Real Estate Psychology

This topic deserves a book. A PhD candidate could write a dissertation about it.

All businesses have their psychological quirks, and I’ve been through a few industries to understand the spectrum.  In any business the bottom line is profit, but in some industries ego steps in the way more than in others.  I’m no longer surprised by how much pride is involved in real estate.

With single family homes, comparable properties are the main indicator of value. That said, unless you’re buying in a cookie-cutter development, no two comps are exactly alike. That’s when personal taste steps in, and that’s where I run to multifamily apartment buildings. With “units” as we call them, there are more numbers involved, which is why I add value in this area of real estate more than I do in SFRs. I’m a math guy. We have costs, CAP rates, GRMs, mortgages, FICO scores, rents, rental increases, gross profit, PITI, cash returns and overall returns.  I love it.  You figure out how much you can spend, decide what return you want on that cash, and we choose the smallest headache that can deliver that return.  Makes sense, right?

I recently removed contingencies on a property in Glendale. My buyer discovered through his physical inspections that the sewage stops up frequently and the electrical panels are out-dated. While every building has its own set of problems, this discovery represented a systems issue that might need major work. We asked for $10,000 off the price to help correct these long-deferred maintenance problems.

I only advise my buyers to ask for credits when there is substantial work needed to sustain a functioning apartment building.  There are always improvements one can make like bolting the foundation for earthquake preparedness or replacing the water heaters with new tankless ones, but those don’t constitute reasons for a price reduction in my book. I only ask for a price reduction if this problem needs to be fixed ASAP.

In response to our formal request, I got this email:

The seller is upset to receive the buyer’s request.  The seller feels that $10,000 is excessive since the buyer was aware that the property isn’t brand new.”

I can take a certain amount of hemming and hawing, but there was no formal counter offer attached to this email.  What is the point of this email between agents?  I am not your client’s therapist. You are responsible for your client’s feelings, as I am for mine.

Do you think I explained to the listing agent my thoughts on her psychological responsibility? No way. I played her psychological tennis match until we came to the inevitable conclusion: a $5,000 price reduction.

I sometimes perform a trick for certain clients where I predict exactly how a negotiation will go, and 90% of the time I’m right. Clients often ask why I suggest offering a certain amount on a property or discourage a particular price reduction. Half of my job is determining what kind of person is on the other end of the deal and where that person’s rationality and interest lies. If I’m working with a good agent who understands her client well, we work together to bypass the back and forth. It’s every agent’s responsibility to interpret his client’s emotional and financial needs into a legally sound real estate deal. That’s what I do for you, and that’s almost always what I do for the other party, as well.

One comment

  1. Great post! I’ve always wondered how a buyer can want to buy at $1mil and a seller can want to sell at $1mil but then fall into the argument trap over a seemingly immaterial $10,000. I guess you nailed it – ego! I’ve also always wondered how to determine when credits are reasonable. Your threshold seems to be if the work is “substantial” and if “the problem needs to be fixed asap.” Seems like a reasonable way to proceed, whether you’re on the buy side or the sell side.

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