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The problem is that we don't know what the thresholds should be in advance. With manufactured goods, it's easy to compare. Salesperson A sold 10 Toyota Prius B
by mdasen 6y ago
The problem is that we don't know what the thresholds should be in advance. With manufactured goods, it's easy to compare. Salesperson A sold 10 Toyota Prius Base models for $18,000 and Salesperson B sold 10 Toyota Prius Base models for $19,000. Houses can't be directly compared.
If the seller is in charge of the thresholds, they can just set them unreasonably high. I can look at my house which would be reasonably valued at $500,000 and say that Threshold1 should be $750,000 and Threshold2 should be $800,000. The agent will never be able to meet those thresholds.
If the thresholds are with respect to the listing price, it's easy to just list high and then accept a lower offer. If Threshold1 is 5% above listing and Threshold2 is 10% above listing, people will just list their houses higher.
With cars, I believe most places do laddered commissions. However, it's easy to know the value of a bunch of manufactured goods that are all comparable. With housing, you can't go by square footage. Some places are nicer than others. Even within a neighborhood, some areas are more desirable and even different sides of the street might get better light.
The incentives are definitely misaligned, but I think it's hard to align them given that they're selling a good where we don't actually know what the value is and where each sale is pretty unique.
- dcolkitt 6y agoWe have pretty accurate algorithms for home appraisal that seem to work for most properties, except the very unusual.
- tmpz22 6y agoHow does your company make money? Are the algorithms used to optimize your profits or are they there to optimize the sellers outcome? Or the buyers outcome?
- chipotle_coyote 6y agoAn appraisal company has no financial incentive to "optimize" outcomes for either the seller or the buyer -- their fee isn't a percentage of the sale (or asking) price, but is a flat fee, depending on the kind of appraisal being done. The "algorithm" here is based on "comparables": look for homes in the same or nearby neighborhoods that have sold recently and are as similar to the current home as possible and record what they sold for, making adjustments based on differences between the homes (e.g., if the comparable home is bigger, has another bedroom, comes with newer appliances, etc., adjust its price down; if the home being appraised is the one that's bigger or has the spiffy kitchen or pool or what have you, adjust its price up).
- tmpz22 6y agoThanks I appreciate your answer
- antisthenes 6y agoThe algorithms probably price houses based on comps, to increase the likelihood of the bank giving the buyer a loan for the house. Like the OP said, it's pretty accurate in 99% of cases (reasonably priced single family houses, nothing exotic)
- gnicholas 6y agoLet the market (for agents) decide. If one agent thinks he can get $1.5M for a house, he'd be willing to accept higher thresholds — with higher percentages — than someone who thinks he can only get $1.35M for the house. I'll admit that there would be some additional complication on the front end, where agents and homeowners would haggle over the thresholds and percentages, but a pretty simple web app (honestly even an Excel spreadsheet) could show the homeowner what his net would be with various agents at various prices. Given the amount of money at issue (six figures on a Silicon Valley home), it seems worth the hassle to get everyone's incentives aligned. This might be less important in areas with less-astronomical real estate prices. As to your hypothesis that sellers would set the thresholds too high, agents could just respond with percentages (and the upfront fixed fee) that make sense for them. It's a double opt-in situation — the homeowner can't force the agent to represent him.
- hkmurakami 6y agoAgents want to be the selling agent 10x more than being buying agents, especially in hot competitive markets. Thus in the current market dynamic, home owners (sellers) should have strong leverage against agents in negotiating contracts. However the dynamic suffers from a typical experience level imbalance like we see in Venture rounds, M&A deals, etc. Edit: one challenge with this is that because sellers sign exclusive agreements for sale, you can get the situation common in IPO lead underwriting banks — tell the client the highest price to win the deal, then start the process of gradually walking back seller expectations.