How The Endowment Effect Hurts Homeowners Trying To Sell

Q: Gerald, we’ve been trying to sell our home for over a year. Our agent has been telling us to lower our price, but the market here is really hot and I don’t want to give it away. Our house is nicer than the other houses in our neighborhood, our backyard is bigger, our basement is finished and we have a beautiful custom deck. What is our real estate agent doing wrong? Kendrick, Upper Marlboro, MD

A: I’m not sure whether your Realtor is any good or not, but the bigger issue is that even in a hot real estate market, buyers are always going to look for the best value they can find. I’m sure you are understandably proud of and happy with your home, but I’m going to tell you about a bias most of us have called The Endowment Effect that may be hurting your efforts to sell your home.

In an experiment conducted by a Nobel prize winner that shows how The Endowment Effect clouds people’s judgment, coffee mugs were given to half of the subjects in a study. The group that now owned the coffee mugs was asked how much money they’d sell the mug for and the other group was asked how much money they’d pay for the mug. Remarkably, the people that now “owned” the coffee mug refused to sell it for less than $5.25 and the group that didn’t own it were willing to pay a maximum price of $2.75–for the same coffee mug! So, owning the coffee mug caused those new owners to value the mug higher and made them less willing to give it up than if they didn’t actually own it.

This Endowment Effect hurts many homeowners trying to sell their homes because in their own minds they value their house higher than the actual market value. So, how do you protect yourself from falling victim to The Endowment Effect bias when you sell property or anything for that matter? The answer is to get an independent 3rd party perspective, like an appraisal, because at the end of the day, the actual market value of your home, or any home, quite simply is what someone is willing to pay for it and not a penny more.

Thanks for your question, Kendrick. Good luck.

For more real estate tips and information visit my blog at geraldlucas.com.