Broker AVM: Exploring the Controversy

Transcription

2014
Broker AVM:
Exploring the
Controversy
Clareity Consulting
clareity.com
5/8/2014
NY 75057448v1
04/28/2014 9:59 AM
Table of Contents
Introduction .................................................................................................................................................. 1
The Crux of the Controversy ......................................................................................................................... 1
The Big Argument: Is an AVM a Broker’s Valuation? ................................................................................... 2
Why This Controversy Came Up Now ........................................................................................................... 4
Other Arguments Related to The Realty Alliance, et al. ............................................................................... 5
What’s Happening in May 2014? .................................................................................................................. 7
Conclusions ................................................................................................................................................... 9
About Clareity Consulting ........................................................................................................................... 10
Appendix 1: The Realty Alliance Letter to NAR ........................................................................................... 11
Copyright ©2014 Clareity Consulting. All Rights Reserved.
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Introduction
For some time, many MLSs have licensed active and sold data to technology companies for the
production of automated valuation models (AVMs). In turn, these AVMs are sold to lenders and other
financial institutions. More recently, brokers have wanted to sell AVMs by partnering with technology
companies, and they have alternately found themselves permitted or blocked, depending on which MLS
market they are in. In those markets where the MLS has restricted brokers’ use of MLS data by not
licensing them the data feed they need to create AVMs, this has been a source of conflict and
controversy.
AVMs have been around since the mid-1980s. AVMs estimate the value of a property using computer
algorithms, fueled by comparable property sales data. AVMs are often used on individual properties,
e.g., to determine the maximum value against which a bank is willing to lend or re-finance, but since the
mid-1990s financial institutions have used AVMs to evaluate their portfolios containing large numbers of
properties as an important risk management step.
AVMs were originally designed to primarily use public records data, but in recent years MLS data has
been added to the mix. The combination of MLSs’ more detailed property information, more recent and
accurate comparable properties, detailed sales terms, and information acquired during physical
inspection has significantly increased the accuracy of AVMs. As a result, MLS data has become a valuable
ingredient for companies that generate AVMs.
The overall question is: who will be able—or should be able—to monetize MLS data with AVM
customers? AVM is therefore a flashpoint in the relationship between brokers and MLSs, a relationship
which has recently experienced an increase in its share of tensions.
The Crux of the Controversy
Valuations are directly addressed in the first section of NAR’s Handbook on Multiple Listings Policy,
which defines MLS in part as “a means by which information is accumulated and disseminated to enable
authorized participants to prepare appraisals, analyses, and other valuations of real property for bona
fide clients and customers.” Brokers have relied upon this key language to build their case that they
should be allowed to use MLS data to create valuations, and it is worth parsing through the language in
that phrase carefully to see what exactly is permitted.
1.
2.
3.
4.
Authorized
Participants
Appraisals, analyses, and other valuations
Bona fide clients and Bona fide customers
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Authorized means that a person or firm has the authority to see MLS data; this means being an MLS
subscriber with data access rights.
Participants has the specific definition, spelled out in Section 2 of the Handbook, of a person or firm
which has both a real estate license and a good-faith intent to buy or sell property.
Appraisals, analyses, and other valuations: “Appraisals” is the most stringent kind of valuation, involving
a licensed appraiser and an on-site inspection for “full appraisals.” “Analyses” may include a valuation
that may involve an on-site or drive-by component, such as a Broker Price Opinion, or may not, such as a
CMA or an AVM. “Other valuations” is a catch-all term intended to give the concept its broadest possible
sense, and is another phrase that may be considered to include AVMs.
