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We think we’re in control of our decision making but there are emotional systems under the surface running the show. Behavioral Economics is the study of why we make irrational decisions.
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00:00 Hey everybody. Welcome back to another episode of rent prep for landlords. I am your host Eric Worral. And this is episode 266 and we are to be talking about behavioral psychology for landlords. So if you’re not familiar with behavioral psychology and behavioral economics, uh, we’re going to be talking about that and kind of, uh, giving some great examples of why this may apply to you as a landlord or property manager. I’m going to get to that right after this.
00:30 1,2,3,4 ya ya ya…. Welcome to the RentPrep for landlords podcast. And now your host, Steven White and Eric Worral.
00:26 So behavioral economics, it is a method of economic analysis that applies psychological insights into human behavior to explain economic decision making. Basically it’s nerd sit around and actually put data to why we behave the way we do, why we make the decisions where we do instead of like a feeling on people. Or maybe this is this way because of that. It’s actually doing scientific studies to figure out why we make the decisions that we make. So in marketing, which is a lot of what I do, behavioral economics plays a pretty large role and it’s very important. But as a landlord, behavioral economics comes into play as well.
01:14 So one of the first things, and one of the first examples I want to talk about is pricing psychology. So the way you price your rental is definitely going to play into behavioral economics. And the reason for that is that, you know, when you put a listing up that if you’re at 1250 and everyone else is at 1200, you’re going to have a hard time, uh, to, uh, get any leads for your rental property. And one of the things I want to talk about is price anchors. So what a price anchor is, is when somebody sees a certain price, it will actually change the way they think about everything else they see after it. Now this is kind of a crazy thing that some restaurants do, is that they will put an item on the menu and not even stock it. So if somebody orders it, they either say, oh, we just ran out. Or they’ll even give permission to the waiter or waitress to say, you know what? Uh, if I, if I were you, I wouldn’t get the fish today, but that fish is the most expensive thing on the menu. So when you look at the menu, you’ll see items that range from $10 to $75. And for whatever reason, that rare fish you’d never heard of is the $75 item. The next item down is $52. So when you look at the $75 item, that becomes your price anchor. So now when you’re looking at that and the waiter or waitress says, you know what, I wouldn’t recommend the fish today.
02:30 You A they get credibility from you, right? Because you’re like, oh they’re, they’re like telling me something I shouldn’t eat. But B, they’re also telling me I shouldn’t get that really expensive thing. But when you, what happens psychologically as you look at the $52 item and you think, oh, that’s not that bad, cause you’re using that price anchor, that $75 fish to think that the $52 steak really isn’t that expensive. Well, price anchors are gonna play a large role in your rental listings. So when you list your rental and all of the rentals in your area of ranging from 800 and $1,200 and you list your for 1250 you’re the price anchor. You’re the one that nobody wants they’re going to look at it and be like, unless you have some immaculate location, immaculate, you know a rental property and everything’s aligned and the stars are all aligned, that 1250 makes sense for your property. You’re actually just the price anchor for somebody to say, Oh, this property over here, it was 1150 so that’s why it’s so important to be able to go through the rental listings and see what other people are charging because that’s what people are going to do when they’re looking for a place to live as well. They’re going to set the top of the market and the bottom of the market and figure out where they are in that range. But that top price listings, those top listings of comparable apartments is what they’re looking at and they might want to come down a shade or two from there. So that’s actually something I’m working through right now.
03:47 I’m going to be listing a rental property this week. Uh, if you’ve listened to previous episodes, I’ve been working on it a ton. I got a brand new kitchen. The bathroom was already remodeled a few years ago. Uh, so it is a really nice probably, you know, upper 10, 15% rental property in that area, which I’m super excited about cause I’ve never had that a out of that rental. And uh, so I will be pricing it towards the upper end of the market, but I may find a need to bring it down. 50 bucks. Uh, one of the things that I’m planning on doing with this, and maybe you can learn from this is a, there’s going to be off street parking in a garage, which is pretty unusual for that area. So what I’m going to do is I’m going to list the actual property for 1250, or excuse me, 1200 and then I’m going to offer the parking for an additional $50, which is a drop in the bucket. And you’re like, oh, that’s a great price for parking. Who’s not going to say yes to it kind of thing. But what that allows me to do is to list a property for 1200 so when somebody’s flipping through all of these listings, they may see these 1250s 1250s 1250s including parking. But then there’s this one that’s 1200 I’ll get more clicks. Because when you are listing your rental property, it’s really about how many clicks can you get because they’re never going to apply it. They never click. So the title is so important. This is the same thing for email, Internet marketing, right? And when an internet marketer sends you an email, they’re trying to do usually two things. The subject line sells the click to open the email, and then the body copy of the email of cells that click to get you to the website. And then usually there’s copy or something on the website and they’re trying to get you to click something there. As a landlord listing a property, the subject line is really the title right of your listing. So if it’s showing up in Zillow, craigslist, Facebook marketplace, wherever a, that title and those images that you use, if the images are shown in most times, they are, are the two most important things because those are going to sell the click to get them to open it. And at that point you can give them more information such as oh, parking available for $50 a month Extra So understanding counts come to those little psychological tricks I think can help you get more leads, more people interested in your property.
