An industry is usually ripe for disruption when current business models are riddled with inefficiencies. Their subjective nature leaves room for error and inconsistent results, and customers feel frustrated. Often one has to experience the painful process of an outdated model for themselves to really realize how much change is needed. My mom recently sold her house, and while there were a lot of inefficiencies throughout the process, there was one part of the transaction that made me realize there had to be a better way.

Delays, errors and frustrations

My mother received an unsolicited offer from someone who wanted to buy her house. She had lived in this house for the past 40 years; it’s where i grew up. My mother didn’t want to sell, but as a widow living alone, she realized now was probably a good time to lose weight. The family that made the offer was in love with the house. As they walked through the house, they joyfully planned their lives by selecting bedrooms, deciding where to hang the TVs, measuring to see if their apartment kitchen table would fit or if they should buy a new one. Their excitement brought joy to my mother as she found comfort in the knowledge that the home where she raised her family would be in good hands. Their bid was $455,000.

The next steps in the process were the inspection and valuation. The home inspection was thorough and without problems. Nothing surprising was discovered, just the normal wear and tear of a 70 year old house. Then came the appraisal. For starters, it took weeks to get someone home due to a shortage of appraisers. In a housing market as hot as the one we are in right now, weeks can seem like an eternity. When the appraiser arrived he was very polite and professional, and everything went smoothly. Three days later, the valuation report arrived, valued at $400,000 ($55,000 below the bid).

After receiving the report, the buyer reduced its offer to $400,000. They were the first homebuyers to be shocked by the valuation. Understandably, they didn’t want to pay $55,000 more than the house was worth. Even if they had kept their original offer, I assume they would have had trouble getting the mortgage approved without making a larger down payment. Anyway, the deal backfired.

Just because the number was significantly lower than the buyer’s original bid doesn’t automatically mean the valuation was wrong. I have no training in home valuations so I am clearly not qualified to appraise a house. However, a quick look at the report revealed some obvious errors. The square meters were wrong a few hundred meters, just like the number of floors. The biggest red flag was the choice of comparators. Near my mother, all the houses are almost identical. The only difference is that some homeowners have built additions to their homes (my parents added an extra floor to our home when I was younger). Since other homes in the area have added similar additions, and some of those homes have recently been sold, finding real comparable homes should have been fairly easy.

I called the appraiser to ask a few questions. He was extremely polite and spent time on the phone answering questions. However, he stuck to his original assessment and emphasized his confidence in the outcome. While I didn’t think the numbers made sense, I accepted his professional opinion.

At that point, my mother had come to terms with moving. She had found an apartment that she loved, so she decided to hire a real estate agent and list her house. Within a week, she had an offer of $470,000. My mother was skeptical that her house would be valued by the bid number, but her real estate agent was confident it would be based on her knowledge of the local market. The process to get an appraiser home again took weeks. The new appraiser came by and within 3 days the report arrived. The house was valued at exactly $470,000 (18% higher than the valuation just a few weeks ago).

The closure for my mother’s house happened last week and it went smoothly. In every way, this story has a happy ending. After paying the brokerage fee, my mom released just a little less than she would have gotten through the original deal. And she closed in time to align with her move date in the apartment. The downside is that the original family that made the offer lost their dream home, along with the cost of inspection and appraisal. But the purpose of the article is not to highlight who has won and who has lost in this deal; the goal is to identify a subjective and inefficient process and explore what can be done to streamline transactions.

Disrupting Traditional Industries

When people talk about disruption, it’s easy to come across as insensitive to the professionals in that industry. When I talk about real estate, for example, I often hear people say that brokers are paid way too much for the work they do. While I agree that disruption will lead to commission compression in the home brokerage business, I strongly disagree with the view that brokers are overpaid. For starters, their workload is non-stop, including at night and on weekends. In addition, because agents are 100% commission based (with no benefits), they bear all the risks of closing a trade. If they tour a customer through 100 homes and then the customer decides not to move, the agent makes nothing. And they are responsible for all costs (including the gas to drive to the 100 houses). Disruption should never be equated with a lack of work ethic from the professionals in the industry. Instead, it should be seen as a way of creating a better way to achieve something at lower prices, with less friction, while increasing customer satisfaction.

When it comes to appraisers, I want to be clear that it is an incredibly difficult job that requires an enormous amount of time and hard work to get a permit. In the state of New York, the requirements to become a licensed appraiser include 2,000 hours of experience in not less than 24 months, an Associate’s Degree, 150 hours of qualifying specific appraisal training, and a state exam. To become a certified general appraiser, you need 3,000 hours of experience, a bachelor’s degree, and 300 hours of qualifying specific assessment. This is a difficult job. My problem is in no way with appraisers. I actually think the bar is set too high, which contributes to fewer professionals entering the field, causing longer wait times when scheduling an assessment. According to HousingWire, the number of appraisers has been steadily declining since 2019 and the average turnaround time could be as high as 27 days. My problem is the lack of efficiency and the subjective results that the current process produces.

Can technology replace people?

Earlier this year I had the privilege of spending some time with the leadership team of a company called HouseCanary. During our conversations, the HouseCanary team emphasized the absurdity of the current valuation industry. The process of sending someone to any home, often in markets they may not know, was a major contributor to the frustration home buyers and sellers typically feel. HouseCanary went on a mission to streamline the review process. They partnered with MLS providers in every market, giving them access to the exact data review and real estate professionals they use. Home data play a major role in a home valuation, but the process also depends on the quality characteristics of the home and the local market. That’s where AI comes in. HouseCanary has built its own platform that combines MLS data with AI to deliver accurate results in a fraction of the time and at a fraction of the cost. Frankly, I didn’t realize how important a solution like this was until I saw firsthand how frustrating the status quo was.

When I decided to write this article, I contacted the CEO of HouseCanary, Jeremy Sicklick, to learn more about their offerings. Jeremy asked me for the address of my mother’s house. I have emailed him the address but have not provided details of the bid or valuation. Within 5 minutes of sending my email, I received the following from Jeremy:

Full report linked here

The price HouseCanary awarded the house was $470,444, just $444 dollars more than the second appraisal and the accepted offer. Obviously, the sample size of my analysis was a single house, so further research would be needed before I could say with certainty that HouseCanary’s AI platform would perform similarly on a larger scale. However, a 5-minute turnaround that delivered the exact same results as a traditional review is hard not to get excited about. Not every appraisal is as straightforward as my mother’s house, and there are many fringe cases where technology may or may not deliver the same accuracy of accuracy. But there is a real need to modernize this process and HouseCanary’s solutions look promising.

I recently published an interview I conducted with the leading PropTech VC Fifth Wall, where we discussed whether the residential real estate industry would ever get to the point where transactions could be executed with a few mouse clicks. With the recent growth of iBuyers, the advancement of virtual tour technology and the latest Fintech and Insurtech startups, we are getting closer to this reality. One of the last major hurdles to streamlining the home buying process is appraisal. I’m excited to see improvements to the assessment industry continue to evolve as we move to faster, more accurate, and less expensive alternatives to current models.

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