Bona fide clients; Bona fide customers. The “client versus customer” distinction is set out in Section 1 of
the NAR Code of Ethics and Standards of Practice. A “client” is a party to a transaction with whom a
broker is dealing with in an “agency” capacity, one in which there is fiduciary duty to the other party. A
“customer” is a party to a transaction whom one is dealing with in a “non-agency” capacity, where no
such fiduciary duty to that party exists.1
Bona fide clients means people or entities seeking to sell or value property. Bona fide customers are
parties to the transaction who receive information or services. Banks and lenders are first-class
examples of bona fide customers. They have a compelling interest in accurate valuations, they assume a
degree of risk in originating and securitizing loans, and without accurate valuations, the entire real
estate transaction, in the absence of cash buyers, would be impossible.
So, an authorized participant—commonly, a broker who is part of an MLS – can create and sell
“valuations”—which may well include AVMs – to “bona fide clients or customers,” e.g., banks and
financial institutions. But is the answer to the controversy really that simple?
The Big Argument: Is an AVM a Broker’s Valuation?
There are two categories of AVMs. The first is Interactive AVM (sometimes called broker assisted AVM)
—where the broker, for example, may select or reject specific comps or add adjustments or local market
knowledge to the valuation. In the case of Interactive AVMs, the broker obviously performs work and
adds value to the report.
1
The Code of Ethics states: “As used in this Code of Ethics, ‘client’ means the person(s) or entity(ies)
with whom a REALTOR® or a REALTOR®’s firm has an agency or legally recognized non-agency
relationship; ‘customer’ means a party to a real estate transaction who receives information, services, or
benefits but has no contractual relationship with the REALTOR® or the REALTOR®’s firm.”
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The second type of AVM is truly automated, does not require human touch or review, and may be used
by a lender to value a single home, or to value hundreds or even thousands of homes in a portfolio. In
order to handle the larger volume orders, AVM software needs a continuous RETS feed of MLS data to
complement their public records data and other databases. In the truly automated AVM, the MLS data
is processed by the AVM software without intervention from the broker.
So, the question that comes up, is whether the AVM that is being provided to the financial institution
can be considered the broker’s “work” product?
To be clear, the financial institution never receives raw MLS data. Rather, it receives AVM reports
created and organized by software the broker has licensed. Brokers also provide input to the AVM
software provider that is then coded into the AVM software so the system “learns” from broker input to
improve future valuations. Also, the broker’s brand appears on the top of these reports, lending
additional credibility to the AVM. To some, this may not seem like the broker’s “sweat of the brow” –
but when evaluating what constitutes a creative, original work, the legal bar is low.
In the 1991 Supreme Court case, Feist Publications, Inc. v. Rural Telephone Service Co, the Court
distinguished between data that was reproduced, materially unchanged, and data in which the author
selected, arranged, or ordered the information according to his own organizing principle. A
“copyrightable” work, one in which the author did work to deal with the underlying facts, was by
definition “original.” In the words of the Court, “Facts are not copyrightable… Factual compilations, on
the other hand, may possess the requisite originality. The compilation author typically chooses which
facts to include, in what order to place them, and how to arrange the collected data so that they may be
used effectively by readers.” The Feist Court thus established that the bar for this human touch was
quite low. Applying Feist to an AVM, it is clear that the fields from the MLS feed used to create AVMs
make up a stream of facts; an AVM report is not just a rearrangement, but a transformation of those
facts, creating new knowledge out of what already exists. According to Feist, brokers who use AVM
software on MLS data should be found to have created an original work and should meet the test for
making MLS data into their copyrightable, brand-able work product.
The industry may be more comfortable with the old fashioned way of preparing valuations—using
spreadsheets and CMA-style analysis software—but it seems unreasonable to forbid brokers from using
modern cloud-based software to provide valuations; and whether the software or data are located on
the broker’s office computers, a local data center, or in the cloud is irrelevant.
