With Terry Story, 30-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL
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Pricing Homes Using Artificial Intelligence (AI)
Steve starts this week’s Real Estate Round-Up with the emerging use of artificial intelligence in the housing market. A slew of new AI websites gives homeowners tools to price their homes before listing them for sale.
Terry notes that AI programs typically price homes based on comparable sales data (comps) for your neighborhood. But they miss out on nuances, such as the added value of a waterfront home.
Home price estimates from AI bots show how your home’s worth is determined, along with charts showing recent price history. Terry believes that homeowner estimates are typically well above market price, and AI estimates are either artificially low or high depending on the quality of recent home sales data.
The problem with home pricing, AI or otherwise, is that price estimates can be way off if homes haven’t sold recently, and no recent comps are available.
Why Homeowners Think Their Homes Are Worth More Than The Market Price
It amuses Terry no end that homeowners believe their homes are worth more than recent comps. So she always makes it a point to ask them what they think their home is worth and why. Inevitably, they cite the research they’ve done at various websites and how much they’ve spent on minor upgrades.
What really adds to a home’s value are major upgrades, such as a pool or added square footage. Minor upgrades don’t really move up a home’s value significantly because buyers may not always love that new kitchen cabinet you put in or the new tiles on your floor.
Steve attributes this to our natural tendency as human beings towards optimism, wanting to be happy in life, and over-estimating our own skills. He likens this to most of us thinking we’re above-average drivers, when that simply can’t be true, statistically.
This above-average mentality extends to the housing market. Most sellers believe that their homes are better than their neighbors’ homes and end up pricing them above market.
Negative Consequences Of Overpricing Your Home
Terry reminds us that overpricing your home is never really a good idea. An over-priced home attracts fewer buyers when prices are shifting downward. As a seller, you’re always better off pricing your house at slightly below market. This way, you attract more buyers, create more momentum, and could possibly sell it for more money than you would if you tried to price it slightly above market.
She notes that the housing market is in a downward shift right now, as it transitions from a seller’s market to a buyer’s market. So, if you’re planning on selling your home, make sure you price it at slightly below market, so buyers perceive it as offering the best value.
Buyers Don’t Make Offers On Overpriced Homes
Moreover, most buyers do their research and know what comparable homes are selling for, through various websites. If your home is over-priced, buyers might just give it a pass and move to homes that offer better value or wait for your price to come down.
Sellers shouldn’t live under the misconception of “Oh, heck! Let them make me a lower offer, and we’ll see.” That’s because buyers tend to avoid pricier homes and won’t even bother to make lower offers.
If anything, they may come to look at your home and walk away feeling good about a similar home that’s selling for less. Over-priced homes often validate a buyer’s interest in similar but lower-priced homes.
If you’re looking to sell in this down-shifting housing market, heed Terry Story’s words of wisdom and price your home wisely, at slightly below market. If you’re a buyer, do your research well, avoid greedy sellers, and get the home that offers the best value for money.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Round-up. This is the time every single week we get together with noted real estate agent Terry Story. She’s a 30-year veteran with Keller Williams located in Boca Raton, Florida. Welcome to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: I have a question for you regarding pricing of homes using artificial intelligence, these websites. I won’t mention any names.
Terry Story: Thank you.
Steve Pomeranz: And homeowner themselves pricing their home for sale. The discrepancy, what is the discrepancy, by the way?
Terry Story: Oh, yes, there is. Actually, they’re fairly similar in a lot of ways.
Steve Pomeranz: Mm-hm, okay.
Terry Story: So the difference is, so you have this artificial intelligence. They’re looking at a different angle. They’re looking, comparing it to other homes in the neighborhood, but it doesn’t necessarily know everything. It doesn’t take into account maybe you’re on the water.
Steve Pomeranz: Yeah.
Terry Story: Another house isn’t. It will do a one-mile radius. And the neighborhood right next door to you is a lesser value, so it gives you a trend if you will. A homeowner, on the other hand, they’re emotionally attached to their house. So they’re counting every dime like, oh, I put this granite countertops on, that’s 3,500. I did this, I did that, so they’re coming in from a different angle. But when all is said and done, they weren’t that far apart.
Steve Pomeranz: Which is kind of interesting. But we’ve always sensed that there is this big discrepancy when you go online and you look and you put in your address. And your house is worth x and you go, yeah, that’s good. Actually, they also have a chart. In the last 30 days, there’s a line that’s gone down. It’s like really? What do you mean it’s gone down?
Also [LAUGH] the problem is, and I think you guys have the same problem, if not a lot of homes sell in a recent period, what are your comps? What are you comparing to?
Terry Story: And that’s a real problem. The interesting thing is both the artificial intelligence and the sellers, in my opinion, are always overpriced.
Steve Pomeranz: Always overpriced.
Terry Story: Always overpriced.
Steve Pomeranz: They think-
Terry Story: They think it’s worth more. And so it’s kind of fun, I always like asking the question before I meet with someone. Where do you think your home value is? Just to hear how they’re going to come up with their answer. Well, I looked at this site or I looked at that site.
Or they’ll go in and tell me all about their upgrades.
Steve Pomeranz: That’s right, well, that’s not, it doesn’t matter.
