A soaring real estate market can further fuel people’s delusions about their being real estate savvy. Homeowners fail to recognize that the rising real estate tide is often responsible for lifting all the boats, not their uncanny ability to time a market or create value in a home. Their passive success strengthens the belief that they are their own best guide in the real estate world—and they tune out their agent’s counsel. Chances are, sellers who ride an up market are still leaving money on the table.
The story plays out over and over, regardless of the market or the real estate cycle. Buyers and sellers don’t trust the expert—the person who traffics in the real estate market all day every day and understands its intricacies. So they grab the reins and direct the process themselves. Even though most people only enter the world of real estate once a decade, or perhaps once in a lifetime, many think they understand how it works. They are unaware of what they don’t know, and they don’t realize how emotions blind them to market realities.
Information about homes and markets only scratches the surface of what buyers and sellers need to maximize the value of their investment. The sophisticated and nuanced sales process often gets buried beneath the popular perception that one can hang a sign, post a listing on Redfin, negotiate a deal, and fill out the paperwork.
A wide range of overlapping skills is needed to successfully purchase or sell a home. You must be an expert at valuing properties. You must understand the psychology of pricing a home. You have to be attuned to the shifting design tastes of buyers and how the local demographic wants to live in their homes. Ideally, you are a concierge, possessing an ecosystem of stagers, designers, builders, and subcontractors who can quickly get a home ready for the market. Using your design acumen and resources, you show prospective buyers how to live in a home. You are skilled at marketing and branding, capable of building a story around a home that buyers remember. You have the negotiating skills to close a deal on favorable terms. Perhaps above all, you have to deliver the unvarnished truth, even if it includes messages that buyers and sellers don’t want to hear.
This Story Has a Happy Ending
I’m writing this book to show you the right way to buy and sell homes and set higher expectations for the professional services that your agent should deliver.
My goal is for this book to serve as the best guide ever to maximizing value on the purchase or sale of a home. In each chapter, I will explore one specific step in the home sale and acquisition process, explaining it in depth.
I don’t recommend buying or selling property without expert representation, but if you are determined to be the captain of your own ship, this book will help you navigate the waters.
I have drawn on two aspects of my background in writing this book. First, my value-focused approach to real estate, which was shaped by buying and renovating residential homes. Before becoming an agent, my passion was finding homes that had fallen out of step with the market, reimagining what they could be, then renovating and selling them for a profit. I bought and sold over twenty homes in the western United States.
Each project served as a laboratory for understanding how to create spaces that people wanted to live in. I studied the entire process of home ownership—investing, renovating, and selling. I made a mistake on every single home, and took each lesson and rolled it into the next project. I invested my own money in each project. I learned to view houses, not just as homes, but as assets to monetize. And I carried that mindset into real estate after I became a licensed agent.
Second, I have worked for twenty years representing clients in the acquisition and sale of homes. I have witnessed how implementation of the principles laid out in this book has resulted in tremendous success for my clients.
This book provides a practical and disciplined approach to buying and selling a home. Along the way, I delve into the psychology of home buyers and sellers because investors’ primary challenge is often themselves. The approach is simple, but it’s not easy. Success in residential real estate is not about timing the market or outwitting the person on the other end of the negotiation—it’s about adhering to a set of reasoned precepts that will guide you through each step of a process fraught with emotional and psychological traps. Follow this approach, and you will come out an absolute winner in the sale and purchase of your home.
There Are No Picassos in Real Estate—Valuing a Home
In 1990, a series of renowned experiments by Nobel Prize recipients Daniel Kahneman and Richard Thaler and coauthor Jack Knetsch revealed that we have an irrational tendency to overvalue something just because we own it, regardless of its objective value.7 The researchers asked a large group to assign a value they would be willing to pay for a coffee mug. Half the participants were then given the mug for free and, soon after, the opportunity to trade their mug for an object of equal value. Classical economics assumes that people always behave rationally within an economic system and that the participants who were given mugs would maximize their welfare by trading for their preferred object. But it didn’t work out that way. The owners of the mugs wanted, on average, twice the price they had been willing to pay for them. Simply owning the mug caused people to value it higher.
A later study showed that the value of a possession increases with the duration of ownership. The longer you own something, the more valuable it is, at least to you.8
The discovery that we value things more when we own them, a cognitive bias Thaler termed the “endowment effect,” repeatedly shows up with homeownership. Regardless of the neighborhood or price tier, homeowners commonly believe the value of their home is higher than its actual market value. They think their home is that rare Picasso that defies market economics.
A paper published by the Reserve Bank of Australia revealed that about a quarter of homeowners think their property is worth up to 20 percent more than it is.9 And the greater the owners’ debt, the more they overestimate it. Hardly a seller in this country doesn’t feel more qualified to render an opinion on value than the expert he or she hires. Unfortunately, living in a home doesn’t make us experts in real estate.
Perception of value matters because the value of a house plays a role in many significant financial decisions. Home values shape household retirement plans.10 Home values influence decisions on expenditures, with consumption going up by 5 to 7 percent of the perceived increase in housing wealth.11 Above all, perceived home values dramatically impact the decision-making process when you elect to sell your home. Thinking your home is worth more than it is leads to overpricing, which can undermine the success of the sale.
How do homeowners shield themselves from the endowment effect—that stealthy, systematic error in thinking that impairs decision-making—when they are engaging in one of the biggest transactions of their life? Find an expert to value your home, an independent third party who has no emotional or financial connection to the property. Someone who does not view the home through the prism of the endowment effect.
The reality is that the value of your home is governed by comparable properties, likely right down the street from you. The residential real estate business is based on numbers, yet we often ignore the metrics and market data and make decisions based on what we want to believe. The value of a home has nothing to do with what we paid for it,