The relationship between the AVM software company and its broker partners is similar to that between
eBay and its sellers. eBay facilitates the transaction between its buyers and its sellers; it provides cloud
infrastructure to the sellers, including catalog software and a payment platform. At the same time, the
transactions that take place are between buyer and seller—not between the buyer and eBay. In the
same way, AVM companies can facilitate transactions between brokers and financial institutions; the
AVM software company serves as a clearinghouse, providing infrastructure to the seller to meet
purchase requests from the buyers. Another point of similarity between eBay and AVM software
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companies is that both take advantage of network effects. eBay would be a small company if it could
only market sellers’ goods to a few individuals, or if it functioned as a simple storefront for a few sellers.
eBay works well because it connects a large network of sellers to a large network of buyers. In the same
way, individual brokerages would have very limited options if they could only sell their valuations in
their immediate market; the eBay-like clearinghouse allows the brokerage to sell its valuations to a large
network of buyers, and for buyers to purchase valuations from a large network of brokers who
collectively provide a national footprint.
Why This Controversy Came Up Now
For many years, brokers have been using MLS data for valuations – including data that has been
provided by other brokers – for comparative market analyses (CMAs), broker price opinions (BPOs), and
broker assisted valuations (BAVs). They have used a variety of tools to create these valuations and
supply them to customers. Indeed, controversies have arisen over the use of MLS data as technology
has evolved, allowing the broker to leverage the data in different ways to achieve the same purpose.
Most notably, “paper brokers,” companies that buy access to MLS data to display it online without an
intention to buy or sell property, have misused VOW agreements in MLSs across the country, and
dealing with them has been a thorny issue.
Now, The Realty Alliance (TRA), a nationwide network of brokers, is advocating for the rights of
brokers—brokers with every intention of facilitating the purchase and sale of property—to use MLS data
without hindrance from MLSs. Unlike the “paper brokers,” or others who have misused the data, TRA
wants to ensure brokers have a legitimate means of doing business, facilitated by the MLSs.
In collaboration with Collateral Analytics (CA), a partner providing AVM and other analytic tools to TRA
broker members as well as other brokers, TRA actively wishes to engage in a conversation with MLSs
and NAR to ensure that (1) they are acting within the rules and that (2) the existing rules acknowledge
that brokers’ use of the data is and has been legitimate. Craig Cheatham, President and CEO of TRA, says
in his January 27, 2014 open letter to NAR’s MLS Technology Advisory Board that the use of MLS data by
brokers for AVMs is already permitted by existing NAR rules and policies, including its VOW policies; at
the same time, he is “willing to… speak to these matters… at the meeting of any subcommittee
equivalent’s upcoming meeting and/or at the full committee meeting” (See the entire letter in Appendix
1). In other words, he is willing to make a good-faith effort to get clarification on these rules, even as he
hopes to influence their interpretation in TRA’s favor. Based upon its extensive due diligence, before
even beginning the project with CA, TRA concluded that the use of MLS data for AVMs was permissible
by NAR rules.
Even if NAR clarifies its policies with relation to AVMs, MLSs may find some impediments to sitting down
at the table and consummating an agreement. The most common problem will probably be the lack of
existing contract language. Many MLSs don’t have a data licensing process or document that includes
sold listing data for AVM use by brokers; the closest thing they have is a VOW agreement which does
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not directly address this issue. MLSs will need to draft their own contracts to accommodate the new
use, or work collaboratively together or with other industry organizations such as NAR or CMLS to draft
a model contract for this purpose.
Other Arguments Related to The Realty Alliance, et al.
Clareity has heard a number of arguments from MLS executives regarding the specific case of TRA and
CA, and the following is our perspective on each one:
“Is the case of TRA and CA an example of actual broker valuations, or are the brokers just selling
access to MLS data?”
Dr. Michael Sklarz, Chairman and CEO of CA, characterizes the involvement of brokers who use his
company’s products this way:
We get input from both brokers (and appraisers) on the formulas/algorithms which are
used in the AVM. After getting this input and programming the logic, the AVM applies
this automatically for all future valuations. There is no need for a more specific role
after that. In addition, the CA Value Interactive AVM has the broker (or appraiser) select
the individual comps or neighborhood boundaries which are used in the AVM.
