{"id":2815,"date":"2016-07-26T11:11:52","date_gmt":"2016-07-26T18:11:52","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=2815"},"modified":"2016-07-25T14:49:12","modified_gmt":"2016-07-25T21:49:12","slug":"the-real-estate-math-mistake-everyone-makes","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2016\/07\/the-real-estate-math-mistake-everyone-makes\/","title":{"rendered":"The Real Estate Math Mistake Everyone Makes"},"content":{"rendered":"<p style=\"text-align: justify;\">Most financial choices boil down to simple math. Add up the gains, subtract the costs, and you should get a number that helps you draw a conclusion. Those numbers are particularly useful when trying to make a major life decision, such as whether or not to sell the family home.<\/p>\n<p style=\"text-align: justify;\">Given how hot big city markets like Toronto are these days, the math would certainly make a compelling case to sell. Yet according to the April sales data from the Toronto Real Estate Board, listings are down 27% year-over-year in the GTA. Despite brisk sales and skyrocketing prices, most homeowners living in semi-detached and detached homes are choosing to stay put. (A similar lack of inventory is plaguing Vancouver, Halifax, Ottawa and nearly every large city in Canada.)<\/p>\n<p style=\"text-align: justify;\">TREB\u2019s rationale for the dearth of listings? A widespread aversion to the high cost of land transfer. Other people have surmised that the scarcity is a symptom of our fear of paying a premium on the next property. After all, while you may sell high, you\u2019re also forced to buy high\u2014a proposition that leaves some feeling like prisoners to the status quo. But I think there\u2019s another reason people aren\u2019t selling as many homes these days, and it\u2019s buried deep inside our brains. More precisely it has to do with how we process gains and losses.<\/p>\n<p style=\"text-align: justify;\">According to Nobel-prize winning professor Daniel Kahneman, we\u2019re hardwired to overvalue a loss and undervalue a gain. \u201cThe aggravation that one experiences in losing a sum of money appears to be greater than the pleasure associated with gaining the same amount,\u201d is how he puts it.<\/p>\n<p style=\"text-align: justify;\">To appreciate what Kahneman means, consider the case of Larry and Laura. Retired for three years, the Toronto couple have a comfortable debt-free life, funded by modest pensions, savings and government income programs. Thing is, they could have more money in the bank if they sold their home\u2014let\u2019s say they bought it 15 years ago for $250,000. But Larry and Laura can\u2019t wrap their heads around selling and downsizing in such a crazy market, even though they could probably sell it for $750,000 or more.<\/p>\n<p style=\"text-align: justify;\">The math says they\u2019d be ahead by as much as half a million. But that calculation isn\u2019t entirely accurate, at least not from an economist\u2019s point of view. To understand how they\u2019re undervaluing their gains, you have to consider the difference between sunk costs and opportunity costs. Sunk costs are anything spent that cannot be recovered. For Larry and Laura, that would mean the money they paid into the mortgage, the time and money it took to maintain their home and the emotional and mental energy they invested in raising a family in the house.<\/p>\n<p style=\"text-align: justify;\">The opportunity cost, on the other hand, is what\u2019s incurred from not taking the next best alternative. This is a fancy way of referring to all the ways Larry and Laura could be spending their time and money if it weren\u2019t tied up in their family home.<\/p>\n<p style=\"text-align: justify;\">Pretty straightforward, right? Only Larry and Laura aren\u2019t as rational as they think. The idea of dismissing all the money, time and energy they poured into their family home feels like the emotional equivalent of losing their investment, a perceived loss that prompts them to overvalue their sunk costs. Economists would say this is irrational. They would explain our refusal to dismiss these irretrievable expenses as a \u201cbehavioural error\u201d or an action that doesn\u2019t conform to rational choice theory (a principle that assumes we always make the prudent and logical decision that provides us with the greatest benefit).<\/p>\n<p style=\"text-align: justify;\">If Larry and Laura were truly rational, their real gain for selling their debt-free family home would be closer to $750,000 (the sale price minus transactional costs). Even if they chose to repurchase in the same market, it would likely be something smaller and less expensive; they\u2019d still have money left in the bank to spend on travel, explore new hobbies or give to their kids and grandkids. So does that mean Larry and Laura should sell? Yeah, maybe. Since each person values a future gain slightly differently, it\u2019s important to ask yourself the following questions :<\/p>\n<p style=\"text-align: justify;\">1. What are the intangible and tangible sunk costs so far?<br \/>\n2. Am I willing to accept that these sunk costs will never be returned to me?<br \/>\n3. If so, can I see what I may be missing if I overweight costs that are irretrievable?<br \/>\n4. Finally, what would I actually gain if I were to sell and move now?<\/p>\n<p style=\"text-align: justify;\">It\u2019s totally understandable if you answer these questions and still choose to pass up the opportunity for a large financial gain. Sometimes the math used to determine a home\u2019s value ignores the intangibles\u2014factors that can outweigh even the most compelling balance sheet surplus. But going through an exercise like this will help anyone make a more informed, more rational decision. It\u2019s better than feeling trapped in the status quo, a prisoner in a surprisingly expensive home.<\/p>\n<p><a href=\"http:\/\/www.msn.com\/en-ca\/money\/real-estate\/the-real-estate-math-mistake-everyone-makes\/ar-BBuyHcr\" target=\"_blank\">The Real Estate Math Mistake Everyone Makes<\/a> by Romana King | MSN Real Estate<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Most financial choices boil down to simple math. Add up the gains, subtract the costs, and you should get a number that helps you draw a conclusion. Those numbers are &hellip; [<a href=\"https:\/\/www.roryc.ca\/blog\/2016\/07\/the-real-estate-math-mistake-everyone-makes\/\">read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-2815","post","type-post","status-publish","format-standard","hentry","category-real-estate"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The Real Estate Math Mistake Everyone Makes &#8226; Rory C Real Estate | Oakwyn Realty<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.roryc.ca\/blog\/2016\/07\/the-real-estate-math-mistake-everyone-makes\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"The Real Estate Math Mistake Everyone Makes &#8226; Rory C Real Estate | Oakwyn Realty\" \/>\n<meta name=\"twitter:description\" content=\"Most financial choices boil down to simple math. Add up the gains, subtract the costs, and you should get a number that helps you draw a conclusion. 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