How the sunk cost fallacy costs millions for real estate companies (and how to avoid it)

What is the sunk cost fallacy?

The sunk cost fallacy describes a situation where a person or organisation has invested in something that has not borne fruit, but continues to waste resources on it because they have already invested so much in it. The ‘sunk cost’ is the resources spent initially that cannot be recovered, and it is the unwillingness to ‘lose’ that investment that makes it difficult to let go of the project that didn't work out the way it was intended.

Sunk costs can occur in a wide range of contexts, from personal relationships and private purchases to recruitment and IT projects.

Examples of sunk costs

Imagine you bought a second-hand car that needs an oil change. Once you change the oil, it's not long before the timing belt needs replacing. Repair after repair is required and you realise that you bought a really bad car. But because you've already spent thousands on some of the repairs, you don't want to get rid of the car, even though it only starts every other time you drive it. You have spent so much time and money on it.

Sunk costs in the real estate industry: Business Intelligence projects that didn't turn out as you planned

A common example in the property industry is Business Intelligence projects. Many companies implement BI solutions with the hope that it will facilitate data management, make information accessible and provide new insights. Initially, it seems like a reasonable investment, but all too often property companies find themselves stuck in the same place when two years have passed and several million kronor have been spent on the project, without even having a first version to work with.

Often the licence cost is affordable, but all the traditional tools are built with consultants, and they are not experts in the real estate industry. This requires endless ping-ponging back and forth between the consultant and the property company to get the BI solution right. The whole process is further complicated by the fact that property companies do not always have client experience within the company. Few know exactly what they want to see and how they want to see it, and how to calculate key figures and build dashboards.

Instead of cancelling these BI projects that are not bearing fruit, companies continue to pump resources into the project to ‘save’ it. ‘We've already spent so many millions on it, if we stop now, everything will be lost’. It is quite natural to feel reluctant to cancel, especially if there is a feeling that with a little more patience, the project can be completed. Unfortunately, it is extremely rare that this works.

What is the solution?

The solution, of course, is not to keep investing in something that doesn't work, but that's not so easy in practice. But hey, all is not lost. You've certainly learnt a lot, and with that experience you know what you need next time. Anyone can go for investments that don't bear fruit, but not everyone has the courage to stop and cancel what isn't working.

How to avoid the sunk cost fallacy

• Do your research and get an idea of when you should see results.

• Set concrete milestones and deadlines the project must meet.

• Set a date for the project to be completed/profitable and stick to it.

How Homepal is different

Homepal is not like regular BI solutions. Homepal is developed entirely for property companies and they are our only customers. We are experts in property data, what property companies need to monitor, what objectives exist and which KPIs are relevant, how key figures should be calculated and how they should be combined in dashboards, and what reporting requirements there are from boards, owners and authorities.

In Homepal, everything is ready to go at the click of a button. Instead of property companies reinventing the wheel every time they want a report, we reuse the wheel. The development we make with one customer is shared with all our customers. In this way, no one is solely responsible for ensuring that their follow-up keeps up with developments, but we do it together - while increasing the pace of innovation in the industry.

You get ready-made dashboards that you can modify and change without being able to code or be a data engineer. No need for consultants, just a few clicks.
See why our customers choose us here.

Executive summary

• Sunk cost fallacy describes when you keep investing in a project that doesn't work because you've already spent resources that you can't get back. An example is continuing to repair a bad car because you already spent money on previous repairs.

• BI projects where a lot of time and money is spent without results are a common example of the sunk cost fallacy in the property industry.

• The difficulty with BI projects is that consultants do not have experience in the industry and property companies do not always have client experience.

• The solution is to dare to interrupt, which requires courage and learning from mistakes.
  Avoid the sunk cost fallacy through careful research, milestones and deadlines, and sticking to them.

• Homepal is different because it is specifically developed for property companies and offers ready-made solutions that can be activated with a click. No consultants are needed, ready-made dashboards can be easily modified and development is driven by Homepal together with all customers, who benefit from everything we develop - at no extra cost.