There are few decisions as life changing as purchasing your first home.  In the many years we’ve worked with clients, a garden variety of personalities often emerge but they generally fall into two camps.  There’s the insouciant creative-type that gives no regard to the details of the process but relentlessly fights for “more natural light” in the dining room.  On the other extreme, there’s the analytical professional who finds a way to over quantify every aspect of the transaction, hiding their emotions behind spreadsheets, unwilling to pull the trigger. Many scientists have even equate the process of house hunting to the act of dating.  While we cannot give everyone a distinct answer to which house they should buy, fortunately, very smart mathematicians have figured out the optimal time to start making offers.  The secret sauce is number 37… percent to be precise.

How does it work?
House hunting is what mathematicians refer to as an optimal stopping problems.  That is, when do we know that we’ve gathered enough information to start committing to an option? This type of problem is quite prevalent in our lives, from picking a life-partner to hiring a secretary, optimal stopping is an age-old problem that many of my millennial friends qualm over. 

First – we need to set some conditions for this concept (and we’ll do it in the context of buying a first home):

Finite Scope of Selection:  As much as we think that there’s an infinite amount of houses that Redfin can spit our way, the reality is that our search is often governed by some very real boundaries.  In your cases, you might realistically be “tapped out” after seeing 50 homes. This sample size can also be bound by time where you might give yourself 6 months to find a home.

Sequential Evaluation:  This condition assumes that each home will be evaluated and rejected in sequence.  In other words, once you’re rejected a house, you will not be able to return to the same listing with an offer. Notably, this is not the case in reality but we’re striving to keep the process clean.

Acceptance Only:  This condition assumes that once you’ve made an fair-market offer (and you’re only allowed to make one offer), the seller will always accept your offer.  Again, unrealistic but we need to maintain this to keep the math clean.

Define Criteria and Metrics: As with any good science project, you will come up with a set of metrics to measure the quality/suitability of each home.  For simplicity, we will simply rank homes from 1-10 (10 being the perfect home). In reality, you might have a combination of scores for location, price, furnishing, culture, amenities, etc.

Here’s an example bring it back to earth:

Let’s say you’re a new home buyer in the market for a 2-bedroom condominium in Jamaica Plain (yes, the key is to get really specific about your wants and desires).  You’ve also given yourself 6 months to find. Since showings are typically listed on weekends, this translates to approximately 26 weekends or roughly 52 homes (assuming you visit 2 homes per weekend).  In accordance to the 37% rule, your best option is to start looking to make offers on “best yet” homes after seeing your 20th listing. We arrived at the 20th listing because 20 is ~37% of your total sample size (52 homes). 

Let’s apply our rating to make this more concrete.  Say that in the first 20 showings, you’ve seen houses as high as 8 and as low as 3s.  The rule states that following your 20th showing, if you see a house rated as high as 8, you should STOP the search and be ready to commit to this home.  This is the Optimal Stopping Rule.

Mathematically, this is the point where you’ve achieved the optimal balance between learning about the market vs. analysis paralysis and statistically being stuck with a crappy home as the well dries up.

Why 37% percent?

So, I won’t spend the time doing a math lesson because you can find it here. However, I do want to appeal to all our intuition that the 37% rule makes sense.  When it comes to dating, hiring, or buying a home, we all know the goldilock rule to be true.  If we settle too soon, we’ll miss out on the massive pool of suitors we’ve never met. Conversely, if we settle too late, then all the good ones will be taken. In short, this intuition sets the foundation for the 37% rule.

It’s not perfect. Obviously

Finally, let’s acknowledge that this is not a perfect solution.  What if the 1st home you’ve seen is a perfect 10 and it meets all your criteria?  According to the rule, you’ll have to keep looking but as an agent, I’ll say put in an offer and see if the seller bites.  The rule is also defined in a vacuum, assuming that there aren’t other buyers competing for the same prize. Finally, it also assumes that the seller MUST sell the house to you if you submit an offer (which is never the case). In short, use the 37% rule as a guideline for life but don’t turn it into a prison.  As a wise grandma once said, “Be as picky with your Men as you are with your selfies.”

About Me: Cheng is a real estate consultant and investor with experience in sales, property management, and investment analysis in greater Boston area.  He is also passionate about Digital Health Technology and perfecting his sticky rice recipe.