AI is taking over the world! Dall-E will put artists out of business! Chat GPT will replace millions of workers !Automation will destroy the workforce! Sheesh, we get it.
Computers have been around for decades. They have helped more than hurt. But will human guidance still be needed?
Short version. It’s really hard to automate the real estate business.
Automated Mortgage Lending
Most people need a loan to buy a home so it all starts with the mortgage lender or bank.
You start the process by applying for a home loan where the lender checks your credit. Your credit scores are algorithmically calculated by 3 credit bureaus. We have a general idea of how they work, but the general public doesn’t really know the exact if/then logic used by these computer algorithms.
Secondly, your (dti) debt to income ratio is calculated. The simple version is that DTI is your monthly debt divided by your gross monthly income x 100.
Finally, lenders use software, such as Desktop Underwriter, where they simply enter your information and the system makes a decision on whether or not to approve your loan.
The Human Touch
But sometimes, the determination of whether or not to approve your loan, known as the underwriting process, requires manual intervention.
For example, perhaps you’re applying for an FHA Loan and the government guidelines state that in order to be eligible for this loan, you must have a credit score of at least 580.
Well, some lenders still aren’t comfortable with that and may view you as too risky so they will apply additional requirements, called overlays, in order for them to feel comfortable lending to you.
They may require a higher credit score, bigger down payment, higher debt to income ratio or a combination of all three. Every lender is different. Chase recently said that they wouldn’t lend to people who didn’t have credit scores above 700 and a 20% down payment.
Perhaps you’re self employed and your financial situation doesn’t fit the typical borrower profile. This will typically require manual underwriting.
The point is that every scenario is different and no computer can account for all of them.
Automation in Real Estate
Ok, you’re approved and now the fun part of shopping for a home can begin. Let’s say you find a home. Let’s go over what happens now.
This is probably the most important item for everyone involved. Pricing of homes is generally determined by the sales comparison approach – comps. You look at what similar homes have recently sold for and use that as a guideline.
There are automated valuation models, such as the famous Zillow Estimate (Zestimate) that attempt to give you a general sense of what a property may be worth. But here’s why the valuation process can never be fully automated.
Simply put, some real estate agents are just better than others at negotiating. If either the seller or buyer’s agent isn’t a good negotiator, the price could be considerably over or underpriced.
Beauty is in the eyes of the beholder:
People may be willing to pay completely different prices for the exact same property.
- A family that needs to be in a certain school district by a certain date will likely pay far more for a property than the next buyer.
- An experienced Airbnb host may know that a certain property is extremely valuable because they could potentially charge 3-5x the expected monthly rent.
- A seller who is recently divorced and may be facing financial hardship may be willing to sell their home for less than it’s worth because they need the money asap.
There are countless other scenarios that simply can’t be accounted for by a computer. Humans will always be involved.
- Issues uncovered during the home inspection, again, conducted by a human, will influence pricing.
- Is there a clear title of is there a lien on the property? (To be fair, NFTs might help automate the title process in the near future).
- Is it spring or is it wintertime? Etc..
The Appraisal – More Humans
One of the last and important steps in the home buying process that kills many a deal is the appraisal.
The mortgage lender will order an appraisal. A human, who has his or her own biases, will then make a determination as to the value of the property. The lender will not lend above this stated value.
Would we be better off if this process were fully automated? Maybe. But I’m not sure the technology is there yet.
How does a computer take into consideration uniquely crafted fixtures, artifacts, custom floors, cabinets, original details in a century old brownstone etc…
Back to Price
The appraiser comes back with a number. This number may be higher or lower than the price that was ultimately negotiated. What if it’s lower than the contract price?
- Will the buyer pay more or will the seller reduce their price?
- Depends whether the buyer has the money and is willing to pay.
- Depends if the seller and their agent are willing to walk away from the deal.
- Depends whether the buyer can walk away, keep their earnest money deposit and look at better options.
If and when this deal closes, the sales price for this home will now officially become a new comp(arison) for an agent, appraiser, buyer or seller. This new comp will influence the sales price for the next similar property. Repeat.
This is how real estate works (for now). Good luck automating this process.