How to Make Price Anchoring Work for You in Real Estate

How to Make Price Anchoring Work for You in Real Estate

In Behavioral Finance, “Price anchoring" is a psychological phenomenon that affects how we perceive the value of things. Whether we think a million dollars is a lot or a little for something requires us to create a comparative context, where we can see the number relative to something else. This guides our perception of the value of just about everything, including real estate, and invisibly guiding your decisions.

What is Price Anchoring?

Price anchoring occurs when individuals rely heavily on an initial piece of information (the "anchor") when making decisions. In other words, when presented with a price or value early in a process, people tend to judge subsequent values relative to that anchor, even if the initial number is arbitrary or irrelevant.

For example, imagine a car dealership lists a luxury vehicle at $100,000. Then, they offer a "discounted" model priced at $70,000. Although $70,000 may still seem high for the average person, the initial $100,000 price has already set a reference point, making the $70,000 price seem like a much better deal—even if it's still outside your budget or the car is worth less in your eyes.

Anchoring in Real Estate: 

Price anchoring in real estate is particularly powerful and pervasive. For both buyers and sellers, the psychological pull of an initial listing price can shape their perception of value and influence their decisions. People often judge a property’s value relative to the price it was initially presented with. Recognize that your perception of the value of a property is heavily influenced by an arbitrary number.

For Home Buyers:

When considering a property listed for sale, you might first look at the photo and see if it appeals to you, but the next thing you notice is the price. If the asking price is set very high, you might subconsciously anchor your perceptions of its value to that high price. If the property has no buyers and your lower offer is accepted, you may feel like you’re getting a bargain, even though the final price may still be higher than the property’s true market value. 

For Home Sellers:

Sellers can use price anchoring in a number of ways. They can start with a higher asking price to create a psychological benchmark that potential buyers will compare subsequent price reductions to. They can price below market to create excitement among buyers at the idea of getting a good deal, even if the price is later pushed higher in active bidding.  

The Role of Price Anchoring in Negotiations:

Price anchoring comes heavily into play when negotiating for repairs and credits. Buyers may start negotiations by asking for a large credit based on the anchor in their minds set by an estimate for termite or plumbing repairs. Similarly, sellers may refuse to offer much of a concession, even if repairs will cost a significant sum, simply because they are anchored to the original listing price. Both sides can leverage price anchoring to their advantage if they are aware of the psychological tendencies involved. For example, the first number presented, whether requested or offered, is the one to which all subsequent numbers are compared. Therefore it is imperative that you get your number on the table first. Recognize that price anchoring is irrational, but undeniable. Do your research, set your goal, and then use strategy to get there. 

 

Work With Us

Parasol Realty aspires to exceed client expectations and create an uplifting experience that transcends the transaction. We take every client’s needs and concerns seriously, we answer calls promptly, and we are delighted to have our clients come back to us repeatedly over the years as life circumstances change.

Follow Us on Instagram