers are going to offer list price. Having two prices upsets this comfortable strategy. Do you offer the low price of the range? Less than the low price? Or do you make an offer somewhere in the range? Maybe you really, really want the house and want to make a preemptive offer. Do you offer the high price?

All of the above make a certain amount of sense. Range pricing is likely to spread out the bell curve of offers. Since sellers choose an offer from the high end of the bell curve, that ought to result in higher transacted prices.

Most importantly, perhaps, the range can act like an advertised reference price. Discount stores will have price tags saying something like "$14.99 COMPARABLE VALUE OF $25.00." Empirical studies and retail practice confirm that customers, even those who know better, are more likely to buy at $14.99 when reminded that they could be paying more elsewhere.

A classic illustration of the two-offer effect is a 1995 experiment by Max Bazerman, Sally Blount White, and George Loewenstein. Volunteers playing a simple bargaining simulation (the ultimatum game) were more likely to accept a given price when it was presented with a second, less advantageous offer. In other words, they rejected an offer of $3, when it was the only offer on the table, but accepted $3, when the choices were $2, $3 — or no deal.

In the case of a house, buyers will figure that if they can get it near the low end of the listing range, it's a bargain. That extra nudge could be important in today's market. As Long Island seller Karekinian said, “I am not just going to say I want $1.3 and that’s final. Now I’m flexible — not stupid flexible, but flexible.”

SEE ALSO
Bazerman, Max H., Sally Blount White, and George F. Loewenstein (1995). "Perceptions of Fairness in Interpersonal and Individual Choice Situations." Current Directions in Psychological Science 4, 39-43.

William Poundstone is the best-selling author of 11 books, including Priceless: The Myth of Fair Value (and How to Take Advantage of It).

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