This kind of involvement is analogous to what happens in a shirt factory, where the owners are
not themselves involved in the physical operations required to fabricate the shirts. They may
buy the machines, hire the workers, and pay a designer, but, after that, shirts come out the
other end without any involvement on their part. And yet, the factory was their idea, the shirts
that come out are their shirts, and they have a right to make a profit from the shirts. The AVM
case is no different: the broker contracts with CA, licenses the software and virtual server, and
the valuations that come out of the AVMs are the broker’s valuations, for which they have a
right to make a profit.
“Why should these brokers make money off of other brokers’ listings and work?”
Brokers make money off other brokers’ data and work every time they use the MLS. This is identical to
the examples of BPOs, CMAs, and other long-accepted uses.
“Who is CA and can they be trusted with our MLS data?”
CA is not an outsider swooping in to make a quick buck, like certain paper brokers. Dr. Sklarz and his
team are industry veterans who have been around for thirty years. Dr. Sklarz’s and Dr. Norm Miller’s
1986 paper on housing price prediction is one of the seminal works on using MLS based market
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indicators to predict the future direction of real estate markets. Their 1987 paper on “Pricing
Strategies” was the first discussion of using AVMs to optimally price new listings. Over the past fifteen
years, Dr. Sklarz and his team have worked with Prudential Locations Real Estate, FNIS, and Fidelity
National; they also provided the underlying AVMs and analytics for Cyberhomes, which was acquired by
RPR.
The source of the hubbub surrounding CA has nothing to do with trust in CA, but rather the tension of
brokers creating and delivering AVMs to lenders through a technology partner rather than through
traditional manual processes. This is an example of technology marching forward and enabling more
efficient and accurate AVMs—which everyone can agree is good for the real estate industry. CA
software processes MLS data on behalf of the broker for the specific use of AVMs and market analytics.
The company has shown that it will abide by the rules of the industry and be contractually obligated to
use the MLS data for only the specific purposes agreed to.
“We can’t do this because our MLS has an exclusive arrangement for the data for this purpose.”
The definition of MLS disseminated by NAR nowhere includes the words “collective bargaining.” An MLS
may be a membership organization that buys services on its members’ behalf, but unless the MLS has
the explicit agreement of its members to become parties to an agreement, it cannot subject its
participants to contracts that it negotiates for itself. Its broker participants are not parties to its
contracts. An MLS may contract with an AVM provider itself, but it cannot prevent its broker-members
from contracting with other such services. An MLS restraining its members in this way may face
questions from antitrust regulators, who already have a watchful eye on the real estate data and AVM
markets—witness the FTC’s scrutiny of the recent acquisition of Dataquick by CoreLogic. Brokers have a
right to contract with AVM providers irrespective of whether their MLS does or regardless of any
exclusive relationships those MLSs may have entered into.
“Is the Collateral Analytics arrangement exclusive to The Realty Alliance?”
No. CA has a preferred relationship with TRA members, but it’s up to the individual broker to decide if
they choose to participate in the program. Additionally, TRA membership does not have national
coverage in every market, so CA works with brokerage firms that are not TRA members in those markets
and others where a TRA broker decides not to participate in the AVM program.
“What other opportunity is there for non-TRA brokers to participate in broker valuations?”
Assuming the arguments in this paper are accepted by NAR and the MLSs, all brokers are free to
innovate and compete by providing property valuations for financial institutions. Smaller brokerages
might have difficulty achieving the scale and process needed to compete for the business with national
lenders and financial institutions, but there is still plenty of opportunity to innovate and compete locally
or regionally.
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Doesn’t this legitimize “paper” brokers who have taken advantage of our VOW agreement in the past
to sell AVMs to lenders?
Not at all. This is only about allowing actual “Participants” to properly license and obtain a feed for data
in order to create and sell the valuations. Brokers that sign up for your MLS without any intent to list or
sell real estate are not Participants, as per previous NAR determinations.
