You’ve probably heard this old adage somewhere along the line: “Don’t bring a knife to a gun fight.” And you get it, I’m sure.
Now, we could ask the bigger question of why not avoid fights altogether, especially any that are weaponized, but that’s not exactly the point here…
In the real estate world, we see clients “bring knives to gun fights” all the time. Sometimes we see clients (or our fellow realtors!) try to tackle problems with mounds of data when they really need to check their gut. And vice versa: we have seen someone using anecdotal arguments to overcome very stark and clear statistics.
Neither is a good situation to be in.
Data or outlier?
In this industry we constantly hear phrases like: ”That’s the right price because the house just around the corner also sold for $500,000…”
Comparable sales are one of the first places the market looks when valuing homes, but there are dozens, maybe hundreds of questions that one could ask to get to the bottom of that sale price. And not all of those underlying drivers of value are relevant to the seller that’s using it as validation for what they believe their house to be worth.
The same goes for per square foot quotes: What was the age range of the houses at that price point? Did any have unfinished floors? How big was the lot? Did the sellers just do a gut renovation?
The point is this: A number is just a number. It’s the information that helped derive that number that’s important. Too often, buyers and sellers — and sometimes agents — clench down on one number and simply refuse to let go. As long as it supports the argument that they’re trying to make, they think it is gold. Unfortunately, it’s often fool’s gold.
Micro and Macro
Unless you’ve been in a college econ class lately, you might need a refresher on the difference between micro and macro. Micro-economics looks at how an individual’s (or entity’s) behavior changes when resources are limited, while macro-economics might say that an entire economy is being studied under similar circumstances.
(Please, no attacks from actual economists – we don’t claim to be econ experts!)
Jumping back into real estate (we do claim to be experts here): if a buyer or seller wants to make a move because they feel the economy is doing well, and that maybe prices will surge, they are looking at macro factors. If that buyer or seller changes their behavior because of three recent comparable sales, let’s say they were neighborhood records, they’re taking a micro approach.
Neither approach is wrong, provided it’s being put to use in a proper micro or macro decision environment.
Often clients see big picture, “macro” market conditions and then blindly apply them his/her specific neighborhood. This can work, but there is almost always some sort of discrepancy between the market as a whole and the specific home, neighborhood, zip code, etc that is being studied more closely.
We all have a narrative that fits nicely in our mind. We pick that one comparable sale that matches our expectation or we look at one of the news channels that points to the strength of the a certain real estate sub-market. Each one is true in and of itself. But that doesn’t mean it’s true to the narrative that you should really be dealing with.
Know your data, cut and dry. Do that, and then know how to apply it, and you will see better outcomes.