Editor’s Note: With this article, we launch a new regular series on personal finance issues by Rob Clarfeld, CPA, Certified Financial Planner and Great Barrington resident with extensive experience in helping people achieve their financial goals.
If you’re considering putting your house on the market you’re probably stressing over how to price it. You probably know that as a result of the pandemic, with many professionals and office workers able to work remotely, a tsunami of potential buyers from Boston and New York want to experience the wonderful qualify of life we enjoy in the Berkshires. Fortunately, you’ll be listing your property in the best “sellers market” our county has experienced in decades. “The average selling price in Berkshire County rose by 32 percent last year” says Gladys Montgomery, with William Pitt Sotheby’s International Reality. “At present, inventory is at a record low, buyer demand remains strong, and well-priced properties can sell in just days, and often over asking.”
As part of the process of developing your selling price you’ll probably search Zillow and Realtor.com to learn of comparable listings in your town. Along with mostly recent listings, you’ll notice, perhaps with curiosity, that some listings are many months old. Are these houses so seriously flawed as to be unsellable? Unlikely. These houses were mispriced; everything sells at the right price. You may want to be a bit aggressive in your pricing, but only a bit. All realtors agree that you will want to avoid a listing that is so mispriced that it goes “stale” or shows multiple price reductions. You want to get it right the first time you list.
The pool of house sellers is as diverse as that of buyers. There are some sellers who are not seriously motivated to sell, and will do so only if a buyer is willing to come up to their “reach” price. Every market has reach sellers. These folks are fine either waiting to see if they can attract the unique interested buyer, or not selling at all.
Then there’s another group of sellers who truly want to find a buyer but are held back from realistic pricing by an unconscious cognitive bias known as the Entitlement Effect — a psychological mindset that causes us to behave in ways that economists view as irrational.
Richard Thaler, a Nobel laureate in Economics, coined the term “Entitlement Effect” to describe why “people often demand much more to give up an object than they would be willing to pay to acquire it.” This is especially true when pricing a house, as real estate is an asset that doesn’t have a strictly objective marketplace, such as buying or selling listed securities on a national exchange.
Entitlement sellers have a prospective of their home’s value that is based on what it means to them, rather than the economics of the marketplace. They often rationalize an over-market asking price by based on a “what I need to get out of the sale,” or similar to the reach buyer, they may have an “it only takes one buyer” mentality. They often think of their house as the place where they raised their children (with pencil marks on the kitchen doorframe to prove it), or overvalue a house’s unique features, which may not be a positive to a perspective buyer. Again, we tend to overvalue that which we own. Does this thinking resonate with you? There’s nothing inherently flawed about appreciating the noneconomic value of our possessions, but such thinking can get in your way when you are trying to achieve a relatively quick sale.
When you are pricing your house for a sale, you should consider relying on the judgment of real estate professionals, rather than listening to your inner cognitive biases.