What’s Happening in May 2014?
A recommendation is before NAR to modify its MLS Policy to make it clear that broker-produced AVMs
are a valid use of MLS data and to require local MLSs to provide a data feed for this purpose.
The work that has been done this year by the MLS Technology and Emerging Issues Advisory Board on
behalf of all brokers has produced a recommendation for the full MLS Committee to consider and
approve during NAR’s May meetings in Washington, D.C. The recommendation at this point is:
Option #1: Participants or their affiliated licensees shall not reproduce any MLS
compilation or any portion thereof, except in the following limited circumstances:
Participants or their affiliated licensees may reproduce from the MLS compilation
and distribute to prospective purchasers a reasonable number of single copies of
property listing data contained in the MLS compilation which relate to any
properties in which the prospective purchasers are or may, in the judgment of the
participant or their affiliated licensees, be interested.
Reproductions made in accordance with this rule shall be prepared in such a
fashion that the property listing data of properties other than that in which the
prospective purchaser has expressed interest, or in which the participant or the
affiliated licensees are seeking to promote interest, does not appear on such
reproduction.
Nothing contained herein shall be construed to preclude any participant from
utilizing, displaying, distributing, or reproducing property listing sheets or other
compilations of data pertaining exclusively to properties currently listed for sale
with the participant.
Any MLS information, whether provided in written or printed form, provided
electronically, or provided in any other form or format, is provided for the exclusive
use of the participant and those licensees affiliated with the participant who are
authorized to have access to such information. Such information may not be
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transmitted, retransmitted, or provided in any manner to any unauthorized
individual, office, or firm.
None of the foregoing shall be construed to prevent any individual legitimately in
possession of current listing information, sold information, comparables, or
statistical information from utilizing such information to support an estimate of
value valuations on a particular property properties for a particular clients. Any
MLS content in data feeds available to participants for real estate brokerage
purposes must also be available to participants for valuation purposes, including
automated valuations. MLSs must either permit use of existing data feeds, or
create a separate data feed, to satisfy this requirement. MLSs may require
participants who will use such data feeds to pay the reasonably estimated costs
incurred by the MLS in adding or enhancing its downloading capacity for this
purpose. However, only such iInformation that an association or associationowned multiple listing service has deemed to be nonconfidential and necessary to
support the estimate of value may not be reproduced and attached to the report
used as supporting documentation. Any other use of such information is
unauthorized and prohibited by these rules and regulations.
Option #2: Participants or their affiliated licensees shall not reproduce any MLS
compilation or any portion thereof, except in the following limited circumstances:
Participants or their affiliated licensees may reproduce from the MLS compilation
and distribute to prospective purchasers a reasonable number of single copies of
property listing data contained in the MLS compilation which relate to any
properties in which the prospective purchasers are or may, in the judgment of the
participants or their affiliated licensees, be interested.
Nothing contained herein shall be construed to preclude any participant from
utilizing, displaying, distributing, or reproducing property listing sheets or other
compilations of data pertaining exclusively to properties currently listed for sale
with the participant.
Any MLS information, whether provided in written or printed form, provided
electronically, or provided in any other form or format, is provided for the exclusive
use of the participant and those licensees affiliated with the participant who are
authorized to have access to such information. Such information may not be
transmitted, retransmitted, or provided in any manner to any unauthorized
individual, office, or firm.
None of the foregoing shall be construed to prevent any individual legitimately in
possession of current listing information, sold information, comparables, or
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statistical information from utilizing such information to support an estimate of
value valuations on a particular property properties for a particular clients. Any
MLS content in data feeds available to participants for real estate brokerage
purposes must also be available to participants for valuation purposes, including
automated valuations. MLSs must either permit use of existing data feeds, or
create a separate data feed, to satisfy this requirement. MLSs may require
participants who will use such data feeds to pay the reasonably estimated costs
incurred by the MLS in adding or enhancing its downloading capacity for this
purpose. However, only such iInformation that an association or associationowned multiple listing service has deemed to be nonconfidential and necessary to
support the estimate of value may not be reproduced and attached to the report
used as supporting documentation. Any other use of such information is
unauthorized and prohibited by these rules and regulations.
