Buying a home is likely to be the biggest financial transaction you will ever make, and you’re at a distinct disadvantage. You’re an amateur up against professionals — real estate agents — versed in psychological tricks to get you excited about owning a property and paying more than you planned.
These tricks start with comparatively simple things such as making rooms look bigger in adverts by using a wide-angle photography. They extend all the way to the point of sale.
None of these tactics necessarily involve outright lying — there are laws against false and misleading conduct. But they are manipulative, exploiting the fact that humans are emotional beings with many “cognitive biases” — a perception of reality that is more emotional rather than rational.
The three most common tactics come down to manipulating your confidence in your own decisions. Close to 80 studies suggest overconfidence is one of the most significant cognitive biases influencing behaviour in the real estate market.
1. Underquote, entice the bargain hunters
You see a property in your price range that’s everything you want. You call the agent, inspect the property, then prepare for the auction. It sells for $200,000 more.
Underquoting involves deliberately advertising a property significantly lower than its likely sales price. While the prevalence of the practice is disputed, with industry representatives saying most agents do the right thing, anecdotal evidence points to underquoting being very common.
Underquoting is effective because it attracts more interested buyers and increases the number and intensity of bidding. It exploits two of the most ubiquitous cognitive biases — herd behaviour and irrational exuberance.
More interest doesn’t just increase competition. A real estate agent will communicate that interest to us, confirming our desire in the property is justified.
This tendency to “follow the herd” and imitate others, as US economist Robert Shiller noted in an influential 1995 paper, is built on the assumption others have information that justifies their actions.
This helps explain pretty much every stockmarket bubble since tulipmania in the 17th century, including the Global Financial Crisis of 2007-8 and speculation on cryptocurrency. We are emotionally swayed by the decisions of others, assuming their decisions are rational, even when they are not. This is fertile ground for our own decisions to be manipulated.
2. Hide reality, inflate expectations
Real estate agents will generally favour auctions to extract the maximum sales price, for the reasons outlined above and the prospect of auction fever — when carefully decided limits are forgotten in the thrill of the moment.
But that’s not always the case. In a soft market with few buyers, agents may instead opt for a private sale, sometimes called a “silent auction“. The goal here is to cause you to overestimate the degree of competition and thus make a bigger offer.
An agent might assist this perception by instead supplying you with information from previous public auctions of similar properties more favourable to their preferred narrative.
The value of hiding information also explains why you may come across so many sold listings with labels such as “price not disclosed” or “price withheld.” The reason for this may well be that the property sold for less than hoped.
Hiding information the agent doesn’t want you to think about depends principally on exploiting our cognitive bias towards overconfidence — assuming we are smarter, more knowledgeable or better skilled than we actually are.
In lieu of that negative information, you are more likely to focus on the available information — particularly if it suits what you want to believe.
3. Talk up nominal gains
You may have heard the old saying that property values double every 10 years. Stressing what a property is likely to be worth in a decade based on what it was worth a decade ago can be a powerful motivator to bid more.
As Robert Shiller noted in his 2013 book The Subprime Solution (about the property-buying mania that led to the Global Financial Crisis), homes are such significant investments that we tend to recall their prices from the distant past (unlike, say, like a loaf of bread or 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 illusion, a mental miscalculation that may increase your willingness to pay more for the property.
In conclusion…
There’s a case for laws to increase transparency and the accuracy of information available in the real estate market.
But in the meantime, if you’re buying a home, it’s wise to acknowledge your limitations. Do your homework, seek out independent advice and even consider hiring a professional advocate with the knowledge and experience to balance emotional and rational thoughts.
Peyman Khezr is a senior lecturer in economics and director of the Behavioural Business Lab at RMIT University. This piece first appeared on The Conversation.