Confirmation Bias

What it is

Confirmation bias is when you do a lot of work to find a deal, you want it to work, and now you start taking out comps that should be comps because they kind of lower your ARV. You’re keeping the ones that confirm the number you already decided on.

I touched on this when I was going through how to comp a house. You see something that’s out of place and you have to check yourself. There are certain comps that look wrong that really are wrong — false square footage, sold to a relative, bought in a package. But there are also comps that look wrong because you don’t want them to count.

The trigger is usually that you’ve been searching for a while and you’ve been outbid or passed on stuff and you want this one to work. Deals feel scarce. So you convince yourself the $180K comps don’t count because the kitchen wasn’t updated, or the house was across the major road. Now you’re justifying, not analyzing.

Why it matters

The spec version of this — what I call the wave — is closely related. You see the market going up 10% a year, the renovation’s going to take eight months, so instead of using the ARV as it is right now you use the speculative ARV you’ll hit in a year. And then you buy a house at a price that only makes sense if the market keeps going up. I see a lot of investors doing that right now and it will crush you when the market stops going up.

I actually lost money in the six-figure range on a house because I used wrong comps. Thought it would sell for around $800,000. Listed at $795,000. Couldn’t sell. Multiple price cuts. Took an offer at $667,500. Lost my butt big time on that one. I made other mistakes too, but the thing was dead before it even started because my comps were wrong.

If you can’t do this unbiased, get somebody else to look at it. Get a real estate agent to confirm your comps. Get another investor friend to review them. Or just have some control over yourself. Run the numbers honestly. If the deal doesn’t work, it doesn’t work.

How it shows up

The third common comp mistake — wrong side of the tracks — is really just a form of confirmation bias that gets people who don’t know the area. They’re buying from out of state and they’re comparing houses from across a boundary they can’t see on the map. Someone I know bought a house thinking they had great comps at $350K. It was on the wrong side of a major road. Worth nowhere near $350K. They had to hold it for years.

The fix is mechanical. Same features, same neighborhood, sold within six months. Fudge one variable if you have to, never two. If you can’t find comps that make the deal work without fudging more than one thing, that’s the deal telling you to walk.

Related

comps, arv, range of comps, 70 percent rule, equity gap, speculation