In both options, the MLS will be required to provide a data feed for valuations, including automated
valuations, and has the right to charge the broker reasonable fees to cover the cost of the data feed.
Conclusions
The one constant we know is change, and technology will continue to leap past our business practices
and policies. Innovation is everywhere; we need to embrace it rather than resist it, and to think of
reasonable solutions that benefit consumers and brokers alike. Other new tools and technologies will
arise, and brokerages’ business models will continue to evolve in response to consumer needs and
today’s cloud-based computing world. Brokerages will also continue to need the support —not
resistance—of MLSs to serve next-generation customers and clients. Unfortunately, MLS operators are
frequently placed in the difficult position of determining valid uses of MLS data and must decline data
requests by companies masquerading as brokerages. However, when brokerages that actively facilitate
the sale and purchase of property request a data feed to prepare valuations, how can an MLS say no due
to technical advances in valuation process and technique? If an MLS says no to cloud-based AVMs, how
far back in technological time does it want the broker to operate? Will the MLS mandate that broker
can only use Excel or AVM software running in their bricks-and-mortar back office?
There have been and will continue to be companies that scrape MLS data, hack MLS and broker systems,
or steal data through the “front door” by illegally using an agent or broker’s credentials. REDPLAN
(http://red-plan.org), a non-profit association formed in 2013 to help protect the real estate industry’s
intellectual property, has already received reports of companies that trick an MLS user into sharing his
or her username and password by promising “free reports.” These companies then resell MLS data on
the black/gray market and create any derivative products they can find buyers for. This type of data
misappropriation is in stark contrast to MLS participants who are appropriately using modern
technology to provide valuations to bona fide customers.
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Clareity strongly supports brokers in their use of MLS data for modern home valuations and real estate
analytics, and the progressive work and thinking of the MLS Technology and Emerging Issues Advisory
Board.
About Clareity Consulting
Founded in 1996, Clareity continually strives to provide our clients an independent and unique
perspective. Due to our extensive involvement and interaction across the entire real estate industry, we
have a finger on the pulse of the industry. Clareity has successfully executed a vast array of consulting
projects for our clients, related to:
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Development and analysis of RFPs for MLS systems, public records, broker systems and
transaction management systems
Public speaking and presentations
Strategic planning
Information security and business risk management assessments
VOW and IDX compliance audits
Regionalization and data share consulting
Mergers and acquisitions and strategic alliances
New product marketing and business plans
Product integration specifications
Conference planning and content development
Competitive analysis
Contract negotiation
Executive and technical staff recruitment
Project management and implementation assistance
Market research including agent, broker, and staff surveys as well as onsite focus groups
For more information please contact:
Gregg Larson
Clareity Consulting
Scottsdale
602-315-3362
[email protected]
Matt Cohen
Clareity Consulting
Minneapolis
612-331-1788
[email protected]
Or visit http://clareity.com
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Appendix 1: The Realty Alliance Letter to NAR
27 January 2014
Mr. Robert Bailey
MLS Technology and Emerging Issues Advisory Board
of the Multiple Listing Issues and Policies Committee
National Association of Realtors
430 North Michigan Avenue
Chicago, Illinois 60611
Re:
NAR Policy on MLS Participants’ Use of MLS data to Create Automated Valuation Models
(AVMs)
Dear Mr. Bailey:
The Realty Alliance (TRA) is a network of real estate brokerage companies located throughout the United
States and Canada. Each U.S. member of TRA is an NAR member and an MLS Participant, and nearly all
of the MLSs in which TRA members participate are owned by associations of Realtors, and subject to the
National Association of Realtors Multiple Listing Policy (NAR MLS Policy). The Realty Alliance represents
more than 100,000 Realtors, and we are confident the vast majority of NAR members share our view.
