Buying a home is a big deal. A home is a significant investment, plus, we must predict our home life needs well into the future. We do not always know how long we will stay.
Do we need good schools or access to age-appropriate medical services?
Do we need to live in a particular area or are we geographically mobile?
In the last couple of decades, housing costs have grown quickly, often outpacing salary growth.
Should we buy a house in a good rental market?
Should we consider a multi-tenant environment, living in a part of the home and renting the other part?
What about other family members... do we need room for others?
Then, how do we pay for this? Can we get a mortgage with affordable payments?
These are just a few criteria preferences. There are many others and will often depend on your unique situation - factors such as location, income, family needs, and other cultural preferences. Beyond identifying preferences, we need to weigh our preferences and then apply them to available home-buying alternatives.
About the author: Jeff Hulett is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.
Table of contents:
Introduction
The Challenge
Decision Process Character: Is the decision complex or complicated?
Making The Best Decision: Homebuyer Criteria and Alternatives
Conclusion
We wish to be confident in our decision. Confidence occurs based on the belief we made a good home-buying decision. The majority of home buying is done by couples. By a “couple,” we mean a married couple, unmarried co-habitants, an individual with help from a parent or friend, and the like. Increasingly, more than 2 unmarried people may pool their resources to buy a single home. This is known as "co-ownership." So, confidence is not only individual, but it requires collective confidence. All homebuyers should share in the belief confidence that they made the best homebuying decision. Most U.S. homebuyers engage buyer real estate agents to help facilitate the confidence-building process and outcome.
All is not well in the homebuying confidence-building process. Approximately 3 out of 4 couples indicate they argue about key home buying “what is important to us” criteria. Arguing suggests there is a lack of confidence in the home-buying process. Generally, the home-buying decision is characterized by a complex, emotion-generating process. Arguing likely suggests confusion about either the definition of the key criteria or the weight of those criteria.
Helping to sort out the “What is important to us” criteria is where a homebuyer’s agent should shine. A good homebuyer’s agent intuitively knows how to:
Educate each homebuyer about the key homebuying criteria and their definitions,
Facilitate a process to weigh those criteria for each homebuyer, then, importantly,
Facilitate the home buying team to combine their criteria as a single approach to deciding on which houses are best for them to pursue.
As the earlier graphic suggests, homebuyer's agents have an opportunity to further help their clients “cross the chasm” to fewer homebuyer arguments and a high home-buying confidence experience.
This article examines the home-buying decision process. We apply a decision science and behavioral science lens. We will break down the decision into its core parts, and then provide suggestions and tools for making the best homebuying decision.
There are two major components to any decision process – the criteria and the alternatives. It is important for these components to be completed in order. Also, there are 2 major decision characteristics - the complicated and the complex. These two decision characteristics describe decision information gathering when making the home buying decision. The following is a high-level homebuying decision framework. We will explore this framework as we step through the article.
In the main, this article is focused upon the decision components-related process, particularly the foundational criteria-building step or “What is important to me (and US) when buying a home.” We will also describe the often-misunderstood Decision Process Character at the core of evaluating information for completing the Decision Components. Before jumping into the process, we will first describe a few key challenges….
2. The Challenge
This article is grounded in a few key home-buying challenges that are particularly relevant in our current data-saturated, high-paced world.
Too much data: Over the last decade or so, there has been an explosion in real-estate data availability. In fact, most people find the volume of data overwhelming. There is a highly relevant observation by Samuel Coleridge, who wrote The Rime of the Ancient Mariner - "Water, water, everywhere, nor any drop to drink." Today's corollary is:
“Data, data, everywhere, whilst little wisdom to benefit.”
Data sources like Redfin and Zillow can be helpful. However, without a game plan to appropriately access and utilize the data, homebuyers can quickly become overwhelmed and discouraged. Often, too much data will confuse and lead to lower confidence. Active data curation is the hallmark of a confidence-building homebuying experience. Please see our notes for an amazing data curation example, “The Miracle on the Hudson.” [i] Later, we present solutions that enable data curation.
