Anchors, Frames and Other Things to Avoid in Rent to Own Negotiations

by Julie Broad

Have you ever walked into a video store to rent a movie only to walk back out 30 minutes later with nothing to watch? If you didn't walk in looking for a specific movie the number of choices can be so daunting! First you have to figure out whether you want a comedy or an action movie or a drama or a romance and then you have to determine if you want a classic, an older movie or a new release. Then you have to remember which ones you've seen, which ones had bad reviews and which ones your friends have recommended. The choices never end.  And sometimes it's easier to retreat without making a decision. When there are too many choices it's debilitating.

And that is the premise of a book called "The Paradox of Choice: Why More is Less" by Barry Schwartz.

But what's this have to do with real estate?

Well ... the entire book is full of different lessons that you can apply to business and marketing but there are a couple that we've learned first hand recently that I thought we'd share with you.

The first concept comes with regards to having an abundance of choices. When we kicked off our rent to own program for 2010 in Nanaimo we wanted to showcase all the properties we would have available in the coming months. And what we found was that having an abundance of choices actually paralyzed people from taking action at all. It's part of the reason why I believe we ended up with a property that was hard to fill (see: http://www.biggerpockets.com/renewsblog/2010/06/30/are-vacant-showings-better/).

What we found was that with each new option we introduced people found there were more trade offs to be made when they decided. For example, when we first opened up our doors to our new program we had three homes we were advertising. One home was an old character home with an ocean view but in an area some people didn't like. Another was a new home in a very convenient location. And the other was an older home on a large lot in a very central and desirable location.
 
Of course each had different price points and very different benefits. And what we found was that most people kept focusing on what they COULDN'T have with any one home because none of them had everything people wanted in a home.
 
What we saw first hand was that giving people more choices doesn't make them happier. In fact, it made them very aware of what they were giving up in order to get something at all. Back when we were offering all three homes most people walked away without  making a decision at all.
 
And Barry Schwartz summarizes this very simply in his book by saying "Being forced to confront trade offs in decision making causes indecision and unhappiness."
 
So Lesson 1 for us this year was to keep our inventory low. Even if we have two more homes coming on the market for rent to own, we don't tell people about them until we are down to only one home available. We keep the choices down to two at the most ... ideally one home only ... so they can focus on whether rent to own is right for them, not whether the home is perfect for them (because I'm sure you know it's nearly impossible to find the perfect home on a budget!).
 
The second lesson we learned is all around what Schwartz calls anchoring. And anchoring is simply the act of giving somebody a number to compare things to. He explained it using bread makers that weren't selling at a department store. The breadmakers were priced at $247 but nobody was buying them. The store brought in a line of expensive breadmakers that cost $499 and suddenly the $247 machines were flying off the shelf.
 
At $247, with nothing to compare them to, people thought the breadmakers were expensive but as soon as the $499 machines arrived the $247 ones looked like a bargain.
 
I'm sure you can immediately begin to see how this applies to real estate. A big one is with regards to list price. A lot of investors mistakenly think they got a great deal on a property just because they bought it for a big discount beneath list price. The reality is that they just became anchored to the list price number and felt that anything lower than that was a deal.
 
Where we encountered this was with our option deposits. What we found was that as soon as you gave someone a value of what was acceptable for a deposit fee that is what they became anchored to. If, in an example, you mentioned $15,000 when you actually asked for $10,000 they were delighted. But if you instead used $5,000 in your example but then asked for $10,000 the tenant buyers would walk away thinking the amount you were asking for was totally unreasonable.  It took us a few lost tenant buyers before we realized what we were doing.
 
So the second lesson is to be careful about numbers you give people to anchor to. Make sure they are serving you and not working against you!
 
The final lesson we learned this year is with regards to framing what we say. Subtle manipulations of how you say something can change whether it's interpreted as positive or negative.
 
For example we discovered a small wording change with regards to the deposit (or down payment) that we accept from tenant buyers changes the whole feeling around the subject. Because, as you probably know by now, in rent to owns you accept a down payment up front from the tenants as the option fee that gives them the option to purchase the home from you at a set price in the future. If something happens and your tenants are unable to buy the home from you in the future or they choose not to, then that option fee is not given back to them.
 
We're always very careful to explain this risk to the prospective tenants because we want everyone we work with to understand that they need to be serious about buying the home because this is a risk. But when we explained it to people as "losing the deposit" if they didn't buy the home we never heard from those people again.
 
Instead, when we explained that the "deposit is non-refundable", the tenants remained interested and continued to work with us if the program was a good fit for them. In other words, it was all in the frame we put around the deposit that changed it from being neutral to being negative. Once we realized that we stopped saying they would lose it and focused on calling it a non-refundable deposit.
 
So the third lesson is to understand how you frame your message and the impact it can have on the interpretation of it.
 
With every person we speak with and every deal we do we're finding more ways to make small but powerful changes. And these are three concepts explained in the book "Paradox of Choice" that we're learned the hard way this year.
 
Now that you're aware of the impact giving people too many choices can have, and how powerful anchoring and framing your offers can be, we hope you'll be able to skip over some of the lost time and energy and deals that we had to in order to learn these powerful concepts. And of course, you could also pick up a copy of Barry Schwartz's book to really understand the concepts if you're interested! 

Published July 14th, 2010

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