The purpose of this letter is to assist the NAR Multiple Listing Issues and Policies Committee and/or any
related subcommittee equivalents should they consider clarifying NAR’s MLS policy to expressly prohibit
MLSs from denying MLS Participants downloads or data feeds of MLS data, including active, sold and offmarket data, that Participants may use to generate automated valuation modeling estimates of value
(AVMs) on properties using software licensed from a third party and delivering the AVM results to financial
institutions in return for compensation independent of a real estate sales commission.
THE ISSUE
TRA believes current NAR MLS Policy already permits MLS Participants to use MLS data to create AVMs
using third-party software and deliver the AVM results to financial institution end users for a fee separate
from any brokerage commission that may be earned on the sale of the subject property. Since the use of
MLS data for this purpose is a permitted use under NAR’s MLS Policy, MLSs subject to that Policy cannot
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effectively deny MLS Participants the ability to engage in this permitted use of MLS data by refusing
Participants and their technology service providers to use the MLS’ VOW data feed to create the AVMs.
Nevertheless, certain MLSs have taken the position that the only uses that MLS Participants may make of
MLS data downloaded or accessible through MLS data feeds are (1) to support the Participants IDX and
VOW sites, or (2) for the Participant’s use in marketing the property included in the MLS’ database
compilation. Since generation and delivery of AVMs to financial institution end users is not a, strictly
speaking, an “IDX” or “VOW” use of the MLS data, nor are the AVMs ordinarily being delivered to the
financial institution end users in the course of marketing the property that is the subject of the AVMs, NAR’s
current MLS Policy does not require MLSs to permit Participants to use MLS data downloaded or
accessible through a data feed from the MLS’ computerized database compilation to create AVMs for as
described above. It is unfortunate that we are forced to have to make this case, but we hope this is helpful.
Because of this disagreement among MLSs and brokers on the proper interpretation of NAR MLS Policy,
should the NAR MLS Issues and Policies Committee amend the NAR MLS Policy regarding this issue,
TRA believes the right thing to do is for amended policy wording to make clear that MLSs must provide
MLS Participants with a source of MLS data that the Participants may use in conjunction with their thirdparty technology and software providers to generate AVMs for the purposes outlined above. The reasons
TRA believes this clarification is based on current NAR MLS Policy are set forth below.
BACKGROUND
TRA has created a program through which brokers (both TRA members and non-TRA members) may
license a third-party real estate analytics company’s proprietary software that creates AVMs and other real
estate market analyses by applying algorithms to information contained in automated databases of
information about closed real estate transactions and properties that are, or have been, listed for sale.
Brokers who choose to participate in this program (collectively referred to as “Participants”) use the licensed
AVM software for two permitted uses, both of which require the software to operate on a database of real
estate information that includes MLS data of all types (active, sold, pending and off-market) that the
Participants are entitled to utilize as bona fide participants in MLSs.
First, the licenses permit the Participants to use the software to create certain property valuation and market
analytics reports appropriate for use in the Participants’ business of marketing real estate to potential
buyers and sellers. These analytic reports resemble traditional “comparative market analyses” or “CMAs”
that Participants supply to customers and clients interested in buying or selling a particular property. Use of
MLS data to create CMAs is a long recognized permitted use of MLS data by MLS Participants.
Second, the licenses permit the Participants to use the software to fulfill orders from financial institution end
users (collectively referred to as “End Users”) for AVM reports on properties located in the Participants’
market areas. In furtherance of this permitted use of the software, the AVM software licensor will also
perform a fulfillment function (the “Clearinghouse”) for End Users orders for the Participants’ AVM reports.
End Users desiring an AVM Report will use a unique password and user ID to log into the Clearinghouse
website managed by the software licensor for the benefit of the Participants. Once logged in, the End User
will specify one or more subject properties for which the End User is requesting an AVM report.
