Avoiding The Winners Curse

Overpaying for a house isn’t a price mistake. It’s a process mistake.

The fear of overpaying is rational.  But the driver of that fear isn’t paying a premium, it’s regretting the purchase.  We aren’t trying to “get a deal”.  We are working to achieve your goals.  

The winners curse happens when a buyer overestimates value because of optimistic or incorrect assumptions.  It’s falling in love with a house before recognizing cost or project constraints.  It’s bidding on a house without understanding the alternatives.  It’s confusing “I want this” with “this is worth it.”

Consider three approaches to determine value:

Comparable Value: What does the market usually pay for this?

Terms Value: What are you giving up to “win”?

Alternative Value: What else could you buy or rent (or could you stay where you are) that gets you to your goals?

So I make it sound easy, but how do we really do it?

We define the mission before touring houses.  What are the non negotiable qualities of your next home?  What are things that are nice to have?  

We build out real alternatives.  We have back up plans to lower the emotion and give ourselves leverage.

We separate price from risk.  Price is visible.  Risk can be hidden in the condition, HOA docs, appraisals, and liquidity.  We evaluate all of it.

We use terms to buy options.  There are more levers to pull than just the purchase price.  The closing date.  A rent back.  Inspection strategy.  The size of the deposit.  There are lots of things that a seller might value more than dollars; we work to find out what those are and pull the levers that add value.

We recognize when paying over asking price, or over our comfort level, makes sense.  It might be a unique or rare property.  We evaluate the planned hold time and personal utility.

Some questions we work through with buyers to ensure the best outcome:

• What assumption must be true for this to be a great decision?
• What’s my Plan B if inspection reveals X?
• If rates/market soften, can I hold this without stress?
• Is this a “rare fit” home or a “common substitute” home?
• What is my maximum appraisal-gap tolerance?
• What is the opportunity cost?
• Could I stay in my current home for a couple more years and have more purchasing power later?

The feeling of overpaying is rarely the number on the contract.  We work with each person to identify their alternatives and determine where we have leverage.  Our goal is not bragging rights, it’s no regrets.