The $20,000 Letter

Saturday, August 20, 2016

I came across an article on discussing a method to decrease the price of a new home. It involves writing a letter to the sellers that convinces them to reject the highest bid for their property and accept a lower offer from you.

At first, this idea seemed bizarre, but I was willing to suspend my disbelief for two reasons: I like to receive discounts, and I like to write.

Unfortunately, the advice contained in the article made little sense. Based upon my knowledge of economics, the only type of letter that convinces sellers to accept anything but the highest bid must necessarily allude to threats of violence and grievous bodily harm. However, the author avoided that line of thought entirely! Instead, the author suggested focusing on the demonstration of attachment, sentimentality and love.

I was dumbfounded. Had I just fallen into an alternate universe? Had the world gone completely mad?

In an attempt to better understand the article, I created a model. For the sake of simplicity I assumed that each bid only differed in terms of the dollar amount offered.

The model consisted of three possible scenarios for a buyer:

  1. He submitted the highest bid, and it's above the seller's reserve price. No letter is necessary, because the seller would be an idiot to reject the highest bid.
  2. He submitted a bid that is lower than the highest bid. Letter or not, the seller would be an idiot to accept a lower bid when a higher bid has been made.
  3. He submitted the highest bid, but it's below the seller's reserve price. Interestingly, the article failed to include this option as a possibility. I'll leave the reasoning behind this almost certainly intentional omission as an exercise for the reader.

My model made sense to me, but perhaps I was wrong. Perhaps homeowners would be willing to forgo large sums of money in exchange for a letter talking about how much I liked their houses. Actually, "exchange" is a funny word in this circumstance as a seller would possess the letter, no matter which he selected.

Using advanced scientific methodology I performed an experiment.

I asked several acquaintances whether they would give me ten to twenty thousand dollars upon receipt of a letter describing how much I liked their houses. I assured them that my letter would be heartfelt, well-researched, and handwritten on a high quality vellum.

My efforts resulted in utter failure. Not a single person known to me would willingly part with money, no matter the content of my proposed letter nor assurances as to the beautiful penmanship with which it would be transcribed.

But if letter writing is ineffective, why do so many realtors suggest it?

Imagine yourself as a letter-writer. You spend many hours over the course of days on a lengthy exercise that includes writing sentences like I fell in love with the wallpaper in the bathroom. (That's an actual quote from the article, by the way.) The effort sounds like a form of brainwashing straight out of The Manchurian Candidate, doesn't it?

Should your offer be rejected, after all that psychological reinforcement outpouring of emotion, what do you think might happen? Either you'd increase your bid, now cognizant of how much that potential home means to you, or (at the very least) you'll be less cautious with your bidding on the next home because you've been self-programmed to be desperate to buy a home right now. Either outcome will be a happy coincidence for your buyer's estate agent whose income is directly tied to your spending.

It's not that I'm bashing real estate agents for potentially shady practices - I did that back in April with Six Ways to Get Fleeced in the Housing Market. It's just that people seem to treat the biggest purchases of their lives with less concern than their decision about what to eat for dinner.

It's almost as scary as how little concern most businesses treat the monetization of their products.

So, um. Do you need help with your product monetization strategy? Who you gonna call? Ghostbusters! me.