Over the past couple months Miranda and I have been house hunting in Westchester. The process has been interesting to say the least. We’ve been out to look at homes four different times and have placed bids on a few houses already but haven’t been able to secure an accepted offer yet.

Being new to the home buying process, I can’t help but marvel at how inefficient it is.

There are really three big problems with the home buying process today: 1) objectively determining the true value of a home 2) the auction process of bidding on a home and 3) the home buying negotiation process.

1) Determining the true value of a home

Valuing a home is very difficult and from what I’ve seen, buyers and sellers do it completely differently. The primary metrics that buyers use to value a home are the square footage, number of bedrooms and number of bathrooms. However, there is so much more to a house than just these core metrics. How close is it to transportation? How nice are the furnishings? Is the house well maintained? How expensive is the home to heat? Is the house in a nice neighborhood? Are the neighbors friendly? How big is the lot? All of these things contribute meaningfully to a home’s true value, but are relatively difficult to objectively value.

On the other hand, the seller tends to value a home completely differently than the buyer. The seller really only looks at two metrics: the price they originally paid for the house and how much money they want to make on the house above what they paid. In a real estate market that has been relatively flat for the past 10 years, it leads to a lot of sellers who are asking much more for their homes than buyers think they’re worth.

2) The home bidding process

Another thing that really irks me is the process of bidding for a home. Essentially it’s a first-price blind auction. Each bidder doesn’t know the price that the other bidders have offered and if you win – you have to pay the price you bid. First-price blind auctions are very tricky, because, as a buyer, you want to win the auction, but you don’t want to overpay. Not knowing any of the other bids makes it very difficult to know how high you really need to bid to win. Buyers will often shade their bids down to where they think others have bid to avoid overpaying by too much.

3) The Home Negotiation Process

The last thing that has really bothered me about buying a home is the fact that a home purchase is a two-step negotiation. First the buyer places an offer, and then after inspection and assessment, the buyer can come back to the table and re-negotiate based on anything wrong with the house and the bank’s assessment of the home. I think this is a rather poor system because it incentivizes buyers to bid very high in their first offers on a house (to beat out competitive bids) and then gives them an opportunity to come back and negotiate a price down after inspection and assessment.

So much inefficiency and so many ways the system can be enhanced. I’d be willing to bet that in the next ten years someone will find a way to use technology to more objectively value homes, more effectively manage the bidding process and solve for poor buyer incentives in negotiation. Technology will disrupt all industries – it’s only a matter of time.

 

 

House Hunting
Tagged on:         
  • I like how startups like OpenDoor are trying to increase the market efficiency: https://www.opendoor.com/

    Basically, OpenDoor becomes the middleman. They buy the house quickly (e.g. a few days), and then turn around and sell it at on the market. They’re incentivized to offer a market price that’s (I) fair enough to the buyer to get them to sell, and (ii) low enough that they can offload to a buyer quickly. After all, the longer they hold the inventory the higher their costs.

    Good time to start, since they’re really screwed if housing market tanks. But since prices are increasing across the board, pretty rapidly, they’ll do well.

  • Nice – i checked it out. Seems like a particularly risky business considering how hard it is to value homes. They must give offers that are under market and hope to make up the difference on arbitrage. Also – sucks that they have to charge all the typical closing costs to transfer title to Opendoor – and then do it again when opendoor sells the property. Interesting concept though!

  • Well, the beauty of operating when the housing market is going up is that, on average, a fair market price *right now* will be under market in 6 months. They need to be careful with regional exceptions, and keep an eagle out for localized housing downturns. I suspect the only real difference between them and any other investor is that they’re (probably) building a price estimation system that takes a lot of that into account.

    I wonder if they have a data agreement with Zillow, who’s the data powerhouse in the industry (especially since they purchase Trulia).