There’s a theory that says we’re willing to pay more for something when it’s being offered alongside something free. Likely, it isn’t a deal at all—the cost of the free item is worked into the cost of the first item, but we are tricked. A free item allows us to forget the negative sides of a particular purchase and often makes us accumulate items we don’t need. The zero price effect causes us to forgo items we need to instead get what is free.
Like many decisions humans make, this isn’t rational. We’re obviously better off purchasing the product we need at a lower price. But we’re compelled to desire the free sample or otherwise practically worthless offer.
Unfortunately, many real estate investors experience the same phenomenon. Maybe a certain neighborhood has a number of houses available and it just seemed like such a great idea at the time to buy up a bunch of properties at what seemed to be such a great rate. We get greedy and enthusiastic and perhaps overly ambitious. And in the end, we’re left with a portfolio that lacks diversity and quality.
Jason Hartman has done a lot of business in California and has identified what he calls “the California brain”—a phenomenon in which Californians venture into the greater United States and are startled by the lower prices. So startled that they over purchase because, by comparison, things seem free. Don’t take your California brain (no matter where you’re from) elsewhere.
Instead, make decisions based on a sound investment philosophy, knowledge, and the advice of experts. Don’t impulse buy or buy in an area just because you can. Find quality properties that have the potential to make you money. Be decisive, but not aggressively so.
It’s been said that a fool and his money are soon parted. Rational decision making prevents this, so identify and develop your investment philosophy, carefully evaluate where and how you’re spending your money, and go forth! (photo credit: Lori Greig via photopin cc)
The Jason Hartman Team