Selling a home inevitably involves determining its value. In a traditional real estate process, Realtors and appraisers have determined value. In recent years, companies like Zillow have relied on computer algorithms.
Using its computer algorithms, Zillow began buying homes directly from buyers through its Zillow Offers division. Now, news of Zillow getting out of the iBuying market shook the real estate world.
But what exactly is iBuying? iBuying is typically when a company or entity offers a seller a cash price to buy their home. It’s enticing to sellers. No repairs necessary. No getting the home ready to show to buyers. That said, the iBuyer is usually paying an “investors” price because the objective is for the iBuyer to flip the property for profit.
In the Zillow Offers scenario, the company invested piles of money into an algorithm to determine the prices of homes. More specifically, they used the computer to determine what the future prices of homes will be where they purchase properties from private sellers. In a perfect scenario, Zillow buys a property from a private seller and their algorithm tells them that property will be worth $x more in 6-12 months. If they hold the property, make improvements, and sell shortly in the future, they make a significant profit. What could possibly go wrong?
The Zillow problem
Turns out, letting a computer determine market value is risky, and as we’re seeing what’s unfolding, highly unprofitable. It’s playing a guessing game based on pure speculation. And the computer’s speculation has been proven to be quite inaccurate.
Just in the last two years there have been several significant events that have and could have changed the trajectory of the housing market. Many economists and even algorithms would have looked at the early events of the pandemic and predicted the housing market would come to a screeching halt. In fact, the real estate market began to turn red hot with the high demand of buyers competing to buy homes.
So if we can’t trust a computer to tell us our homes’ value, what can sellers do to determine fair market value?
Trust the auction method
It starts with bringing competition from all buyers within the marketplace. These buyers, operating in the market at that exact moment, determine a home’s value. That is how true market value is achieved—through auctions. An auction takes the guessing game out of properly pricing a property with a traditional listing. It flips the process upside down.
When you don’t have a list price, there’s no price perception put into the market’s minds. The market will decide what it’s willing to bare. There’s no better appraisal than conducting an auction and hearing what buyers are willing to pay for that piece of real estate. It’s the truest form of achieving market value. It’s not based upon one person’s opinion (or a computer’s calculations), it’s based off willing and able buyers—that’s a value worth trusting, not an algorithm.
Sara Rose Bytner, CAI, AARE, AMM, BAS, Beth Rose Real Estate Auctions, contributed to this article.