The concept of sunken cost bias might seem like a new one to you, but I promise you it’s not. Everyone’s gone through this. Think of the time you started on a project or job or school or relationship or whatever it is.
As time goes on, it starts to feel like a waste of time. There’s something in you that says to stick it out. Keep going – you’ve already put so much time / effort / energy into it!
That’s the sunken cost bias. That time / effort / energy is a sunken cost. It’s gone, and you can’t get it back.
For real estate investors and business owners, this shows up in the form of bad investments. We tell ourselves to stay with it because we can turn it around and “salvage” it.
Let me give you a real life example from my own experience.
A few months back, I put in a contingent offer on a property. Paid for an inspection, went to see the place, and my agent had spent a lot of her time as well. But the inspection didn’t go well, and the owner wouldn’t negotiate. So what did I do? What was going through my head? How did I logically decide to walk away even though every bit of me said to stick it out?
Watch today’s video to find out!
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Expand Transcript
What’s up guys, it’s James here. And in today’s video, I’m going to be talking to you about sunken cost bias and how it plays in real estate in a way that could potentially cost you millions. So this is a concept if you’re unfamiliar with a sunk cost bias, it’s a concept that says that as you sink more cost into something, as you invest more, whether that’s money, whether that’s time resources into something, you have a bias, and that bias is telling you to continue to invest into that thing, even though it might be a poor investment. And it’s a natural occurring bias. And every one of us, we all have it, we all experience it, I’m sure you can relate to something that you didn’t realize early on was going to be a waste of time or energy or money. And then you invested time or energy or money into it, only to realize that it didn’t really work out the way that you had intended. And then you try to invest more and more and more, because you don’t want to accept that you made that bad call and accept losing the time or money or resource that you sunk into it. So you chase bad money after good or bad resources after good trying to recoup your initial investment or trying to salvage this investment. And that is a sunk cost bias at play. And so what we want to do as real estate investors is really avoid this. So in this video here, I’m going to talk to you about how this plays in with short term rental investing how it plays out with real estate investing in general, and talk to you about how you can avoid it in your own investing journey. So you can hopefully avoid making some pretty nasty mistakes, they’re going to cost you substantially. Now, if you are interested in learning exactly how to invest successfully into short term rental properties, and leverage Airbnb and this incredible sharing economy, then I highly recommend you check out the links down the description down below whether you want to invest in short term rental properties actually purchased them. Or if you already have one, and you want to learn to host it more effectively. Or if you want to manage other people’s properties on Airbnb without having to buy rent furnish any properties at all, we’ve got trainings, they’re all linked in the description down below, and they’re all completely free. So I highly recommend that you check those out. Now, the sunk cost bias is a really good example actually talked about in the last video here on the channel is a property that I was recently looking at that I offered on conditional, I ended up getting an inspection done. And so at that point, I had sunk substantial amounts of time and energy and money into the property, money being getting the the inspections done, which was about $1,000. And at that point, I ended up having to walk away from the deal. And I can tell you, for sure I had a bias going on in my head with that sunken cost where I really didn’t want to walk away from the deal, because I was so heavily invested into it at that point. Now looking back, I’m very, very happy that I made the right and discipline call to walk away from that deal, and didn’t let my subconscious bias Jade my decision making and having made a really, really bad decision. And I think that the best way to come to terms with that and to really keep disciplined about this mentally speaking, is to have a longer term time horizon that you’re looking from. So it’s really, really easy for you to get carried away and make the wrong decision if you look in a short time horizon. So if I were to have been looking at the next three months, well, yeah, it’s probably going to be more painful for me to walk away from that deal in the next three months, than it will be to just go ahead with the deal. Because if I go ahead with the deal, that doesn’t really make a lot of sense, I’m not gonna be paying for that in the next three months, I’m gonna be paying for it in the next three years in the next 10 years even. And so I think that by zooming out, it helps to give a lot of perspective because initially, if you look at look at it, and you look at the prospect of buying a bad property or not so great property, well, in the next three months, what’s that going to look like? Well, it’s going to take four or five weeks just for the property to close. And so if I buy this property, then I get the joy of buying a property excitement of buying a property, whereas if I walk away, then I’m probably gonna have to just go back and start from square one looking for more properties and trying to find another good property another winter. Now, then beyond that, I’m going to be in the renovation mode, I’m going to be getting it all set up and furniture, and that’s a lot of dopamine hits, right, that’s just a lot of success, a lot of fun, a lot of enjoyment for most people, they actually enjoy the success and the instant gratification that comes along with renovating property, getting it looking really nice. And then actually, you know, getting everything all furnishings set up and listed. And that’s gonna be another month or so. And then I’m going to launch