Leonid: So you know, what are kinds of some things that you might want to use a clearance rate model for? And I think one of the core concepts that really came out of this type of modeling work is that when you try to clear any kind of inventory, you don’t just want to look at sort of the price🏷️, you know, the price relative to your valuation of the goods.
So, you know, if you sell it for more than the value, that’s fine👌. But that’s not the whole picture, like really, what you want to do is you want to match that to how long it takes to sell us, especially for houses that have quite high holding costs💰, right. And so, you know, if you sell the house for $100, or $1,000, more than you value it, it’s okay. But if you ended up taking a month longer to do it, well, you’re actually worse off😟. Because you’re paying holding costs that whole period of time. And so what a model like this allows you to do is say, you know, takes few $100 of holding costs per day.
Well, now I can perform a calculation that says, here’s the price I sold it for minus the valuation of the home, I guess minus holding costs per day times the number of days that it was on the market, and that gives you an overall profit🤑.
And so you can start using something like this, to do optimal pricing, right? As I raise or lower the risk, the list price, all of those components change. And maybe there’s a sweet spot🎯 somewhere where I optimize profit. Right? And so the thing is out there in the market, where you have two sides of the transaction. And so, you know, just as OpenDoor is trying to figure out the fair price for a home. So is the counterparty right, and each of us have different amounts of information. And so you can think about it🤔.
If you’re trying to price the house correctly. Well, if your model is wrong, then kind of like two things can happen right? If the model is wrong, let’s see on one direction and You’re mispricing a house by saying it’ll sell really, really quickly, well, then you’re going to raise the price⏫💲 on the house, right? And you’re going to overprice it, and you’ll actually overshoot, and the house will end up staying on the market for a lot longer.
Actually, in real estate, that’s a really bad thing to do. Because people typically don’t behave rationally. And so as long, as soon as the houses on the market for longer than other houses, will people think there’s something wrong with it? Right? And so that kind of carries negative externalities with it. And then you can also be wrong on the other hand, which you think a house is going to take a lot longer to sell, than it actually does. And so you lower the list price⏬💲, and you’re, you’re leaving money on the table there.😱