How to Use the Scarcity Principle to Your Advantage in Real Estate Investing

by | BiggerPockets.com

I’ve been to more than a few events from the so-called “real estate gurus,” and their final pitches always go something like this,

“You can get my program for three easy payments of $2,999.99. But, oh wait, for today and today only, I will throw in this bonus three-ring binder full of all my super tips. But, oh wait, if you buy today, and today only, you can get it for only two payments of $999.99. Remember, today only. In fact, you must buy it before my presentation ends. Go ahead and get up and run to the back and give us your credit card information right now. But, oh wait, if you pay today, err, I mean before this presentation ends, and before this presentation ends only, I will throw in three free consultations with me or one of my assistants or perhaps a virtual assistant I hired in Thailand who sort of speaks English.”

While my description is rather self-indulgent (and yes, there are some good gurus), the standard pitch of such gurus highlights the importance of scarcity in negotiating and sales. These gurus are basically saying, “Today is your only shot at getting this deal, so you better jump at it!” And love it or hate it, it works.

Indeed, one of the key rules of sales is that “you must always be willing to walk away.” This in and of itself highlights the principle of scarcity, because if the seller of buyer knows you are on the hook, then they will know they have all the leverage. They have at least one buyer or seller. But if you’re willing to walk away, they may have one buyer or seller, or they may have none at all and be forced to start over in their search to make a deal.

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Related: How to Become a Better Landlord By Honing Your Influence & Persuasion Powers

Again, we turn to Robert Cialdini and his great book Influence:

“People seem to be more motivated by the thought of losing something than by the thought of gaining something of equal value. For instance, college students experienced much stronger emotions when asked to imagine losses as opposed to gains in their romantic relationships or in their grade point averages. Especially under conditions of risk and uncertainty, the threat of potential loss plays a powerful role in human decision making” (Cialdini 200).

One example Ciadini gives is health:

“Health researchers Alexander Rothman and Peter Salovey have applied this insight to the medical arena, where individuals are frequently urged to undergo tests to detect existing illnesses (e.g. mammography procedures, HIV screenings, cancer self-examinations). Because such tests involve the risk that a disease will be found and the uncertainty that it will be cured, messages stressing potential losses are most effective… For example, pamphlets advising young women to check for breast cancer through self-examinations are significantly more successful if they state their case in terms of what stands to be lost rather than gained” (200).

As a matter of fact, this antipathy towards losses is such an ingrained part of human psychology that assets are actually valued to reflect this, particularly in the stock market. Part of the way stocks are valued is what is called the “beta.” As Investopedia explains:

“Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole […] A beta of 1 indicates that the security’s price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security’s price is theoretically more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.”

The higher the volatility (or beta), the higher the necessary return. But wait a minute. Over the long run, doesn’t the market go up? As the Wikipedia article on beta notes, “Academic theory claims that higher-risk investments should have higher returns over the long-term.” In essence, because of the natural human aversion to loss and thereby aversion to risk, less volatile stocks will be worth more than more volatile stocks even if the expected return is the same.

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Censorship

This longing not to lose out also plays a roll in any debate regarding censorship. As any parent knows, the best way to make your child want to do something is to tell your child that said thing is not allowed.

Related: Become a Master Influencer Using This 2,000 Year Old Negotiation Principle

Turning again to Cialdini:

“…The results of the few studies that have been done on censorship are highly consistent. Almost invariably, our response to banned information is to want to receive that information to a greater extent and to become more favorable toward it than we were before the ban” (210).

Effectively, censorship creates an artificial scarcity that increases the perceived value of whatever is being censored. Social activists and politicians should take this psychological trait into account when discussing any attempt to censor hate speech, pornography, or other such things. Aside from important concerns over freedom of speech, such attempts may very well backfire.

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Scarcity and Real Estate Investment

Every real estate investor knows that an important key to finding good deals is finding motivated sellers. The reason is simply that the seller fears missing out on a chance to get rid of the property more than missing out on getting a good price, so there’s an opportunity there.

And as mentioned above, in any negotiation, you always need to be willing to walk away. You never want to be a motivated seller or a motivated buyer for that matter.

Don’t fall in love with a house or apartment or deal or anything. They’re just investments; don’t become attached.

And remember this concept outside of simply buying and selling properties. In salary negotiations with employees (or employers), you should be at least willing to walk away. Or at the very least, be willing to bluff a little about it. You can also use limited time offers for rentals (first month off or something like that). And merely the act of getting more than one bid from a contractor creates a sense of scarcity in that contractor’s mind that they very well might not get this job. That should get a better price. Even with contractors you’ve used for a long time, it’s not a bad idea to reject their quotes every once a while, just to keep them honest.

Indeed, there are a thousand uses of the scarcity principle. The important thing is simply to remember it exists, both when selling and when being sold.

Have you seen the scarcity principle at work in your real estate dealings?

Let me know with a comment!

About Author

Andrew Syrios

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

2 Comments

  1. Stephen Gregory

    Great Article Andrew! Thanks for taking the time to write it. I especially like to part about walking away. If beginner REI investors are willing to make offers that makes sense for them (and are willing to walk away from counters that don’t make sense) then they will land some deals!

    A while back on a podcast you described the acronym IDEAL. This really does crystallize the power of real estate investing. I’ve shared that with so many times with friends and neighbors. Thanks for sharing your knowledge and experiance!

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