An article on the latimes.com entitled “The Pain of Selling Your House: Why owners often remove their homes from the market even if they’d make a windfall” caught my attention. The article is an excellent analysis of why sellers and buyers act the way they do. Consider the following scenario from the article:
You bought your house 10 years ago for $250,000. Now you’re thinking of downsizing, so you put your house on the market — for $600,000. No takers. After a few weeks, you reduce the price to $575,000. Then $550,000. An offer comes in for $520,000. You reject it and pull your house off the market, waiting for better times.
There are two ways to look at a selling price of $520,000 for a house you bought for $250,000. One way is to start with what you paid for the house. With that as your benchmark, or anchor, $520,000 is a windfall. You’ve doubled your money in a decade.
The other way is to use your original asking price as your anchor. If you do that, selling at $520,000 will feel like a sizable loss.
Take for instance the example of Williams-Sonoma and the automatic bread maker.
Is $279 a lot of money to spend on an automatic bread maker? When Williams-Sonoma first marketed these then-novel gadgets more than 20 years ago, no shopper knew what a bread maker ought to cost, and Williams-Sonoma didn’t sell a lot of them. Then it introduced a deluxe, $450 model. The company didn’t sell many of these either, but sales of the $279 model went through the roof. The deluxe bread maker made the regular one seem like a bargain. Conclusion: We are affected by anchors whether it’s rational or not, whether we want to be or not.
This concept of price anchors plays heavily into auctions. Generally, when property is sold at auction, the seller establishes in a price they would be willing to take for the property. Sometimes this price is in the form of a reserve, and sometimes it’s merely an amount they’d like to receive. At the same time, a buyer establishes a price they are willing to pay for an item based on their own anchors.
According to the article, in every purchase or sale, we have set anchors. Whether you are selling or buying, it’s important to realize what your anchor is, and more importantly how you determined the anchor. If as a seller, you set your anchor based on emotion, or speculation, you’ll often come away dissatisfied with the results. The same holds true as a buyer, if you set your anchor price of an item based on speculation and without research, you’ll either not succeed in purchasing the item because your anchor was too low, or you’ll grossly overpay for an item because your anchor was too high.
As a buyer or seller, avoid anchoring yourself to values of an item by relying on professionals to assist in the valuation of an item. As a seller, talk with the auctioneer about what they feel the value of your item may be; conduct research on recent sales of your item. As a buyer, the same holds true, what are other similar items selling for in the current market? What is the approximate value the auctioneer feels the item will bring at auction? By doing so, you’ll be setting yourself up for success when buying and selling.
In our current economic times, it is especially important to conduct research on the true market value of an item. The market is changing quickly, both up and down, and without the correct anchors, you may be left with an asset that you’ve overvalued for no other reason than an improperly set anchor. In parting, always remember every person has an anchor set based on certain factors. By taking into account potential anchors and considering the ultimate objective of an individual, you’ll be better prepared to evaluate the true market value of an item.
John D Schultz is the Vice President of Operations and an Auctioneer for Schultz Auctioneers Landmark Realty, Inc. based out of Upsala, MN. He is also the current President of the Minnesota State Auctioneers Association. John can be reached by email at John@SchultzAuctioneers.com.
