Lurking behind almost every home sale price is a shadow sale price that the market will never discover. This is a key reason why relying on AI for sale price info can be extremely misleading; AI only uses publicly available pricing data. Seller credits, rate buydowns, and payment of the buyer’s closing costs are just a few of the ways that a seller might give the buyer significant rebates that effectively lower the sale price without actually lowering the publicly available sale price. Two houses that both sold for $700,000 did not sell for the same price if one had $40,000 of seller credits and payment of the buyer’s closing costs, while the other did not. Basically, one of these houses might have secretly sold for $650,000. The only way to discover this is to contact the parties involved in the sale.When an appraiser assesses comparables, it’s helpful for them to contact the agents involved in the sale of those properties. Contacting agents allows the appraiser to find out if the seller offered any hidden incentives or credits not reflected in the sale price. However, this contact does not always occur, and in my experience, it only happens in unusual circumstances.
Even if the appraiser contacts all agents of comparable sales, getting accurate information isn’t always easy, especially if the only comps aren’t recent sales. Agents might be unresponsive or won’t have the information easily accessible.
The shadow sale price that the market will never discover can have a huge effect on appraised values that is difficult to quantify. If a house that needs a paint job and had a run-down yard sold for $700,000, that sets a high bar for neighboring property sales. The market may never know that the seller paid some closing costs and threw in a $40,000 credit for the repairs because they were desperate to unload the property. All the market will ever know is that a slightly run-down house still sold for $700,000 instead of $650,000. This could help boost the appraised values of the surrounding homes.
Builders of new homes are often accused of inflating list prices only to throw in a ton of buyer incentives (like rate buydowns and payment of closing costs), so the prices of all their homes appear to be higher. Though this can cause buyers to overpay, there isn’t a clear way to quantify this supposed overpayment. I would argue that the shadow prices of these builder sales are actually easier to see than the shadow prices of existing homes sold by private individuals.
This is becasue new homes sold by builders are more of a commodity than pre-existing homes. Builders tend to sell homes that are in the same state of wear and tear, since they are brand new, and these homes often are virtually identical. These homes are listed at similar times, and builders offer similar incentives across the board. The shadow prices of these homes after incentives, buydowns, etc. are actually fairly easy to guestimate if you look online at the builder’s advertising.On the other hand, trying to guess the shadow sale price of a 100-year-old house that sold four months ago is much more difficult, especially if the agents can’t be reached or don’t recall the exact circumstances of the sale. Did all the plumbing need replacement? What did the inspection uncover, and did the seller throw in a credit for any problems found by the inspector? Remember, it’s usually not legal to even show the seller the buyer’s inspection of their own house unless the seller explicitly consents to see it. The seller may not actually know the state of disrepair of their own home, unless the buyer asks them to fix it.
By calling it a shadow sale price, I’m not saying that determining a home’s true value is impossible, or that there’s a purposeful attempt to cover up pricing. Most markets for any product are somewhat opaque, like lease deals for cars, dealer incentives, discounts on clothing… the true sale price of most goods is not exactly transparent. However, many buyers think that the Zestimate or Redfin estimate should make it easy to determine a property’s value. It’s important to explain to a buyer why understanding real estate values always involves significant guesswork and instinct.
The term “shadow pricing” isn’t something I’ve heard in the industry, to be clear. I’ve heard “net sale price,” “adjusted sale price,” or “effective purchase price” to describe the sale price in public records after factoring in buydowns, credits, etc. However, terms like “effective purchase price” are usually used from the perspective of those involved in the transaction, and describe a price that just isn’t available in public records. If I’m describing the cost of my own home purchase, “effective purchase price” makes sense to note what I’m actually paying. I know what I’m actually paying, but no one outside my transaction has a clear way of finding this out. “Shadow price” is how I often describe the sale price of other people’s homes, since there’s no way to actually discover this price from outside the transaction besides tracking down the individuals involved. If I’m trying to figure out the effective purchase price of a number of houses across the country in a specific neighborhood, it would take far too long to reach out to all the parties involved to make this worth it, in most cases.
When publicly available pricing information is all you have to go on, you’re going to miss a lot of the behind-the-scenes pricing patterns that are highly specific and localized. Because of this, there really isn’t a replacement for a real estate professional who has real experience with what actually goes on in local buyer-seller negotiations.Recently, I’ve encountered a lot of people who are using ChatGPT to determine their property’s value, or using AI to come up with an offering price. ChatGPT can be helpful, but it also is biased based on what information is fed to it, and it generally only has access to publicly available information. Sometimes it can be helpful for scouring Reddit for local perspectives on pricing, but this is hit-or-miss. If someone is really balanced and careful with what they ask Chat, it can produce quality information. However, the majority of people I’ve encountered who use it for real estate pricing are not doing so judiciously.
The world of real estate’s shadow pricing will always be confusing, and the better you can clearly explain the reasons for this, the more you will gain the trust of clients, and the better you’ll be able to guide them.