05:53 Uh, one thing I want to talk about a different concept in behavioral economics or behavioral Econ if you will, is market versus social norms. So market norms and social norms, what are they? Well, they are different. So a market norm is a simple transaction that occurs with money. Uh, happens all the time. We’re all aware of all these. The social norm is different in that usually money is not involved. So a really good example of this and why they are both necessary. A, uh, a market norm might be something like you’re providing housing, they’re providing you rent. So you charge them rent and they pay you but a social norm. Can we work a little bit differently? So let’s say you’re having somebody help you move into a rental property, right? Your tenants are having somebody help them move into rental. If they’re hiring a moving company, they’re going to pay him with money. That’d be a market norm. If they’re having friends come over, it’s really awkward if they paid the money. You don’t pay your friends to help you move, you pay them in pizza and beer and they understand that it’s not a great pay, but they’re doing it cause it’s your friend. Right? So the, that’s the difference between market and social norms. If I could use kind of an example that landlords and property managers all universally understand is because we, I feel like we’ve all been asked to move before and we’re like, Oh God, I don’t want to help somebody move for half a day for three slices of pizza and three beers. But, okay. And, uh, that was actually a personal rule of mine when I turned 30 and I don’t no why I decided I, I needed some new principles in my life and one of them was I will not ask anybody to move and that will not help anybody move unless I truly want to. Cause he used to always feel guilty and always be like, oh, I’ll help you move you in though I would never ask somebody to move. I said if I’m 30 and they’re over 30 it ain’t happening. And I think that’s a pretty good rule to live by. Maybe that makes me a jerk, but I’ll stick to it. So as a landlord, there are some things that you can pull out of market and social norms. I see this in the rent prep for landlords, Facebook groups sometimes. And usually it comes up, people ask things like, oh a do you guys get anything for new tenants when they enter the property? Like when they just move in. Do you guys do anything for tenants like around the holidays and of course at those times it’s usually not just about money. It’s usually a gift right. Why would you do that? A lot of times, especially even on this podcast, we said keep it a business relationship, but when you’re talking with your tenants, sometimes it can be good to at least have a little bit of a market norm thrown in there. And a really good example is when they move in, uh, instead of saying on the lease or in communication, hey, don’t use, you know, um, I don’t want to use screws in the walls to hang pictures or anything like that. I prefer if you use those, I forget what they’re called, those like a simple release kind of tabs that you can put on the wall where you know what I’m talking about you, you’ll pull a little sticky and they come right off. Well, you could just provide that as part of a welcoming package, right? You could give them some of the cleaning supplies and some of the things that you want them to clean. It doesn’t necessarily mean they’ll do it, but it can go a lot longer way of saying like, Oh, here’s like some stuff to hang some stuff on the wall and it’ll come off really easily. Cause then they see it and they’re like, oh, this actually worked pretty well. And then if they need to have more stuff and maybe they buy that same product. So you can see all like a market norm in that situation. You’re giving them something for free. It’s not money, it’s a gift, but you’re also kind of getting a behavior back that you want and that’s why you’re doing that. That’s why a lot of people have those like, you know, a, it’d be like cleaning supplies and stuff like that as a welcoming gift when they move in. Same thing around the holidays. I don’t particularly prescribed to this, uh, where I’ve always, um, given something around the holidays, but at certain times I will, um, and I usually try to do it unprompted where it’s just like, hey, you know, saw this welcome mat. You know, I thought you might like it or I’ve dropped off flowers before like that, you know, around the holidays, like I was at home depot, they had points set as they were like $3. I bought a few of them and I dropped them off with the rental property. They don’t have pets or they shouldn’t. So they should be fine cause I know those things were really poisonous. But I digress. So just something to think about. Ah, how market versus social norms apply.
09:55 And in real life scenario, this is a really great example. I heard a is comes from a professor, Dan Ariely of Duke University. Really Smart Guy. Uh, he said a good example of market versus social norms is, let’s say you go over to your in-laws and they’re making dinner and you decided, you know what, I’m going to bring a bottle of wine that is a market norm. But if you were to go over, excuse me, that as a social norm, if you were to go over and just take that instead of, you know, let’s say you got a pretty nice bottle of wine as 20 bucks, right? That’s nice in my world and I think if you’re spending 20 or more on wine, that’s good wine. But you know, I’ll still drink out of a box of wine if I have to. But if you go over and said to give them that $20 bottle of wine, you could see your, you know, mother-in-law and you go, hey, this was such a great dinner. Uh, I appreciate you inviting us over. Here’s $20 that is not going to go well. Both of those things cost $20 but one of those things is considered rude and one of those things is considered a nice gesture. So that right there is market versus social norms in a nutshell. Just think about it in your everyday life, even. Maybe it’s outside of being a landlord or property manager, there are times that being able to change the way that you’re compensating or at least giving thanks to somebody and using market norms, uh, it can go a lot further than somebody can.