Legal requirements: Well-intended laws may seem restrictive to buyer’s agents, given their mission to help their homebuyer clients. Most states have laws discouraging “steering.” Steering may occur if a buyer’s agent inappropriately influences a homebuyer’s decision criteria. [ii] For example, consider neighborhood selection. Steering sometimes has racial discrimination overtones. A buyer’s agent would not want to presume homebuyers will care about the racial makeup of the neighborhood they select. Dan Patrell is a real estate veteran and is with the Maryland REALTORS®, a state realtor industry organization. Mr. Patrell said:
“Potential steering is a critical consideration for buyer’s agents. Realtors are required to learn about and comply with steering-related laws and regulations.”
To avoid steering concerns, buyer’s agents are discouraged from the assistance that may potentially be considered steering. The challenge is that it is difficult to walk the not-always-clear steering line. Later, we present decision process solutions that enable appropriate criteria assistance and as appropriately used, will eliminate steering concerns.
Consistency and efficiency: Not all buyer’s agents are the same. The real estate industry has a relatively high agent turnover. When the economic times are good, many new agents are attracted to the real estate business. When the economy turns down, many agents will drop out of the business. Also, an individual realtor’s life stage matters. The real estate industry attracts some part-time agents who may enter or exit based on their life situation, like family priorities. Tom Kavanagh is the co-founder and Director of Growth for Fulcrum Properties Group, a Mid-Atlantic U.S.-based real estate company. Mr. Kavanagh said:
“We spend significant time and resources training our buyer’s agents. Not all agents are the same. A team of consistently well-trained agents is the goal. We appreciate the best-trained agents drive the most volume and create the most customer delight. A win-win!”
To create consistency and efficiency in the dynamic realtor world, it is necessary to provide technology solutions that:
a) Enable efficiency,
b) Is intuitive to use, and
c) Deliver clients' criteria and decision-making confidence.
3. Decision Process Character: Is the decision complex or complicated?
We now turn to the homebuyer decision process. We present this decision process in a context consistent with deep decision science and behavioral science research and practice. In the case of home buying, the quick answer to the “Is the decision complex or complicated?” question is “YES!” The homebuying decision is BOTH complex and complicated. Generally, the difference between a complicated and complex decision has to do with the information available and the difficulty of the homebuyer to process that information to make a home-buying decision.
Complicated decisions are addressable with data and algorithms. The data and algorithms may help us confidently achieve the best homebuying alternative. The typical challenge with complicated problems is the volume of criteria and evidence needing evaluation. You will likely have many “filters” you wish to consider when buying a home, like the number of bedrooms, or a particular school district. While complicated by the volume of considerations, it is addressable with good organization and access to filtering data. Filtering data like that from real estate data aggregators such as Zillow or Redfin. People use filters to quickly reduce the number of alternatives. This makes decision-making simpler. However, the challenge is that entire sets of homebuying alternatives will be eliminated from the filtered consideration set. What if a home has everything you want except it just falls outside of your desired location? This may be the perfect house and the location may turn out to be workable. Criteria are better to be weighted than filtered.
Complex decisions are different. These are often decisions with some uncertainty and a lack of data. These problems require our best judgment. Your judgments include beliefs, emotions, and attitudes. For example:
A neighborhood may have a good “feel” when you drive through it. You may get comfort from a neighborhood that feels like yours from growing up.
You may not know how long work-from-home is going to last. The importance of distance from the office is the best guess. Requirements for presence in the office will almost certainly evolve.
Collecting and filtering data is only the initial stage of the decision process. The data must be applied to the weighted criteria of all homebuyer stakeholders.
Building decision confidence is critical to a successful outcome. High confidence is your feel-good emotion signaling a good decision. To gain this critical confidence, one should have a process that handles both complex and complicated decisions. Then, the process should help you define and weigh the criteria and then apply both objective-based information and your judgment to potential alternatives.
It is important to recognize that because home buying includes complexity - each home buyer has a unique perspective. That means, there is not some “AI” that can make a home-buying decision for you. Certainly, the decision will be helped by applying available data and algorithms. Best decision practices suggest homebuyers should develop their unique decision perspective by integrating available data and algorithms, plus, add homebuyer judgment to manage uncertainties and appropriately apply beliefs, emotions, and attitudes.
In the remainder of this article, we provide approaches and solutions to help homebuyers create and implement their own unique decision model, apply their unique model to available home-buying alternatives, then confidently make the best homebuying decision. The realtor may certainly be an important facilitator of this confidence-building process.
