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Five Ways Overconfidence Kills Real Estate Deals

Everyone love a discount. It’s a serious rush-generator for yours truly. Yet and still, there are several things I just don’t believe in cutting costs on. Attorneys, for one. Surgeons, for two. Yoga pants — some things just need to work, perfectly, every time, and the discount version causes bad results.

And I feel the same way about overconfidence. Much of the time, it actually serves our interests to take a reasonable estimate of our abilities (which we tend to be overly conservative about, as a rule), and jack it up 10 or 15 percent: When we go into a sales pitch, or start a business, say — maybe even when it’s time to approach the man or woman of our dreams and start that first, terrifying conversation.

But when it comes to financial decision-making — especially in the real estate realm — overconfidence only ever causes bad results. Here are some of the ways overconfidence rears its ugly head in the world of real estate.

1. No showings, no offers. When sellers are overconfident in their home’s appeal, their read on market dynamics, or their own personal negotiating power, the result is a phenomenon that strikes terror in the hearts of real estate agents from coast to coast: overpricing.

Overpriced homes don’t get shown to buyers nearly as much as they would if they were properly priced, because buyers see them online up next to much bigger, better homes in the same price range, or next to similar homes that are much better priced, and decide to not even bother coming to see them unless and until the seller’s overconfidence is cured.

And no showings means no offers. No offers means no sale. No sale means the house lags on the market, maybe eventually attracting some lowball offers from buyers who’ve read the lengthy number of days the place has been on the market as a sign of desperation. Overconfident sellers shoot themselves in their own feet.

2. A series of unsuccessful, lowball offers. When buyers are overconfident, on the other hand, it usually manifests in a misunderstanding of the market (i.e., they think there’s less competition or that sellers have more flexibility than really exists).

A typical overconfident buyer might read a national news headline that says home values are down, then go make an offer on the biggest and best house in the most desirable part of their own booming town at 30 percent below asking — despite the fact that there are seven offers on the place.

While that might seem like an exaggeration, there are plenty of buyers out there who don’t understand that the down market does not mean that sellers are giving homes away — nor does it mean that banks are desperate to offload foreclosed properties.

These folks end up making unsuccessful offer after unsuccessful offer, then usually end up having to either adjust their offers upwards or their standards downward.

3. Defies the data. Today’s buyers and sellers have the advantage of access to powerful data that previous generations of buyers and sellers simply did not have.

This data — including the ability to see what recent similar homes have sold for and what homes are in competition for buyers right now, photos and all — puts today’s real estate consumers, and the agents that advise them, in the position to set list prices and make offers based on the facts and strategy, not emotion and guesswork.

Overconfidence deactivates the power of the data that today’s consumers should be using to make smart real estate decisions. In other words, you might as well toss your spreadsheets and laptops out the window and go back to guesswork if you won’t allow the data and your agent’s data-based advice to correct your overconfidence.

4. Creates delay. Overconfidence causes buyers to make crazily low offers, lengthening their house-hunt times unnecessarily. It also causes them to make bizarre demands during escrow, asking bank sellers to make repairs or reduce the price midstream (even though foreclosure sales are particularly firm on “as-is” terms).

It makes sellers list their homes high, delaying the sale of their home until they relent and bring their pricing into line with reality. Generally speaking, overconfidence delays both buyers and sellers from meeting their real estate objectives.

5. Destroys rapport. When an overconfident buyer makes an irrational demand during a transaction, some sellers find it to be completely insulting. Even if the seller does bend on her position a little bit, ultimately, the buyer might have destroyed any and all rapport he might have had.

Why should the buyer care? Well, if he later needs to request an extension of time to obtain his lender’s final approval or to close escrow, or he needs to ask the seller to complete a small repair, the seller might simply refuse.

Rapport is crucial to making real estate transactions runs smoothly, and overconfidence kills rapport.