A little over a year ago I came across a small vacant house for sale in Nashville, TN near one of my target investment areas. I spoke with the owner over the phone about some of the facts of the house and got as much information as I could. He was a friendly guy with a southern accent, what many from this region would call “a good ol’ boy.” His asking price was $40,000, which was incredibly cheap, but the house was only 672 square feet and it had been moved to that parcel from a different location. The fact that it hadn’t been built on-site was definitely a concern for future resale, as many buyers worry about the unusual. I asked him what his lowest price was for an all cash, no contingency offer, with no inspections and a quick closing. He said $30,000. Wow. Had I really gotten a drop of 25% of the sales price that fast? Could it be that easy? My typical negotiating approach is to initially get the seller to say their lowest price and then counter-offer a bit below that. I got him down $10,000 with one question. That was sweet, but I wasn’t satisfied. How cheap could I get this little cottage for?
Price anchoring is a concept that arises frequently in real estate investing whether the involved parties are aware of it or not. The anchor is a number, a starting place of sorts, commonly used in pricing that has a tendency to pull the negotiations toward it. The effects it has can be dramatic. One must be aware of when an anchor is in play and if it working positively or negatively.
Rolf Dobelli states in his book The Art of Thinking Clearly, “The more uncertain the value of something -such as real estate, company stock, or art- the more susceptible even experts are to anchors.”