Some Selling Psychology

I like this title. It all begins with an "S" sound.

Anyway, this article is about the psychological impact of selling real estate.

Years ago I was in the advertising agency business. We represented many, many developers of condominiums and single family homes -- which is, I think, how I became interested in real estate in the first place.

I was sitting in a meeting one afternoon with a very knowledgeable real estate marketing expert from Miami and he started talking to all of us about the pyschology of selling real estate. He said that he discovered a few years ago in focus groups that when buying real estate, people mentally picture themselves in the house. If they like what they see, they will buy. If they don't like what they see, they won't buy. All the other factors having to do with the purchase -- location, floor plan, construction quality, neighborhood amenities, mortgage rate, etc. -- all those things simply help to justify the purchase decision. The sale was made when the buyer pictured himself in the house and liked what he saw. So, the purchase decision was made on the emotional level.

My friend and broker, Bill Tourtelot of Tourtelot Brothers Real Estate in St. Petersburg, Florida, has a theory that he often discusses. Bill likes to point out that there are two great motivating factors in the purchase and sale of real estate -- hope of gain and fear of loss. Of the two, Bill believes that fear of loss is the stronger motivating factor most of the time.

The reason I bring these old theories up is that both seem to indicate that in buying and selling, our emotions play a major role in the decisions we make.

What salesmen and marketing experts have known for many years has now become the subject of discussion and research at the university level. Writing in the Washington Post on November 4, 2006, Kirstin Downey describes how university professors have begun studying the psychology of finance to reveal that emotions play a major role in the decisions people make about money and the sale of property.

Kevin McCabe, a professor of economics, law, and neuroscience at George Mason University in Fairfax, Virginia (a man with that many degrees probably needs to get out more often) has stated that "There's a whole emotional processing system that goes on in the brain that's largely beyond our control." McCabe goes on to say, "The general view is that our emotions control us, and not vice versa."

Studies in neuroeconomics have made several recent discoveries which I think can be applied directly to real estate and to the pricing and selling decisions made by many people. These include ...

• Many sellers will pass up sure profits for illusory ones.
• Some sellers will turn down profits if they believe someone else is unfairly profiting more.
• Some sellers will refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today. (This sure sounds like Bill Tourtelot's hope of gain/fear of loss theory.)

Kirstin Downey's article goes on to describe something called "loss aversion". Loss aversion means that people tend to deny reality when something they own -- like a house -- declines in value. Every real estate agent who has ever listed a property in a market where prices are declining has probably seen this theory in action. Sellers tend to maintain their asking price at a level that makes no sense even when prices for similar properties are falling. That's loss aversion.

Also a psychological drawback to successful selling is a condition that exists when sellers become mentally attached to the prices received by their neighbors when they sold at the top of the market rather than at current prices which may be lower. In this case, sellers become reluctant to sell unless they receive the higher price enjoyed by their neighbors. It's the "I'll-sell-when-I-get-my-price" syndrome. In such cases, houses often sit unsold for many months with no reduction in asking price and no acceptance of realistic offers from buyers using current pricing information.

"There seems to be a psychological resistance to taking losses on the sale of a house," said David Laibson, a professor of psychology and economics at Harvard University.

No kidding, professor. But many times these "losses" are not true hard-dollar losses. They are psychological losses. They are a failure to obtain a mythical dollar figure which simply does not reflect current market conditions. Often times, these asking prices and profits from the sale of real estate are driven by sellers and agents who create unrealistic expectations regarding the market value of property. This creates mental tension because reality does not match the expectation of net profit. Sellers worry about losing money when in actuality they have a nice profit, just not as large a profit as they had originally hoped. So, sellers worry about "losing money" when in fact they are not.

Buyers, for their part, suffer from this psychological imbalance on the part of sellers by paying more for property than they should when their offers are rejected or countered because buyers suffer from fear of loss/hope of gain syndrome just as much as do sellers.

Geez, it's enough to drive anybody to the psychologist's couch.

For more information on real estate in Tampa Bay, visit my website at www.TheStPeteRealEstateSite.com.

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