4. Making The Best Decision: Homebuyer Criteria and Alternatives
At this point, you and your homebuying team have decided to pursue homebuying. While it is possible you will rent longer, your team is committed to seriously evaluating home buying as a credible alternative. You have also initially reached out to a local realtor and a mortgage loan officer to discuss mortgage pre-approval. You have read this article and gathered additional information to inform the home decision team of the decision process. This is STEP 1 and STEP 2 in the decision framework.
Homebuyers’ criteria – “What is important to me or us?”: The best decision process is to start by identifying and weighing criteria. This is STEP 3 and STEP 4 in the decision framework.
Decision Science teaches us criteria development is a significant decision risk point. Often, the criteria development and weighing process may get overlooked or only marginally considered in a trial-and-error process. Many have the desire to go directly to evaluating home alternatives with only a vague idea of their criteria.
The good news is - there is nothing wrong with “going shopping” to get homebuying research ideas. It is important to recognize that the trial-and-error shopping process is only done in the context of informing your criteria. The criteria-informed homebuying alternative evaluation and selection process should only occur after the criteria have been identified and weighed. An effective criteria evaluation process has the following characteristics:
Criteria are well-defined.
Each criterion is independently evaluated and weighed.
Evidence to evaluate criteria may be judgmentally or objectively based. When possible, high-quality objective evidence is preferred.
Combining criteria evaluation of multiple decision participants is necessary. Utilize differences as discussion points. Differences may be resolved with additional evidence or “agree to disagree” by splitting the difference.
Behavioral Science teaches us that people have naturally occurring biases. These biases often result from belief inertia associated with fear, overconfidence, or expertise devaluing.[iii] A disciplined criteria evaluation process will greatly reduce the potentially misleading or confidence-reducing bias effects. This does not mean we need to quantify all our criteria evidence. Often our judgment is needed because 1) evidence is uncertain (because it occurs in the unknown future) or 2) evidence is unavailable (because it is found in a difficult-to-interpret emotional response). A disciplined criteria evaluation process will significantly reduce bias and optimize judgment.
Building confidence-enabled criteria for homebuyers is challenging to accomplish without the help of a well-trained realtor. The realtor helps create home buying confidence by applying decision science-enabled tools and expertise to help their clients. The challenge with biases is that most people do not recognize their own biases. This is especially challenging for buyer's agents when it comes to advising their clients. Good decision tools will help their clients realize the best decision by minimizing bias.
At the bottom of the article is a suggested smartphone app for making the home-buying decision. It comes preloaded with common criteria. It is easily customizable to add or subtract criteria most important to the individual homebuyer. It provides a decision science-backed criteria weighing process. The results may be combined with multiple members of the home buying team to create an accurate aggregated criteria perspective. The app is integrated with major real estate data providers like Redfin or Zillow. The results are able to be shared with the buyer’s agent.
The Homebuyers’ alternatives: Now that the criteria have been clearly defined, weighed, and combined across all homebuying team members, the home alternative selection process becomes straightforward. This is STEP 5 and STEP 6 in the decision framework.
Since the homebuyer clients have clearly defined their criteria, the buyer’s agent is able to provide homebuying alternative suggestions. Both the homebuyers and the buyer’s agent are guided by a clearly defined, ordered, and weighted list of “What is important to us.” Also, as much as the homebuyers tried to accurately assess the criteria, it is possible their perceptions may change with experience. The good news is that our process allows for rapid updating. Also, most people will buy multiple houses throughout their lives. When it comes time to buy a future home, their customized criteria model will be available as a starting point for all future real estate transactions. The buyer’s agent can securely archive their homebuying decision model and make it available when needed in the future.
Our economy tends to swing between buyer’s markets (significant inventory with pricing power skewing to the buyer) and seller’s markets. (limited inventory with pricing power skewing to the seller) Each market has unique challenges for the buyers.
In a seller’s market, being clear about criteria is critical. In this environment, speed to the decision is paramount to achieving the homebuyer’s goals. In a fast-moving seller’s market, the home buying decision is more likely to be either, 1) pursue this available alternative or 2) stay in our current housing situation like renting. The decision trade is a lower number of alternatives for a higher speed of decision premium.
