Anchoring and Real estate prices
I heard about an ex army man who wanted to sell his flat in Navi Mumbai for a price of Rs. 2 crores. This was in 2013. He did make some effort and the best offer that he got was Rs. 1.65 crores. He obviously did not budge. He was staying in Kerala and had ‘heard’ this price and was stuck to it. This is called Anchoring. Vivek Kaul has written more about anchoring in an article today..and that is at the end of this note of mine. Do read that too.
I told his broker that the gap between 1.65 and 2 was just too huge, and this is STUPID anchoring. He was stuck on this price because a flat in his building WAS SOLD for Rs. 1.80 crores about a year ago, and he thought that a 10% jump up was fair to ask.
He did not understand/ accept that the deal at 1.80 was a stupid comparison. This was a terrace flat, had some extra space and his neighbor wanted it for his son who was getting married. It was a flat which was fully done up in terms of interiors AND the neighbor wanted to connect the 2 flats INTERNALLY TOO. Fairly obviously this was a premium flat where as our friend’s flat was not touched at all – and about Rs. 20 L would be needed to make it livable, with just the bare necessities.
I told all this to him on phone (not yet met him)..and he is 78 years of age. So does the capital really matter? His expenses are much lesser than his indexed pension. He has lost his wife and children are doing well. Should it really matter what exact price he gets? I know not.
I have seen big – real big – transactions happening in a jiffy and small individual investors/ landlords struggling over their properties. If he dies his children will spend money to get it transferred to their name, pay stamp duty, etc. and then sell – which easily means another Rs. 10L of expenses. UPDATE AS ON OCT 2018: STILL THE BEST OFFER HE HAS IS 1.70….HE is waiting for 2 crores..
Amazing what anchoring can do…read on…
Kirti
Well said. Anchoring is something that does not happen only in real estate but also in real life
Does a $800 Louis Vuitton purse function better than a $25 handbag from Wal-Mart? No, not even if it was hand made from giraffe leather and stitched by real, magical leprechauns. It’s just a purse. But the anchor is set. Louis Vuitton bags are expensive, and that in itself has social value. People still buy them and are happy with their purchase. If Wal-Mart offered a purse at $800 it would live out its life on the shelf. The price would be so far from the anchors already set by the store it would seem like a bad deal.
subra
buying an expensive product is NOT ANCHORING. It is a lifestyle issue. In a place where my skin or passport color is not being respected, I need to wear an Armani till they know me. Once they know me I can choose to go in cheaper clothes. Just a biz decision.
Vijay
Probably the most simple and best explaination of a good reason for buying an expensive product.
Thanks Subra for the enlightenment.
Krish
I sold two of my flats in last 3 years at B’lore. Learnt lot of lessons and it is true that what seller thinks is the right price, buyers have completely different view. Had to use lot of my corporate marketing skills and let me illustrate.
1. All the documents kept in order and indexed for quick browsing by any buyer. Even the latest property tax paid very much in the beginning of the year.
2. Vacated the tenant, painting done, washed rest rooms, repairs done and kept the flat in good condition. I am sure any buyer would like to his buy in good condition. Spent nearly 75K and kept vacant for 6 months without rent.
3. Some missing docs wanted by the buyer for loan processing, went out of the way to reach association president from abroad and got it arranged.
5. Got a broker (although not required) to arrange to flat show for every interested buyer
6. Did not get decent offers matching my expectation. Quickly realised that market would not pay my expected price ever. Agreed for 50% discount for the serious and interested buyer. In fact sold both my flats for loss. Silver lining was no cap gain. Had given 15% commission to the broker. CA who helped me filing my tax returns told me that he could have purchased my property.
7. Had seen many sellers in the same complex unable to sell the units for the last 2 years. One of my flat buyer was unable to sell his independent house for the last 2 years in the same area.
I can definitely tell that it is very difficult to buy or sell property from individual owners, most of them has anchoring bias and unbearable attitude.