The Availability Heuristic and Anchoring

[Adam Christopher Zaleski]

The thesis of my post is that it's possible to bid 10% over asking price and still get a "deal" which I think, recently happened to us.

My wife and I closed on a primary home two weeks ago that is an "ugly" foreclosure with no major structural problems. My wife and I have struggled to purchase a home on Kauai for the past 15-18 months. It's a small island and inventory is low. Anything that is livable and priced decently will typically get multiple offers.

The bank foreclosure was listed for 550K. In my opinion, it should have been listed for 600K. I thought the house was easily worth 600K and with 20K of material to upgrade the house it should easily sell for 700K.

We offered 603K and I told my wife we have a really good chance of getting it because most other offers are going to put too much emphasis on the list price and anchor around it. When someone throws out a number people often use it as a reference point even if the number has little value. In the field of psychology, this is considered to be the availability heuristic and/or anchoring.

There ended up being 9 offers total. The seller (bank) informed us we were the 2nd highest offer and to "hang on" just in case the first offer didn't go through. I was devastated at first because we came in second. However, the first offer did fall through and we had it under contract at 603K.

It ended up appraising at 615K. A pretty good comp recently sold for 710K. It's a smaller house with a smaller lot, but not a foreclosure. After our house is fixed up, I think it should be worth about 725K based on the comps, with no market changes.

The project is going to be 20K of material and sweat equity. I image putting in about 10 hours/week for the next 6 months, so we are talking about 250 hours of sweat equity. I am paying someone $35/hour to do a few things that I can't do (skilled carpenter), which should total around 5K.  I'm hoping the total rehab cost is around 25K and 250 hours of my time. I can try and post updates after each month to see if my expectations are consistent with reality.