Posted by: jeb1 | March 21, 2011

The True Value of a Home to a Seller

By JENNIFER SARANOW SCHULTZ

If you’re in the market for a home, you may want to consider some advice from academics before sealing the deal. Research papers on the topic of negotiation offer numerous tips to help potential buyers better navigate the home buying process, as I recently learned when I wrote a paper for my business school negotiation class on the subject. This post is part of a series on some of the findings that I thought were worth sharing.

While it may be possible to determine how much a seller paid for a home, figuring out how much he or she truly values the property is another story.

In a 2000 article in the Journal of Personality and Social Psychology, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” researchers from Cornell University and Carnegie Mellon University suggested that it may not be that easy for buyers to truly figure out what a home is worth to the seller.

In the paper, the researchers explain that because of people’s greater sensitivity to losses versus gains, “owners value things more than do buyers simply because they own them” –what’s known as the endowment effect.

In their studies, the researchers found that owners and buyers tend to underestimate the size of this endowment effect because they believe their valuation of a good is similar to that of their negotiation opponent.

According to the paper, owners and buyers both tend to incorrectly predict what their own valuation would be if they were in the other role.

Using this research, potential home buyers who are about to make an offer may want to try to adjust up a bit their perception of how much the home is worth to a seller.

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