In 2000, Paul Morrissey, the film director and business partner of Andy Warhol, listed his Montauk estate for sale. He and Warhol had bought a 22-acre property, called Eothen, for $225,000 in 1971. Warhol never spent much time there—the ocean breezes kept blowing his wig off. In its heyday, Eothen played host to everyone from Jackie Onassis to the Rolling Stones. After Warhol’s 1987 death, his foundation donated three-quarters of the open land to the Nature Conservancy as a preserve. Morrissey was selling the remainder, 5.6 acres occupied by five homes, a three-car garage, a stable, and 600 feet of Atlantic oceanfront.
By East End real estate standards, Eothen was the unique property from hell. Built in 1931 as a sportsmen’s lodge for an Arm & Hammer baking soda heir, Eothen had stuffed deer heads and mounted fish on its weathered wood walls. Warhol and Morrissey never changed the outré décor. The small, never-updated rooms—characterized as “hobbit huts”—were unlikely to appeal to anyone who could possibly afford to buy it.
There was another way of looking at things. Conceivably the Warhol provenance was the place’s greatest asset. Hamptons buyers were the same people paying record prices for Warhol paintings. Morrissey spoke wistfully of finding a buyer who would preserve the place.
The mix of positives and negatives made it incredibly difficult to gauge Eothen’s market value. Morrissey set an asking price of $50 million. The real estate community felt that was way out of the ballpark. The East End buyer wants “satin sheets and ice makers and Sub-Zero refrigerators and flat-screen TV’s, built-in pools,” Realtor Paul Brennan told The New York Times. “If he would sell it for $25 million, I could sell it for him.”
Going by that, Morrissey was asking about twice a realistic asking price. That’s a much higher anchor than those used in Northcraft and Neale’s experiment. Morrissey wasn’t impatient. He kept Eothen on the market for seven long years—a time study no psychologist could afford. Morrissey wasn’t in a hurry because he had the use of Eothen each summer, renting out some of the houses to defray expenses. Over time, he cut the price to $45 million, and then to $40 million. It apparently wasn’t until the latter reduction, in the summer of 2006, that he started to get serious nibbles. The $40 million price was still outside any zone of credibility (being 60 percent over Brennan’s suggested listing price), but it was no longer such a deterrent to lookers. On January 9, 2007, Morrissey closed a deal with Mickey Drexler, CEO of J. Crew. The sale price was $27.5 million. “He seems to be a great guy who understood it immediately,” Morrissey said of Drexler. “His intention is to keep it exactly like it is.”
The real estate agent’s nightmare is the client who wants to keep a property on the market to get a good price. Agents are not paid by the hour, and they would rather sell sooner than later. They have evolved several scare stories to justify this predilection to buyers. One says that an overpriced property becomes damaged goods. When it does sell, it’s sure to sell for less, not more.
Some would say that Morrissey was foolish to set such a high price; that the all-powerful and wise market brought an unrealistic seller down to earth. The marketing of Eothen seems equally consistent with experiments like Northcraft and Neale’s, saying that a high listing price raises perceptions of value. Eothen’s sale price was 8 percent more than the agent Brennan’s suggested $25 million list price (quoted just four months before the sale). Figure that a $25 million asking price might signal a willingness to sell for, say, $23 million. Then Morrissey got about $4.5 million (20 percent) more by anchoring with a ridiculously high price.
Most sellers who set too-high prices do so in the hopes of getting those prices. They are destined for disappointment. Anchoring does not mean “You get whatever you ask for.” It means “The more you ask for, the more you get.” To use anchoring successfully, a seller must set a high price and not expect to get it.
Not many home sellers are in a position to wait seven years—or to alienate their hard-working agents. There is a way to have your cake and eat it too. It’s to use the trick known in other contexts as advertised reference pricing (ARP).
Discount stores have long used ads and price tags comparing their store’s price to a higher “reference price” charged at another place or another time. The higher price acts as an anchor, increasing the product’s perceived value and presenting a favorable contrast. For the same reason, stores leave old price tags visible when they discount items for clearance sales.
“This past summer, I went out to purchase a tennis racket,” explained Donald Lichtenstein (no relation to Sarah), a University of Colorado marketing researcher specializing in psychological pricing. “I went to the sporting goods store and looked at the vast array of rackets they had, about half (thirty-five or so) of which were on sale. When comparing the prices, I paid as much attention to the ARP as the purchase price. I knew better, but I just couldn’t help myself.”
That’s why reference prices are so insidious. Everyone knows they can’t possibly work! As Lichtenstein remarked in a 2004 speech,
ARPs work, a lot of research shows they do, and retailer practice and returns show that they do. This is nothing new—it is widely known. If I advertise a sale price of, say, $29.95 and accompany it with an ARP of, say, $39.95, in most contexts, sales will increase relative to a no ARP present situation. Sales will likely increase as I increase my ARP to $49.95, to $59.95, and to $69.95. But what if the ARP is set at a level of $129.95? What about $329.95? And just to add some interest, what about $5,000?
Lichtenstein and others have done experiments on how far reference prices can be pushed. One 1988 study reported that the relationship between the reference price and perceived value for consumer goods is almost linear, even when the reference price is as much as 2.86 times the usual market value. That would correspond to a $279 item being advertised as selling for $799 elsewhere. As Lichtenstein put it, “your idea of what an item should cost is influenced by advertised prices even when they are totally unbelievable.”
For seven years, Eothen was notorious. Montauk cocktail parties and open houses were abuzz with talk of the $50 million white elephant. When Morrissey cut the price to $40 million, the $50 million price did not vanish into thin air. You can bet that every buyer was told that the property had originally been listed for $50 million. Intentional or not, it was tantamount to an advertised reference price. That original price still pulled estimates of value upward. Buyer Mickey Drexler obviously knew the $50 million and $40 million prices were hot air. But if he’s anything like experimental subjects, he must have felt he was getting a good deal. In the real estate market, just as at J. Crew, it’s hard for anyone to ignore a 45 percent discount.
One gimmick of home flippers is to list a property for a short time at a very high price, then cut it to a more reasonable asking price, consistent with the seller’s and agent’s patience. Thereafter the listing can “honestly” mention the original price (REDUCED FROM $X). This tactic adds only a few days to the time the house is on the market, yet it likely gets most of the benefit of the anchor price.
I will leave it to you to decide the ethics of such things. A somewhat more devious trick is for seller A to put his house on the market and persuade neighbor B to post her house as an FSBO (for sale by owner) on some websites. B doesn’t really want to sell; she lists at an absurdly high price (which she’d be glad to accept!). The point is to make A’s house look like a deal.
The Zillow website has a “make me move” feature whereby homeowners can post fantasy prices for their property, even though it’s not for sale. Anyone who uses Zillow knows that these “make me move” prices are ridiculous. Yet the “make me move” prices show up on the same maps and lists that buyers see when they search for homes that are for sale. One has to wonder whether they have a contrast effect, helping sell the nearby properties.
Not many home sellers use anchoring or reference pricing because they’re sure buyers are too smart to fall for it. Donald Lichtenstein compares the reference price effect to certain urban legends. A rumor once went around that McDonald’s used ground earthworms in its hamburgers. Sales plummeted as much as much as 30 percent in some areas. Practically nobody believed the rumor. Certainly 30 percent of the public did not believe that a big corporation would risk its billion-dollar brand in order to save a few dollars on beef. The point is, things no one believes still affect behavior.