The Psychology of Buying Real Estate: Why Some Investors Happily Pay More
There has been an on-going discussion for years on the Biggerpockets.com forums related to real estate investing and what is a “good deal.” Because there are so many different ways to invest in real estate and technology has brought every consumer much closer to opportunities than ever before, it seems that debating a “good deal” is a merry-go-round that will never end.
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I was thinking about this the other day when I got off a plane and immediately took a phone call while walking through the airport. The caller on the other end was an investor wanting to ask me some questions about my company and rather than schedule a call time for later when I had time I decided to chat with the investor right then, but I was on the hunt for a treat.
As I walked through the airport answering his questions, I was in search of a special, little green sign that promised to make me happy. It is a universal sign that many of us, including myself right in that moment, would search for with our map finder apps on our smartphones and pass dozens of other similar establishments…in search of something special. I must have passed four or five eateries and bakeries in the airport in search of one very particular and much more expensive item. A Starbucks!
While I could have easily stopped sooner, paid less and received a similar product, I chose to continue looking. I could have saved time and money and yet, I continued to walk because I knew what I wanted. I wanted what Starbucks offered. To be fair, I couldn’t care less about Starbucks. I prefer brewing a simple cup of French press coffee if I am going to have a cup. But, they have built a massive following and brand and have become the most popular coffee brand in America. And on that day, like thousands if not millions of other consumers, I was in search of that particular product and at the time and I didn’t care that I could wait until I got home and could do it myself. That would take too much time. I didn’t care that it cost more. It had value to me right then.
And so, I began to shape this article in my head. These are the exact reasons why some real estate investors will pay more for their investment opportunities. For every consumer, a “good deal” is a personal definition and trying to argue otherwise is like buying two tickets for that merry-go-round – pointless! It never stops…
5 Reasons We Pay More…For Almost Anything
Real estate investing is no different than any other product or service. Buyers come in all shapes and sizes and almost as many different motivations. What motivates one investor will certainly be different from another. So, the real question becomes: why we will pay more for some things and how do we find those same reasons in real estate.
5. Cost & Value
Consumers will always place a higher premium and value on something that costs more. It is a natural assumption – not always correct – but has become an evolution of our thought and buying processes. Just ask yourself, how many investment companies market their service as the Wal-Mart of the industry? Know any homebuilders touting bargain basement pricing?
That is because a certain segment of real estate investors want to pay more to receive more and are willing to keep looking until they find the more they are after! They do not want bargain basement pricing accompanied by bargain basement service and product. Some real estate investors, just like any other category of consumer, can smell "cheap" from a mile away and no matter how you try to convince them otherwise, they have no interest in buying cheap. They would rather pay more, since in most cases; more comes with more of everything including quality, service and time saved. If the return on investment is still strong enough to make the trade-off, then investors will pay more all day long.
4. Scarcity Is All Around Us
This is something that is driven in many ways, most notably from the news media. But online resources and businesses themselves feed the scarcity mentality and some of it is real. Buying cycles create the scarcity and sometimes it can be scarcity in opportunity or even scarcity of proximity. So, investors can see that prices are sky rocketing in their particular area and opportunities are “scarce” and therefore they seek to buy in other markets. Combined with other buying psychology triggers, they may very well pay higher prices in other markets while they could easily find cheaper alternatives. Those two things combined with the messages from many companies that you “have to buy RIGHT NOW or you’ll miss out” and you have a scarcity environment and consumers often pay more to secure an opportunity.
3. Popularity Rules The Day
My Starbucks example above should illustrate this one perfectly. Simple brand and/or quality recognition go a long way in the buying process. A recognized brand comes attached with expert status and since all real estate investors are also consumers, we will pay more for service and product that is the most recognized and comes with the value of having been vetted heavily by consumers before us.
Paying more is akin to earning a lower return and many investors find this palatable as long as they are dealing with the known best in the business or at least the highest quality product they can find.
Related: Tips for Building Your Brand in 2014
2. Ease of Purchase & Ownership
It is no secret that passive investing ,where the owner of the property has deed and title, have exploded in the most recent real estate cycle. More and more investors have been drawn to real estate through the constant news cycle. Many have realized that with a certain lack of motivation and certainty of skill as well as an over-loaded schedule, the only real route to investing in real estate is a passive investment. The word ‘turnkey' will come to mind for a lot of investors.
This is where almost every debate on the forums seems to center when it comes to defining a good deal. It is also where I think that many commentators lose perspective.
After all of my own false starts and dumb mistakes as a real estate investor, I am pretty comfortable now that I know exactly why I invest in real estate and exactly what I am looking for as an investor. So to keep things in perspective, I don’t tell other investors about all the mistakes they might be making if they don’t follow my example and do things exactly as I do. I am one consumer who buys real estate investments for very specific reasons. I have learned to invest in real estate around my own schedule and obligations. I expect top service and attention and I want to deal with only the best companies available when I am buying my investments in any city.
My way is certainly not the right way for everyone!
But my way is the way I buy and pay for everything. I am absolutely willing to tip more for great service, to pay more for extra, added values and place a very high premium on buying higher quality goods. That is who I am and the way I buy regardless of what the product is. I find more value in ease of business and higher quality products and service, than I do in taking away from my personal time to save the dollars. And I am positive today that many, many real estate investors place the same value on their time and are willing to pay more for investments if it means they can keep their time.
1. Higher Quality
Quality is the kicker in this conversation. When debaters realize that there is really nothing to debate, then the questions come down to: what is someone paying for. Are they paying for a name brand? Are they paying for a label on a product or an ornament on the hood? What is really being paid for when a consumer, for reasons of their own, decides to pay more for a product? It has to be quality.
In real estate, quality comes in many different forms. It can be quality of property and location. It can be the quality of the renovation work. It can be the quality of property management. It can be quality of client customer service and interaction. Or it can be quality of any combination of these services together.
These are the things that some real estate investors are willing to pay for and debating if they are “right” or “smart” is just a waste of time and, well…dumb! Remember that these buying traits are not unique to real estate investment. Whether we are buying cars, picking restaurants, buying clothes, watches, furniture, tennis lessons, golf lessons, coffee etc., etc. The list goes on and on of all the items that we as consumers are wiling to pay a premium to get a higher value, be purchasing the name brand, to experience an easier process and to be getting a higher value. The same applies to real estate.
1 Note to Conclude…
Every investor whom I have ever dealt with that shares my feelings about the value of a product of service, absolutely avoids justification. They do not justify the WHY about the actions they take. Instead they rely on well-thought out processes and expected outcomes. They have their eyes wide open as investors.
If an investor finds themselves reaching for justification, then they probably failed to do proper due diligence and end up dissatisfied and justifying their investment. I know what that feels like. It is where I started before I learned how to define my exact purpose for investing in real estate!
Why do you buy how you buy? What are the defining characteristics of your investing patterns?