A few days ago, I stopped to pick up a few things at the grocery store. It wasn’t the store I usually shop at, but it was on the way home, so I decided to pop in. A big pile of fresh cauliflower caught my eye and I grabbed a medium-sized head on my way the display.
“Twelve thirty-two,” the cashier said at checkout.
The total seemed high for a pint of cream, some French bread – and that head of cauliflower.
“$1.99 per pound,” she replied, when I asked what the cauliflower cost. “Total of $6.22.”
I like cauliflower as much as the next guy, but not six dollars’ worth. It seemed exorbitant and I knew I could buy it elsewhere for much less.
“I’ll pass,” I said, and had her take it off the bill.
Funny as it sounds, similar buying decisions happen in the real estate market every day.
Clients of mine recently fell hard for a gut rehab in the perfect location for them with finishes they liked. The husband thought it was a bit too small, but the wife thought they could make it work, and they decided to make an offer. I reviewed a list of recent comparable home sales with them and we all concluded that the house was significantly overpriced.
Like many buyers, my clients had been looking for homes online for months before they began working with me and, in that time, they had developed a very good idea of what they could expect for their money in terms of square footage, amenities, and finishes. This one was certainly their favorite in many respects, but the
Let’s go back to my cauliflower for a moment. It was a pretty standard piece of produce, not Organic, or fancy purple cauliflower, and I was certain I could get it for much less at a half-dozen local stores. So, in my mind, it didn’t warrant the premium price point and I didn’t buy it.
This is called the principle of substitution. In real estate, it means that, all things being equal, a buyer will generally choose the least expensive house that satisfies his or her needs.
This principle creates tension in the marketplace: Sellers want to sell for the most money while buyers want to pay the least amount for the most house possible. Or, said a different way, buyers won’t buy a more expensive house if they believe they can get a similar one for less.
My clients were willing to pay a premium for that home, but not an exorbitant one. They made a fair offer based on comparable homes sold in the last year, but the seller rejected it without countering and my clients walked, disappointed but confident in their decision.