In a buyer’s market, there may be more alternatives and more motivated sellers. In a higher inventory buyer’s market, the home-buying decision is more data-rich with multiple home-buying alternatives from which to choose. The decision trade is a higher number of alternatives for a lower speed of decision premium.
Now that the criteria have been clearly defined - using real estate data aggregators such as Zillow, Redfin, or other Multiple Listing Service-related sources, the homebuyers can simply identify alternatives to walk through. The homebuyer’s agent will become even more effective in driving:
Homebuyer confidence and
The speed to achieve the best real estate decision!
Effective decision science-enabled solutions will help facilitate the best decision in either buyer’s or seller’s markets.
5. Conclusion
The home-buying process is both complex and complicated. An explosion of real estate data availability has provided more information directly into the hands of the buyer. Paradoxically, if not managed properly, more information may cause homebuyers to reduce decision confidence. With the assistance of buyer’s agents, the technology now exists to help homebuyers evaluate their criteria before evaluating alternatives. The article demonstrates that the order of operations matters…. Having the homebuyers come together on their criteria first is critical to the best home-buying decision outcome.
Homebuyer’s Choice by Definitive Choice® - Definitive Choice is a smartphone app. It provides a straightforward user experience and is backed by time-tested decision science algorithms. It uses a proprietary "Decision 6(tm)" approach that organizes the criteria (what is important to you?) and alternatives (what are the choices?) in a series of bite-size ranking decisions. Since it is on your smartphone, you can use it while you are doing the research. It is like having a decision expert in your pocket. The results dashboard provides a rank-ordered list of "best choices," tailored to your preferences. It is easy for homebuying participants to share and compare their criteria.
Also, Homebuyer’s Choice by Definitive Choice comes pre-loaded with homebuying templates. You will want to customize your own criteria, but the preloaded templates provide a nice starting point. This app will help homebuyers increase confidence, improve interactions with the buyer’s agent, and help you negotiate for the best home.
Below is the high-level process flow showing the interactions between the buyer's agents and the home buyers.
For more information, please contact Definitive Business Solutions, Inc.:
Jeff Hulett, Executive Vice President | jhulett@definitiveinc.com
Greg Potteiger, Chief Technology Officer | gpotteiger@definitiveinc.com
Additional Resources
The next articles provide a deeper dive into aspects of the home-buying process:
What is a mortgage preapproval and how do I get it?
How do I find the right realtor for me?
CFPB: Find the right home
Homes do not seem very affordable. Is it worth it?
What are some home-buying adaptations I can make to get on the housing ladder sooner rather than later?
Notes
[i] One of the most salient examples of successful data curation in recent times is when Captain Chesley "Sully" Sullenberger landed U.S. Airways Flight 1549 from LaGuardia on the Hudson River. He had less than 3 minutes to make decisions that would impact hundreds of lives. The biggest unsung hero of this amazing event was the Airbus A320's cockpit display. It allows pilots to quickly understand a few important airplane measures (airspeed and flight angle) to make quick and effective decisions. In the case of Sully's flight, it enabled him to "load shed," which is a pilot's term for when they are overwhelmed with information. Sully was able to quickly load shed unimportant information and focus upon the highest weighted information to choose the best alternative and to make the best decision. The outcome was “The Miracle on the Hudson.” An extraordinary landing on the unusually calm Hudson River that day. They landed in front of commuter ferries that quickly mobilized to save all aboard the quickly sinking airplane. If Captain Sully had been busy calculating airplane vectors, he may have missed the option to land on the river. Helping homebuyers confidently load shed to focus on their most important home buying criteria is critical to a successful home buying experience.
Wodtke, Sully Speaks Out, History Net, 2016
[ii] The Fair Housing Act prohibits discrimination based on "protected classes." Protected classes include race, religion, gender, sexual orientation, and others. "Steering" as a means to direct home seekers to certain areas based on race is prohibited under the act. Many states and localities have complimentary laws that may increase steering-based protections.
Editors, The Fair Housing Act, U.S. Department of Justice
[iii] Hulett, Changing Our Minds, The Curiosity Vine, 2021 – See section 1a, “Our Approach & Belief Inertia.”