Agents have been claiming “the first offer is the best offer” for years, but are they full of hot air? A study says no: humans have an implicit preference for firsts, according to three experiments conducted by researchers at Berkeley and Harvard.
What is the primacy effect?
Three pairs were presented to participants in the study in order to test the “first is best” phenomenon: two salespeople, two brands of chewing gum and two inmates up for parole. Participants overwhelmingly chose the first option presented in each pair, regardless of which item was presented first. This innate tendency to choose the first option presented is called the primacy effect.
This implicit preference reflects in real estate practice in the form of buyers and sellers making selections for properties, agents, mortgages and purchase offers. If the first is best phenomenon holds true, agents may be able to improve their practice and earn more for reaching near immediate client satisfaction.
Going once – the seller’s first offer
The primacy effect may urge a seller to accept the first offer they receive, which they may view as the answer to their quest to sell the property. The agent’s expertise is then relied upon to inject logic into the decision, on behalf of their seller.
First, the agent needs to work with the seller to consider the benefits and drawbacks of the offer in the current market. How does the offer compare to other offers received, and the seller’s asking price? Was the seller’s asking price in hindsight reasonable? What kind of demand now exists for homes in the seller’s neighborhood?
For agents, the differentiation is simple. They are trained to be able to identify a low-ball offer from a reasonable, well-researched offer. Sellers, however, are typically unaware of all the conditions influencing the sale of their property. They may have priced their home too low and believe the first low-ball offer they receive is a good deal.
If the seller’s asking price is low, and the seller is inclined to accept it, agents need to advise their clients on the merits of a counteroffer at fair market value (FMV).
However, in direct contrast to the primacy effect, many sellers refuse to see the benefits of a good first offer made on their property. Sticky pricing and accelerated pricing often lead greedy sellers to believe they will get a perfect deal at a high price if they hold out just a little longer, apparently ignorant to the fact that their property will become of less interest to buyers the longer it remains on the market.Shop-worn properties like these will ultimately sell for less than their FMV at the time of listing, making the seller wish they had accepted that first, well-negotiated offer.
Agents, too, suffer the consequences of sellers’ refusal to accept first offers. Agents will have to continue expending time and effort to market the property as it becomes ever more shop-worn and induce the seller to take a realistic look at fair offers. Offers will become increasingly sparse the longer the property is listed, frustrating the seller, which will only mean more work and less reward for agents and brokers.
A buyer’s first love
The primacy effect also influences buyers. A buyer just starting to peruse the market may fall in love with the first property they view – even if it’s out of their price range. In this case, the primacy effect takes hold of the buyer and affects how they continue on their home search. Buyers stuck on an expensive home they have been shown may demand their agent find homes with the same features, despite the hefty price tags. Agents need to deflect these buyers’ daydreams by asking about and focusing on the most important features the buyer is looking for in a home.
A ready, willing and able buyer — someone who knows exactly what they want and is in a financial position to obtain it — will be more likely to experience the benefits of the primacy effect. This buyer is able to provide specific details about what they want in a home, which allows an agent to find the most suitable properties faster. This means the agent has to expend less time and fewer resources to find a home which satisfies the buyer’s conditions.
However, buyers sometimes waffle when presented with the first property; they do not trust that their ideal home came to them so easily. Sometimes these clients simply need reassurance. An agent may sit down with their clients to review their preferences and budgetary range, and discuss why one or another property meets those parameters.
Other buyers, however, will obstinately refuse to trust the agent’s advice. Those buyers are likely not truly ready to engage in buying a home, and end up beingdifficult clients. Agents need to then determine whether to continue working with those clients, as they are likely to cost significant time and resources to appease their unrealistic demands.
Market conditions and the likelihood of the primacy effect
The housing market is the third player in the primacy game, and current market conditions are ripe for implicit preference payoffs. A low supply in California increases the likelihood that first offers will be the best offer, as buyers come in strong in price and terms to secure the rare property in their price range.
Market improvements, of course, directly benefit agents and brokers. Agents will be able to spend less time and fewer resources scraping up properties from the bottom of the listing barrel and earn more for their efforts in being the first to bring the best property to their buyer’s attention. Agents will also glean referrals from satisfied clients eager to spread the word about their agent’s fast and accurate performance.
The primacy effect is not infallible, however. Although “first is best” may often be true, it is not always true. Buyers and sellers need to trust their agents and be sure they don’t use the first is best phenomenon as a rule, otherwise they may find themselves duped by speculators. Speculators offering what seem like appealing, cash-only offers are still working their way into purchase agreements with sellers unaware they are selling at a below-market price – the grist for a flip.
Agents need to evaluate each particular scenario and advise their clients according to the current market conditions, analyze the nature of the offer made or received and shape the client’s expectations. The true best offer is still one formed from sufficient information accurately presented and discernment to negotiate the best result.
No comments:
Post a Comment