Terry Story: It doesn’t matter.
Steve Pomeranz: Well, if you put in a pool maybe.
Terry Story: Yeah.
Steve Pomeranz: [LAUGH]
Terry Story: I’d say if you had a pool or added square footage to the house, but-
Steve Pomeranz: Right.
Terry Story: But if you put in new kitchen cabinets, and they’re not what a buyer would want them to be, what good are they?
Steve Pomeranz: Yeah, yeah that’s true.
Terry Story: I hope you enjoyed them.
Steve Pomeranz: Well, I think that human beings, for the most part, are optimistic. I think to be happy in life, you have to have a kind of an optimistic streak, right?
Terry Story: Right.
Steve Pomeranz: So we tend to think that we’re above-average drivers. And when you think about it, if you ask a group of people, raise your hand if you think you’re an above average driver, almost everybody raises their hand.
Now that’s not possible because you can’t be above it. You can’t have more than average for everybody putting up their hands because then that’s not average. So we tend to overestimate our skills and maybe how good looking we are [LAUGH] as well. But the bottom line is I think you’re doing it with the houses, as well, right?
Terry Story: Exactly, exactly, and they always compare their house to somebody else’s house who’s on the market that’s probably overpriced. And they’ll say, oh, well, my house is nicer. I just got a new coat of paint on mine.
Steve Pomeranz: Their house is always nicer. No, I know. Yeah, but look, if you do overprice your house, then that could lead to some negative consequences because you could lose momentum.
Terry Story: That’s right.
Steve Pomeranz: Yeah, so tell us about that.
Terry Story: So we’re starting to see a shift in the market. And basically, with a shift, you don’t want to be the overpriced property. And believe it or not, Steve, when the market’s starting to shift, you’re better off pricing your house slightly below market. And you’ll create more momentum and possibly sell it for more money than you would if you tried to price it above, slightly above market.
Steve Pomeranz: This shift you’re talking about is the shift from a seller’s market where the seller kind of has the power because there’s low inventory and lots of demand.
Terry Story: Correct.
Steve Pomeranz: The shift, now, we’re not there yet but it’s shifting towards.
Terry Story: We’re starting, we’re in it. We’re in it.
Steve Pomeranz: Okay, so more of a buyer’s market where there’s more inventory and buyers can have an opportunity to be more choosy?
Terry Story: That’s right. Now we’re not necessarily in a buyer’s market right now. I would say we’re in this shift. In a shift, yeah, okay. And it’s transitioning to that, we’re not.
Steve Pomeranz: Yeah, you’re doing it every day.
Terry Story: We’re not officially in a buyer’s market.
Steve Pomeranz: No, I understand. You’re doing it every day so you can feel it, you can smell it.
Terry Story: You can smell it, taste it, feel it, breathe it, it’s there.
Steve Pomeranz: So, logically speaking, if now you’ve got more competition down the street, maybe you want to underprice your house a little bit to get somebody’s attention.
Terry Story: To get their attention, to make your house stand above the others because, Steve, like anything else in life, you’re going to buy what you perceive to be the best value. So if there are ten homes, and one is priced at x, and the other one’s priced at y, and they’re both very similar, and the x one is priced better than the y, which one are you going to buy?
Steve Pomeranz: Yeah.
Terry Story: The x.
Steve Pomeranz: Yeah, okay, so, also, all the listings are lining up on your Web page, right?
Terry Story: That’s right.
Steve Pomeranz: And so you can kind of see the stats. There’s that little block. And then you’re looking at the price and you’re going, if the price is, you’re going to be more attracted to the lower price. You may see that first.
Terry Story: You’re going to perceive it as better value.
Steve Pomeranz: Yeah, and if you go there first, and you’ve got a good person who’s selling the property, then they may anchor on that. [LAUGH]
Terry Story: [LAUGH] And you know what? The truth of the matter is the buyers know their values because they’re the ones who are spending the most amount of time going through the online sites. And if it’s over-priced, Steve, they’ll just sit there and they’ll wait. They’ll say, and I hear it all the time, we’ll go take a look at it when it’s priced better.
Steve Pomeranz: Yeah.
Terry Story: We’ll wait for them to adjust the price.
Steve Pomeranz: So they don’t come in and they don’t make an offer?
Terry Story: No, they don’t, and that’s the misconception that sellers have. Sellers believe, well, I’ll just price it here and if they like it, just make me an offer. No, buyers only buy when they perceive it to be good value. Not my perception, not your perception, their perception.
Steve Pomeranz: God, that is a huge lesson to learn, I have to tell you.
Terry Story: It is huge.
Steve Pomeranz: I think I’m kind of guilty, it’s huge. I’m kind of guilty of this idea, so they’ll just make an offer and we’ll get to it, but not necessarily. It’s not the psychology.
Terry Story: No, no, and if you’re overpriced, they may come look at your house to validate the lower price down like, wow, we’re really getting a good buy. We got to go on this one. I see that all the time.
Steve Pomeranz: Oh, my God, okay.
Terry Story: So the overpriced ones do get shown but for the wrong reasons.
Steve Pomeranz: All right, okay. My guess, as always, is Terry Story 30-year veteran with Keller Williams located in Boca Raton, Florida. She can be found at terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.