What does great clips have to do with real estate? I went to get a haircut at great clips at 8 am on a Tuesday morning and the place was packed and yet a month earlier on the same date and time there wasn’t a single patron. Why? How can this pattern or lack thereof help you when purchasing real estate? 5 tips to train yourself to act “rationally” and avoid the great clips effect to prosper in real estate.
If you look at any economic model in finance, they all assume that people are “rational” and therefore somewhat predictable. Rational decision making favors objective data and a formal process of analysis over subjectivity and intuition. It also assumes the decision maker has all the information (ie: perfect information).
Can great clips help real estate investors? Great clips is a prime example that most humans do not act in a rational fashion. Every time I get a haircut, I always ask the stylist what the busiest time is. The answer is always the same; they state that there is absolutely no rhyme or reason why it is busy at some times and not at other times (I’ve asked the same question at locations throughout the country). For example, I once was driving through the foothills of Colorado in a snowstorm and decided to get a haircut thinking the place would be empty, unfortunately it was packed. Why? Great Clips is a prime example of the erratic nature of human behavior.
This erratic behavior (i.e. not rational) transfers over to real estate. For example, I was looking at a property and made an offer to purchase the property; I was bid out by 20 percent over what I was willing to pay. I looked at all the comparables and made a rational decision based on the recent sales in a tight radius (I do this same thing looking at loans hundreds of times a month). My conclusion was that the house was overvalued. Another buyer “irrationally” felt that the house was a bargain and bid over the asking price; this buyer acted in an “irrational” fashion and ended up paying a premium for the house which likely will take 5-10 years to just break even with natural appreciation.
How can you use this to make the right real estate decisions? Great Clips teaches us that the majority of folks do not necessarily act “rationally (economically that is)” and therefore they use emotion or some other driver for their decisions. The easiest step is to recognize this human weakness and strive to act “economically rationally”. A good example is when you are buying a house people always focus on the thing in the house they “love”. This could be a unique item (like a dome house with a beautiful 360-degree view). They subconsciously factor this into their buying decision. Unfortunately, average America likely doesn’t see the same value as you and therefore because of your subconscious you overspent on a property and likely will not see the expected return in the future.
What is the solution? Approach any business decision (including a real estate purchase) as an investment opportunity. Do not get sucked into the emotion/irrationality. It is crucial to make your primary decision on the facts. In this case of real estate, ask yourself the following questions.
5 tips to avoid the “great clips” effect and harness irrational behavior to prosper in real estate!
- What have sales in the immediate area sold for?
- How does your property compare on the facts: square footage, updates, etc… (for example does every other property have a new roof? Are you comparing apples to apples? Make sure you don’t “distort” the numbers in order to fit your scenario
- Is the property you are looking at selling at a premium to the comparables (why, is this warranted)? A good example is many buildings in Denver are selling at steep premiums since they might house a marijuana operation with an overmarket rent. Long term this is not a premium since over market rents are not sustainable
- Is the property unique? In real estate, more often than not, being unique is typically not a good thing, for example if you are in a neighborhood and all the houses are 500k houses, and there is a million-dollar house this is not a good investment to say the least.
- Consciously ask yourself (and write it down) why you like the property. Ask a neutral third party (like a random coworker that you know will give you an honest answer) to say if that is a trait they would also highly desire.
By following the five tips above you can consciously adapt to the “great clips” effect and make considerably better financial decisions.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).