An industry is typically ripe for disruption when the current business models are filled with inefficiencies. Their subjective nature leaves room for errors and inconsistent results, and customers are left feeling frustrated. Oftentimes, someone needs to experience the painful process of an outdated model themself to truly appreciate how badly change is needed. My mom recently sold her home, and although there were many inefficiencies throughout the process, there was one part of the transaction that made me realize that there has to be a better way.
Delays, Errors, and Frustrations
My mom received an unsolicited offer from someone looking to purchase her home. She had lived in this home for the past 40 years; it is where I grew up. My mom wasn’t looking to sell, but as a widow living alone, she realized that now was probably a good time to downsize. The family that made the offer was in love with the house. As they walked through the home they joyously planned out their lives selecting bedrooms, deciding where to hang the TVs, measuring to see if the kitchen table from their apartment would fit or if they needed to purchase a new one. Their excitement brought joy to my mom as she took comfort in knowing that the home where she raised her family would be in good hands. Their offer was $455,000.
The next steps in the process were the inspection and the appraisal. The home inspection was thorough and without issue. Nothing surprising was uncovered, just the normal wear-and-tear of a 70 year old home. Then came the appraisal. For starters, due to a shortage of appraisers, it took weeks to get someone to the house. In a housing market as hot as we are currently in, weeks can feel like an eternity. When the appraiser arrived, he was very courteous and professional, and everything went smoothly. Three days later the appraisal report arrived, valuing the home at $400,000 ($55,000 below the offer).
Upon receipt of the report, the buyer dropped their offer to $400,000. As first time homebuyers, they were frightened off by the appraisal. Understandably, they did not want to pay $55,000 more than the house was worth. Even if they had kept their original offer, I assume that they would have had issues getting the mortgage approved without putting down a larger down payment. Regardless, the deal collapsed.
Just because the number came in significantly below the buyer's original offer, doesn’t automatically mean that the appraisal was wrong. I have zero training in home appraisals, so I am clearly not qualified to value a home. However, a quick look at the report showed some clear errors. The square footage was incorrect by a few hundred feet and so was the number of floors. The biggest red flag was the choice of comparables. In my mom’s neighborhood, all of the homes are nearly identical. The only difference is that some of the homeowners built additions onto their homes (my parents added an additional floor to our home when I was younger). Since other homes in the neighborhood added similar additions, and some of those homes recently sold, finding true comparables should have been fairly straightforward.
I called up the appraiser to ask a few questions. He was extremely polite, and he spent time on the phone answering questions. However, he stuck with his original assessment and stressed his confidence with the outcome. Although the numbers didn’t make sense to me, I accepted his professional opinion.
By this point, my mom 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 home. Within a week, she had an offer for $470,000. My mom was skeptical that her home would appraise at the offer number, but her Realtor was extremely confident that it would be based on her knowledge of the local market. The process of getting an appraiser to the home again took weeks. The new appraiser came out, and within 3 days the report arrived. The home appraised for exactly $470,000 (18% higher than the appraisal from just a few weeks back).
The closing for my mom’s home took place last week and it went smoothly. By all accounts this story has a happy ending. After paying the brokerage fee, my mom cleared just slightly less than she would have had the initial deal gone through. And she closed in time to align with her move in date at the apartment. The downside is that the original family that made the offer lost their dream home, along with the cost of the inspection and appraisal. But the purpose of the article isn’t to highlight who won and who lost in this deal; the goal is to identify a subjective and inefficient process, and examine what can be done to streamline transactions.
Disrupting Traditional Industries
When people speak about disruption, it’s easy to come off as insensitive to the professionals in that industry. For example, when discussing the residential brokerage industry, I often hear people say that agents are grossly overpaid for the work that they do. While I agree that disruption will lead to commission compression in the residential brokerage industry, I strongly disagree with the opinion that agents are overpaid. For starters, their workload is nonstop, including nights and weekends. Additionally, since agents are 100% commission based (with no benefits), they bear all of the risk of a transaction closing. If they tour a client through 100 homes and then the client decides not to move, the agent makes nothing. And they are responsible for all of the expenses (including the gas to drive to the 100 homes). Disruption should never be equated to a lack of work ethic from the industry professionals. Instead, it should be viewed as a means of creating a better way to accomplish something at lower prices, with less friction, while increasing client delight.
When it comes to appraisers, I want to be clear that it is an incredibly difficult job which requires a tremendous amount of time and hard work in order to get licensed. In the State of New York, the requirements to become a licensed appraiser include 2,000 hours of experience in no shorter than 24 months, an Associate's Degree, 150 hours of qualifying appraisal specific education, and a state exam. If you want to be a Certified General Appraiser, it requires 3,000 hours of experience, a bachelor's degree, and 300 hours of qualifying appraisal specific education. This is a difficult job. My issue is not in any way with appraisers. I actually think that the bar is too high, which is contributing to fewer professionals entering the field creating longer wait times when scheduling an appraisal. According to HousingWire, the number of appraisers has been in a steady decline since 2019 and the average turnaround time can be up to 27 days. My issue is with 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 named HouseCanary. During our conversations, the HouseCanary team stressed the absurdity of the current appraisal industry. The process of sending someone to each home, oftentimes in markets that they may not be familiar with, was a significant contributor to the frustration that home buyers and sellers typically feel. HouseCanary set out on a mission to streamline the appraisal process. They partnered with MLS providers in each market which gave them access to the exact data appraisal and real estate professionals use. Housing data plays a huge role in a residential appraisal, but the process also relies on qualitative characteristics of the home and local market. That is where AI comes into place. HouseCanary has built a proprietary platform that combines MLS data with AI to deliver what they believe to be accurate results in a fraction of the time, and at a fraction of the cost. Honestly, I didn’t appreciate 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 reached out to HouseCanary’s CEO, Jeremy Sicklick, to learn more about their offering. Jeremy asked me for the address of my mom’s home. I emailed the address over to him, but I didn’t provide any details about the offer amount or either appraisal. Within 5 minutes of sending my email, I received the following from Jeremy:
The pricing that HouseCanary assigned to the home 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 home, 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 which generated the exact same results as a traditional appraisal, is hard to not get excited about. Not every appraisal is as straightforward as my mom’s home, and there are many edge cases where technology may or may not produce the same precision of accuracy. But, there is a real need to modernize this process and HouseCanary’s solution set seems very promising.
I recently published an interview that I conducted with the leading PropTech VC Fifth Wall, where we discussed whether or not the residential real estate industry would ever get to the point where transactions could be conducted with a few clicks of the mouse. 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 homebuying process is the appraisal. I’m excited to watch enhancements to the appraisal industry continue to develop as we move to faster, more accurate, and less expensive alternatives to the current models.