Remember old truths in the new year
Originally appeared in Bay Area News Group publications on January 25, 2013
“Ignorance more frequently begets confidence than does knowledge.”
– Charles Darwin
Dunning-Kruger Effect
The “Dunning-Kruger Effect” is a simple, yet brilliant notion, but not because my name is attached to it (I am not related to David Dunning, who was one of the Cornell researchers behind this concept). It states that people tend to overestimate their competence and underestimate their incompetence in various areas.
Another way of saying this is that many folks don’t know what they don’t know and they think they know more than they really do. This is the definition of ignorance.
There are fundamental aspects of the real estate business that were not understood by buyers and sellers when I began over 33 years ago. They continue to be disregarded today. Ignoring these basics can be a costly mistake.
Condition is critical
Condition is the most overlooked and under-analyzed aspect of the home buying process. It is a prime example of an area where buyers have little idea of what they are doing, even though they think they do.
Commonly, someone who has skills in one trade, e.g., carpentry or electrical, erroneously assumes this qualifies him or her in other aspects like foundation, drainage, roof or pest control.
An alternate version of this is when the buyer brings in an “expert” friend or relative who, again, is not versed in all systems of a home. Although sometimes tragic, it can be almost comical to see someone like this walk a buyer through a property and either mischaracterize or fail to notice significant problems.
Regardless of what a buyer thinks he or a friend/relative knows about houses, I always recommend a professional home inspection as a purchase contract contingency.
Purchase contracts
The average buyer or seller does not have the time and/or inclination to fully understand the real estate contract and its addenda. Compounding the problem, and substantiating the Dunning-Kruger Effect, is the fact that so many think that skimming the contract or asking a few questions is all that is required.
Unfortunately, a substantial number of real estate licensees also lack proficiency in the contract. This could be a deadly combination for you as a buyer or seller.
It’s always about the price
It is rare to be at a party or gathering where people are not talking, some with an authoritative tone, about real estate sales and prices. The Internet allows people to become pseudo-experts.
Anyone can interpret statistics; this is different from being an on-the-ground expert. Understanding pricing takes years of professional sales experience in a particular locale.
Despite this, pricing is something many believe is simple. It isn’t, and this is further proof of the truthfulness of the Dunning-Kruger Effect.
Timing the market
The real estate market goes through cycles and you need to be clear on which cycle is dominant at the time you are ready to buy or sell. In our local market today, inventory is low and prices have been rising.
Some potential sellers are stuck with the mental picture of peak prices in the frenzied market of 2004 to 2006. They wish they had sold then and are holding out for a repeat of those highs.
There are buyers who wish they had bought in 2008 through 2010, when prices came tumbling down. Now, they see prices moving up and are waiting for them to again slide to their nadir.
These buyers and sellers are failing to accept that wishing will not make it so. Even the most knowledgeable real estate economists cannot accurately predict market highs and lows.
The bottom line is that the best time to buy or sell often does not coincide with the personal and business aspects of our lives, preventing us from taking advantage of the optimum moment. Most people need to do the best they can in a less-than-perfect market.
Choosing an agent
Another facet of the Dunning-Kruger Effect is the failure to recognize genuine skill in others. Those who act as though there is not that much to know about real estate, or think they know much more than they do, don’t appreciate a highly professional, capable agent when they meet one.
Even those who have some real estate knowledge may not be conscious of how vitally important it is to choose the right agent. That licensee may not be the most attractive, the smoothest talker, the best dresser or the one from the largest company or office.
It is not the one who will “find you a house” if you are a buyer, or “get your house sold” if you are a seller. Besides being experienced, knowledgeable and competent in your local area, the most important attribute of an agent is to stand in your shoes and represent your best interests.
Of all the mistakes buyers and sellers make, not understanding what representation and agency means is the biggest.
Final thoughts
The old saying, “A little knowledge is a dangerous thing” definitely applies in real estate. Don’t become a victim of misplaced overconfidence that what you think you know is correct or sufficient.
Related Articles:
Condition: What Your Agent Should Tell You
Does Your Agent Stand in Your Shoes?
Contract Revised Again
Pricing by the Square Foot
(NOTE: follow links within each article to others on the same subjects)