it and then I’m going to have another big dopamine hit of having all these bookings come in and getting the listing up and running. And it’s not going to be until after the first year when I look back at my total ROI and realize that it wasn’t what I wanted it to be. It wasn’t nearly what it could have been with a better property. That’s when reality is going to sink in. That’s when the more macro reality is going to sink in that I made a bad call and then the second year when again performs Like a dog, and it doesn’t do well, that’s when reality is going to hit. So there’s gonna be a lot longer time horizon for it to feel better to walk away from that deal than it will to just stay in it. If I stay in the deal, then you can avoid that reality, you can just not really pay attention to the numbers because they haven’t happened yet, you can convince yourself that you’re going to do better than you anticipated, and the numbers are going to work out well, it’s going to take a year, two years, three years for you to actually be able to look back and objectively say this was a bad idea. Whereas if you buy the right property, it means that over the next three months, it’s going to be more painful, it’s going to delay things, you’re gonna you’re probably like me, you probably want to buy a property. If you were at the stage where you invested time and energy into it, you put an offer in got that offer accepted, you know, you’re probably pretty excited, pretty ramped up. And so it’s usually going to be quite the letdown emotionally and mentally to walk away from that deal. So that immediate kind of downswing is going to have a cost, right, there’s going to be, there’s going to be a negative impact of that. And we all want to avoid that, right. But where you’re really going to get the positive upside is going to be a year from now, not next month, because you may not still have a property then but it’s really going to be a year from now, when you get to look back and say, Wow, this property performed really well. I’m glad I waited for it. I’m glad I took longer, you know, it’s been 1215 months now since then. And now you get to actually go and look back at the better investment that you did get to make and realize that that was the right call. So again, if you look at the short term, it’s going to feel like a big loss, you know, walking away from a property in the instant that I did it that felt like a major loss. Even though I knew the logical part of my brain knew that what I was losing was not something good. I was losing a bad deal. But I was still upset about it. Because I had been so invested in I’ve gotten so excited. But then the analytical side of my brain was telling me, Hey, I am losing something that is bad, I don’t want it. I ended up being disciplined and listening to that. And now we’re, you know, 3456 months out from that, and I’ve gotten another property and found it, I actually ended up purchasing it closing on it, we’re renovating it. So now I’m actually getting to see some of the enjoyment. And I’m even more excited for being able to look back a year from now, once the property has been live. And it’s gotten me a really great ROI and say, Wow, I’m really, really glad that I walked away from that other opportunity that wasn’t nearly as good as this one. And so really, what you want to do as an investor is try to think long term. That’s one of our values that our core values and my company b&b Inner Circle where we coach people and train them how to invest successfully in short term rental properties. One of our core values is long term thinking, because as an investor, it’s so fundamentally important, and really in life, it’s so important to think long term, right? All of your big wins are going to happen in the long term, I can guarantee you that because anything worth accomplishing anything incredible that you’re going to accomplish isn’t going to happen overnight. It’s not going to be a quick win, it’s going to happen long term. But as Tony Robbins often says, people often underestimate, they will often underestimate what they can do in a year, 10 years, but they wait, overestimate what they can accomplish in the next week. And so if we just zoom out and we look longer term, we’re going to accomplish a lot more than we realize. And in order to do that, you just really need to be thinking long term. So you’re making the right decisions to line you up for wins long term, not wins short term, because when short term can often just be long term losses in disguise. So I hope this has been helpful for you and just reframing the way that you think about real estate investing. In short term rental investing, it makes it make you hopefully a better investor in the long term. Now you’re interested in working with us and you’re interested in winning long term building like financial legacy to pass along. We’re really interested in building something for the future that I highly recommend you check out the free training, it’s linked in the description down below, where you can learn more about our step by step process for exactly how to invest strategically and successfully in short term rental properties. We’re also going to give you our analysis spreadsheet completely free as soon as you sign up for the program. So are short for the for the free training. So I highly recommend that you check that out because you’re gonna get your analysis spreadsheet completely free. And that’s just going to be for you to go out and analyze properties and make sure you’re buying the right deals that are going to be winners long term. So with all that said, I hope you enjoyed this video. If you did, give it a thumbs up, make sure you hit that like button. Seriously, do it. Don’t just listen to what I’m saying or not do it hit the like button. Also, while you’re over there might as well hit the subscribe button right give it a little click. You’ll be subscribed, you can stay up to date as we post two new videos every single week on the channel. Last but not least, if you have anything to share with me if you have any questions, comments, thoughts, anything at all just let me know in the comment section down below. With all that being said I hope you have a fantastic rest of your day and I will see you in the next video.