Why Disrupting Real Estate is Hard (Part IV): The Fear of Loss

Why Disrupting Real Estate is Hard (Part IV): The Fear of Loss

05-03-2019

I am not a gambling man. The thought of hitting it big at the blackjack table is not nearly as appealing as the certainty of not losing hundreds of dollars in one sitting with nothing to show for it. Though it is true that without big risk there is not big reward, I think of the casino primarily as a potential big loss.

I don’t want a big loss. So then why risk gambling at the casino? I might as well hold on to my money.

It’s that “why risk it?” thinking that rings true for a lot of us. Humans are wired with an inherent fear of loss. We don’t want to lose our stability. We don’t want to lose our belongings. And we don’t want to lose our money.

A lot of home sellers ask themselves: Should I risk forgoing the traditional agent (which I’m pretty sure works) and venture into alternative ways to sell my home (which seems riskier)?

That question is completely understandable. Our homes become important parts of our lives: where our families are formed then raised, where our memories are made, and where we spend our lives. They also tend to be our largest financial asset. It’s only natural that when a homeowner has made the decision to sell their home, they’re frequently a little stressed about it.

Therein lies the first “fear of loss” hurdle that real estate disruptors must face: home sellers know that—despite its flaws—the traditional method of selling one’s home does work. What, then, will I lose if I choose to list my house with a non-traditional real estate brokerage? Will I get worse service? Will Buyers’ Agents discriminate against my listing (thus contracting my market)? Will mistakes be made? And the granddaddy of them all: Will I sell for less money?

“Will I sell for less money?” is a brutally difficult piece of human psychology to overcome. At Door.com, for instance, we have saved our clients an average of over $10,000. That $10k is a great “win,” however to get to that point the client must first overcome what is sometimes perceived as a big potential loss.

Before every homes is listed, some sort of listing presentation (“LP”) is performed by the real estate brokerage. It is at this LP that the suggested list price and strategy for selling the home is discussed.

At Door.com, we have to be disciplined about the price at which we will list a home for two primary reasons: 1) we have an employee real estate agent model that means we have a fixed cost for every home we sell, and 2) we want the reputation of selling homes, not taking any listing and letting it languish on the market.

By comparison, when a traditional agent meets with a potential home seller at an LP, they frequently are comfortable listing at a higher price than we would be with listing the home. The agent is an entirely variable cost to the traditional brokerage, and so there is not a strong disincentive to take an overpriced listing.

But then the question sneaks in for the home seller: Will I sell for less money? Cue the fear of loss.

For instance, we tell you to list your home at $299,000, while a traditional agent says $330,000. The promise of a higher sales price is enticing to a home seller. Though the proceeds from the home sale are imaginary until the wire clears at the end, people tend to start counting the money at the beginning. Who wouldn’t want an extra $31,000?

What sometimes happens next is quite interesting. That imaginary $31k is awfully enticing, and the home seller starts to worry about “losing” that money. Though Door.com would save the seller ~$4,000 on the sale, that savings is peanuts compared to the extra $31k that the traditional agent is telling the seller she will pull in by using her services.

Did the traditional agent miscalculate the list price? Did they disingenuously suggest a higher price in order to win the listing? It doesn’t matter as the higher price is now anchoredin the seller’s mind. Though not yet in her bank account, she’s now thinking about selling her home for $330,000, turning any suggestion of less into a perceived loss.

Moreover, while Door.com would be saving that seller ~$4,000, that net proceeds gain pales in comparison to the feeling that she might “lose” $31k by listing at a lower price.

You might be asking yourself: “But what if the house does sell for more? What if the traditional real estate agent is right and Door.com is wrong?” Great question.

The punchline is this: only 10.4% of the sellers that decided to list with a brokerage other than Door.com have sold for an amount higher than our suggested list price range [as of 4/18/19]. On average, those who sold with another brokerage ended up selling 0.7% above the midpoint of our recommended list price range.  In other words: by far the most common outcome for a seller who decided not to list with Door.com has been to sell within our recommended range after deciding to list above our recommended range.

Digging deeper into the data: of the listings we lost in Q4 of 2018, 67% of them listed with another brokerage. Of that group, only 38% have sold. Of those that sold, 59% sold at or below the high end of our suggested list price range.

Of those that decided not to list with Door.com and sold with another brokerage, they on average listed 2.6% above our maximum recommended range and sold on average 1.7% under our maximum recommended price.

They were afraid of selling for less money.

Which is why it pains me every time we lose to a traditional brokerage because they suggested a price higher than the price we suggested. It’s nearly certain that a seller who chooses a traditional agent and doesn’t list with Door.com ends up spending more money to sell for the same amount (or less). This is particularly true when you consider that our fee tends to be around half that of a traditional brokerage.

Ultimately, it’s the net amount that really matters to a seller, even if the headline list price gets all the attention. How can the disruptors of the residential real estate world make sellers comfortable with our value proposition? How do we—collectively, as disruptors—convince people that our data-driven approach will net them far more money than will that traditional agent who may feel “safer” to list with?

These answers are hard to find, because they are frequently somewhere deep inside the human mind. We’re fighting a psychological battle just as much (maybe more) than we are a technological battle.

Perhaps we can discuss further over a game of blackjack. I’m open to change.

This is the fourth in a series on why disrupting real estate brokerage is hard. Read the most recent one here: The Power of Social Connections.

Alex Doubet
Chief Executive Officer at Door, Inc.

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