Estate Transactions: A Comprehensive Analysis of Buying and Selling Decisions.
By: Nicholas Kerkmeester
The real estate market is a complex industry that goes beyond the purchase and sale of properties. To properly understand it, one needs to comprehend human psychology and emotions, which play a significant role in the decision-making process. From buying a dream home to selling a property, emotions are always present, and they can significantly impact the outcome of a real estate transaction.
To properly understand the impacts of the psychological side of real estate, it is necessary to focus on three key aspects: connections to the properties (sense of identification and belonging), sense of security and stability, and signing the contract.
An individual's biggest financial decision will most likely be the decision to purchase a home. The sentimental value behind this purchase is massive. A home reflects who you are, your identity, your sense of purpose, making the buy that much harder than it originally is. There are other factors that influence the decision to purchase a property, including location and budget/price, but emotions play the biggest role in it. According to studies, emotions influence 90% of our decisions. When the time comes to buying the property, understanding and knowing the psychological aspects that affect the human psyche will help us become more informed and make more rational choices.
Humans are greatly influenced by emotions, forming bonds wherever they go. This may be with other living organisms, or objects and landscapes. This obviously affects buyers and sellers as well. Not seeing the property for what it's worth and instead envisioning it as being the place that they will create memories and build a life can be a major flaw of the buyer psyche. This has proven to have led millions of homeowners to paying higher prices than the asking price due to personal connection. According to a survey done by real estate tycoon Zillow, it was found that buyers who fall in love with a property are willing to pay an average of 1 to 5% more than the listed price. Other factors can also be affected by psychology.
Colour has started becoming famed due to its involvement in the influence of human decision making. Due to the eye responding to waves (visual light), and each colour having a different wavelength, they can affect the electrical impulses going to the hypothalamus in different ways. This leads to different triggers that control the behavioural patterns and other bodily functions. Therefore, using more comforting colours (Green, Blue, White) can lead to fostering a sense of comfort. Added value through newly painted walls and clean areas can give the perception that the property is worth more than it actually is. This can cause buyers to overlook flaws or pay more than they had initially planned.
On the other hand, sellers may have an emotional attachment to the property as well, whether it's because of the memories they have created or the work they have put into maintaining it. This can make it difficult for them to part with the property or to negotiate on price. Understanding these emotional connections can help real estate agents better serve their clients, by providing the necessary support and guidance throughout the buying or selling process.
Finally, setting up the sale sign outside of your property can be an emotional process. The emotions at play in this decision making moment is substantial to make imperative decisions regarding pure statistical data. Due to humans' habitual psychological patterns, attachments may be formed to property, giving a strong sense of sentimental value. In addition to sentimental attachment, sellers can also experience anxiety and stress related to the sale, including the fear of not receiving a fair price or not being able to sell the property quickly. This sense of anxiety can lead to sellers making biassed economic decisions that would lead to sale that are not of their best interest, such as accepting a low offer or not doing necessary repairs to the property before placing it in the market. As a result of emotional attachments and anxiety associated with selling a home, real estate professionals must be aware of these factors and work to manage them to assist sellers in making informed decisions.
A non-negotiable characteristic of a property is the security that it provides. Undermining all other aspects, security is what makes one be comfortable going to sleep without thinking about what may happen when they aren't watching. Perceived safety in this case is what drives prices of homes. Different factors such as comfort, predictability, sense of control, and trust, make properties value or devalue in price. The psyche of the buyer to analyse all these factors and set a reasonable price for it is imperative. Because security is such an underlying factor, buyers may be willing to overpay the market price to feel the sense of tranquillity.
The predictability of the area that the property is situated in has a significant impact on the driving force of the price. This is not only limited for the physical landscape, but also the psychological one. For example, if an economy is projected to experience growth in the near future, consumer confidence (which measures how optimistic or pessimistic consumers are about the state of the economy) will increase and thus they will be willing to pay a higher price for a property, as they believe that it will appreciate in value. Conversely, if the economy is expected to have a downturn, consumer confidence will decrease exponentially, and thus they will be more hesitant to invest in real estate, leading to a decrease in demand and subsequent depreciation in property values.
Physical landscape also matters in consumer confidence. If plans become present for development and infrastructure development, this will increase the buyers sentimentality and consequently increase of price and demand is imminent. This can be said for the negative changes as well. If changes occur, such as the construction of a nightclub or a football stadium, this can decrease demand and subsequently decrease property values. Additionally, the perceived future value of a property can also be influenced by factors such as the school district, crime rates, and environmental concerns. Real estate decisions should take into account future predictions, as they can significantly influence property prices, and are crucial for both buyers and sellers.
Neuroscience behind decision making has been studied for centuries. Theories have been highly popularised stating that emotions affect decisions and cause irregularities and uncertainties. Decisions were speculated to only be perfect if they were based purely on logic. A decision cannot be made effectively without emotional input, researchers are now discovering. Scientist Antonio Damasio was a pioneer in proving that emotions support rational thought, not impede it.
During his case study, he supervised a man named “Elliot '' who had a small tumour removed from his cortex near the brain's frontal lobe. After the experiment, it was discovered that Elliots intelligence remained the same, but he had lost his sense of emotions. This was a massive chance for Damasio to conduct the experiment of logic vs emotions. It was predicted at the time that human emotions were damaging to results and that a perfect answer was derived from local based thinking and not emotion based speculating. After supervising Elliot for a long period of time, it was resolute that he couldn't conduct the most banal decisions. Overall, this left Elliot in shambles as he ended losing his job, his marriage and what used to be valued in his life.
This study helped reach the verdict that emotions intertwined with logical prowess is what is necessary for decision based thinking. Each psychological factor without the other one would be damaging and it is required for more open minded individuals to perceive the process as a whole and properly analyse all the different factors before making the final decision.
Real estate buyers have begun modelling plans to manage these cognitive biases that are causing negative returns. Plans such as creating non-negotiables goals before finding a property is popular advice. Setting up barriers such as the price, location, and number of bedrooms can lead to proactively setting up their expectations. This will cause individuals to keep their emotions in check when being faced with all these psychological obstacles. These non-negotiables allow for impeding buyers from paying over the budget due to the purpose of “loving the house”. Overall, this will cause loss of time spent on the house, but at the end of the day it will save someone from being a slave to their ideas and losing out on the deal because of it.
In summation, as the real estate market is a complex and intricate system with lots of undermining factors causing impacts, it is recommended to understand more about some of the psychological biases that could inflate the market price and learn ways to avoid it. As the predominant trait of cognitive bias does not discriminate, it is present in all living organisms that are partaking in the exchange. This may be through the seller making the house more welcoming towards the psyche of the buyers or the buyers using the intricate gaps in the mental fortitude of the sellers to decrease the price. Overall, it is extremely important to understand the role that logic and emotions play during the pricing of real estate and learning how to overcome this will make you a stronger individual.