What The Psychology of Money Taught Me About Buying Real Estate in 2021
“No one’s crazy.” “Pessimism is seductive.” These are just two chapters from a book I recently read and ended up! Today, we’re talking about “The Psychology of Money” by Morgan Housel, and how I think it can help you succeed in your real estate buying, selling, investing, and everything else. There are a couple of things that I pulled out from this book that I think are absolutely critical for anyone looking to buy, sell, or invest in real estate in 2021.
Chapter 1 – No One’s Crazy
In this market, whether it’s national or local, you’ll always see something about how housing prices are ridiculous and that we’re in a bubble. Personally, I don’t think that we’re in a bubble locally. But going back to the book, Morgan talks about the psychology of how people act and how people think, and how he think that no one’s crazy. In this chapter, he says that everyone has a unique idea of how the world works. This worldview is influence by a unique set of circumstances, values, and external influences. To quote him, he said:
“Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
Simply, very smart and rational people can look at the same event and end up drawing completely separate conclusions from it. When you take that into the real estate world, whether it’s buying, selling, investing, bidding high, removing contingencies, everybody’s got a rational reason for doing whatever it is they do. Therefore, when you’re going into a competitive situation, or looking at a property, you need to find out what that rationality is for you and accept the fact that there are other ways of looking at (and valuing) a house. That’s where your agent, your lender, or your friends and family can come in and help you see things from a different perspective. Ultimately, building that team of people with multiple perspectives is absolutely critical for your success.
Major takeaway? If someone has a totally different perspective from you, just understand that they aren’t crazy. They’re just doing what they feel is rational based on their own understanding of how things work. As you go into the spring market this 2021, keep that in mind. After all, it’s bound to be really competitive.
Chapter 17 - The Seduction of Pessimism
Currently, everybody’s talking about how the 2021 real estate market is going to crash and burn, how it’s going to be terrible. Why? In The Psychology of Money, this is what Morgan says about pessimism.
“Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.”
Generally speaking, if people say, “The world is going to come to an end,” and they’re wrong, everyone’s like, “Well, you’re just being safe.” However, if someone says, “It’s all going to be totally fine,” people think that person is a complete idiot, and they’re missing all these warning signs. Just think about it with all our current headlines.
Additionally, he goes on to say this:
“Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.”
It is well known in sales training that people are willing to take more action to save/ protect $1,000 that they already have than go and get $1,000. That’s just human nature. We want to protect what’s ours. So when someone tells us the market’s going to crash and it’s a terrible time to buy, we’re bound to listen.
Additionally, if you look at YouTube right now, you’ll find an echo chamber of a market crash coming our way. Those messages can end up in your consciousness. It can make you think that it is all terrible, then you’ll act as such. DON’T fall into that trap. Always look at things from different perspectives first before making anything final.
Chapter 20 - Confessions
The third and final point that I wanted to bring up is a section in Chapter 20 of The Psychology of Money called Confessions. I couldn’t find the exact quote, but I will paraphrase it for you here: Know the game you’re playing.
Additionally, Morgan has a quote about investing that says:
“I can afford not to be a good investor, but I can’t afford to be a bad one.”
Here, he is talking about his personal investing strategy. He doesn’t go for big but risky gains, he’d rather play safe. He prefers to invest in index funds and other vehicles that are very boring but steady. With regards to his lifestyle, he’s built one that is very frugal. He has paid off his house and lives well below his means.
The main message here? If you’re someone who might want to buy or sell houses, know the game you’re playing. Know your goal, and know what it is that you need to compare yourself to. For example, if we sit here in Alameda, California, or the Bay Area, and we compare ourselves to other markets that are going up, down, sideways, backwards and forwards, it might get discombobulating.
Comparing yourself to someone in San Francisco, or San Jose is NOT your game. You have to know the actual buyer pool that you’re going for, or that you’re going to be competing in. Know what those people are all about, what their price point is, what their general constraints are, and who your competition is. Most importantly, know what your goal is. All this will help keep you aligned in whatever it is you’re trying to accomplish.
I hope my blog about what The Psychology of Money taught me about buying real estate has helped you.
There are the three most powerful lessons in the book but there’s a ton more and I would love to take more time with you to go through them. If you want to pick up a copy of The Psychology of Money, you can get it HERE. If you did or if you’ve read it already, tell me more about what you liked. What are you thinking about reading it? What’s your favorite part?
Also, if I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below.
Here’s to all your success!
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