11:13 So just think about that. Uh, the last thing I want to talk about as far as behavioral economics and how it can affect landlords is loss of version. So loss of version is, and I got a definition sitting up here on this screen is an important concept associated with prospect theory and is encapsulated in the expression “losses loom larger than gains”.It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining.. So let’s say you had $100 and you one group of people, you’re going to take 50 away and the other group of people you’re going to give them 50 and you have a 50 50 shot, whether or not it happened, right? You’re going to roll the dice. And in one group you got a 50 50 chance of losing 50. And the other group, we get a 50, 50 chance of winning 50. The pain of possibly playing that game. And you know, of course there’ll be some other outcome, maybe a, they’re going to get some, some free bonus or whatever. But the pain of losing 50, the thought of losing 50 is nearly twice as powerful as the thought of gaining 50. So this is a really interesting concept because it helps explain why so many people are risk adverse. It’s just a psychological thing that is embedded in many of us. Uh, some of your major entrepreneurs are people that are probably missing this part of their brain, uh, because they just, you know, are willing to take risk after risk and swing and swing and swing and swing. And you see that a lot too. Like when you hear these like, uh, entrepreneurs success stories that people are like, oh, this was my fifth business, that succeeded kind of thing. But as a landlord, you’re kind of playing the same game because you’re doing something that the majority of the population is not willing or does not want to do. And that is your taking a risk, buying a rental property. You’re taking a risk putting tenants in it, but the potential gains are great. You know, you have like your appreciation that you’re getting on the property and then you’re also having the rent coming in and you’re having all this work for you. And of course there’s a tax advantages of working with rental properties as well. But the fact that loss aversion exists is to your benefit. And the reason I say that is because there’s a lot of people who maybe will read up on owning rental property or they will think about reading up on owning rental property or they’re just about to pull the trigger I’m making an offer and they just, you know, they stopped the last moment and they’d never do it. And the reason is they’re thinking about the potential losses that they could incur by buying the rental property. So that’s good for you. If you’re an investor, it’s also good to know about yourself because you might have a point in time where you start to doubt yourself. You’d done all the research, you’ve done all the numbers, you actually feel confident in the decision, but then all of a sudden you start getting that little little bit of doubt that really could just be loss aversion. It could be a psychological trick that your mind is playing on you from years and years of conditioning that, you know, don’t do it, don’t do it. Stay safe, stay safe, stay safe. Uh, but it’s a, a, it’s an interesting uh, idea and it can also, I’ve seen it come into play with the way that people handled their rent payments cause I know some people who will start at $1,300 for rent, but then be like, if you pay on the first, your rent is 1200 but really 1200 was the number they were after all along. They just want people to pay consistently. Well what it does for the renter is if they pay rent late, it’s like, it’s not so much that they’re getting charged a late fee, which is kind of like, you know, a gain in some ways if you want to think of it that way. It’s more like they’re losing something, they’re losing that hundred dollars of savings and that may actually be more powerful psychologically than getting a $100 late fee in five days. So we think of things in that term. It really does make a big impact and change in the way that people think and behave just by changing how you present information. There’s so many studies on this stuff. I’m a nerd. I find this stuff fascinating. I bring it up at work all the time. Uh, but uh, that’s something that we’ve done actually is we used to have four packages that we offer with our tenant screening services. We’ve actually reduced that to two. And the way we presented on our pricing page, we just show that we offer one. That’s because when you offer too many options to people, they never make a decision. And we’ve had more people sign up for our service because we actually reduced the amount of service, uh, that we show them. And then when they get in the platform, then they can start to make decisions. Same thing with your tenants. you’re trying to lead them down a path, especially if you’re in that phase of getting them into your apartment. You don’t want to just hit them with so much information. It’s really a good title, some good images, a little bit of copy. And then it’s just breadcrumbs. So that leads to the prescreening process where you’re going to have a phone call with them, or maybe it’s that survey that you’re going to send them just to make sure they pass your initial screening. Then you’re going to have them look at the property and then they’re going to, you know, and it’s just being able to bring them along in the process. I mean, if you try and do it all in one day, you’re probably going to freak people out and they’re not gonna want to live in your rental. And, um, there’s so much of that psychology that comes into that. And, uh, it’s just really interesting to think about from the terms of a landlord. So keep in mind some of these things. Uh, if you’re interested in behavioral economics and you find this stuff fascinating, like I do, I highly suggest checking out anything from professor Dan Ariely. Uh, in the show notes. I will link to some of my favorite youtube clips from him, uh, of stuff that he’s done. Cause I think it’s fascinating that some of the work that he does and um, I would suggest checking out the, if you’ve never heard of it, freakonomics, it’s a pretty interesting book that came out about 10 or so years ago. They have a really great podcast that dives into a lot of this stuff as well.
16:51 All right, everybody, until next week, hopefully I will have some solid leads coming in because I’m going to be posting my rental this week, getting some leads and starting some conversations. I still gotta like finish a, putting some grout in a backsplash or two, uh, and then just cleaning up really, uh, but really hoping not to get somebody in to by mid month and back, get this place run it because it’s been weighing on me the last a little bit. So, uh, yeah. Until next week. Hopefully I got good news and that once you guys have a great week, take care.