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The Clearinghouse software will then identify the Participant that participates in the MLS that maintains the
MLS data necessary to create the AVM report(s) on the subject property identified by the End User. The
Clearinghouse will then instruct the AVM software to generate the AVM report(s) requested by the End
User and return the AVM reports to the End User by email as PDF attachments, or as an Excel
spreadsheet. The AVM reports, designed in conjunction with Participants, returned to the End Users will be
branded with the logo of the Participant who participates in the MLS whose MLS data was used to generate
the AVM. The End Users will also make payment through the Clearinghouse for the AVM reports delivered
to them. These fees will then be divided among (1) the Participant(s) whose AVM reports were delivered to
the End User, (2) software licensor as a license fee for use of the AVM and Clearinghouse software, and
(3) TRA for administration of the Participant network.
TRA believes that NAR MLS Policy permits the above described use of MLS data by MLS participants, and
likewise requires MLSs to provide an MLS data feed to the Participants or their technology service
providers for the following reasons:
EXECUTIVE SUMMARY
The Participants are permitted under applicable state and federal laws governing real estate appraisal
practices to provide AVM reports to End Users, so long as the Participants clearly disclose that the AVM
reports are automated estimates of value generated solely by computer software programs operating on
real estate information databases, and are not to be relied upon as human generated “appraisals” as
defined under the Uniform Standards of Professional Appraisal Practice (USPAP), Broker Price Opinions
(BPOs), or Competitive Market Analyses (CMAs) that are expressions of professional opinions about the
values, or the prices at which properties should be offered for sale or acquisition.
TRA contends that NAR’s MLS, VOW and Professional Standards Policies confirm that Participants may
use MLS data to create and deliver AVM Reports to financial institution End Users using computer
hardware and software supplied by third party licensors. That being the case, MLSs must therefore facilitate
that use by either providing an MLS data feed, permitting Participants to download the MLS data for such
use, or allowing the MLS’ VOW data feed to be used not only for the purposes set forth in NAR’s VOW
Policy, but also for use in generating AVMs for delivery to End Users.
This conclusion is further supported by provisions of NAR’s VOW Policy that permit MLS participants to use
MLS data to create and deliver CMAs to customers and clients through a VOW. While an AVM report is
legally distinct from a CMA, the AVM report is an “estimate of value” of real property, which NAR MLS and
Professional Standards Policy expressly authorizes MLS Participants to create using MLS data.
Pursuant to the Participants’ AVM software licenses, the AVM reports will be delivered through the
Clearinghouse to End Users as products of the Participants. In addition, the license agreements require that
the MLS data used to generate the AVM reports must at all times reside on computer servers that are
subject to the control of the Participant, although the hardware may be supplied by a third party “cloud
services” provider. The license agreements further prohibit the software licensor from making the MLS data
accessible to any third parties; therefore, the MLS data will never be accessible to End Users, other than
the minimal amount of MLS data contained on the actual AVM reports. The End Users are in turn prohibited
from using the AVMs, or the data contained on the AVMs, for anything other than internal collateral
valuation or risk management purposes.
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DISCUSSION
Legal Status of AVM Reports
AVM reports are calculations of a property’s current estimated market value created by computer software
operating on electronic databases of real property records. The software locates the property data for the
subject property, identifies the best comparable transactions, and performs appropriate calculations to
determine an estimate of value. The AVM report presents the valuation together with certain physical
characteristics of the subject property, and a summary of the comparable properties that support the
valuation. A copy of the AVM report is then delivered electronically to the requesting party.
AVM reports are not “appraisals” as that term is defined under USPAP. USPAP is promulgated by the
federally chartered Appraisal Standards Board. Most “federally related” loans secured by real property must
be supported by “appraisals” that meet USPAP standards. A USPAP compliant residential “appraisal” is
prepared on a Uniform Residential Appraisal Report (URAR) form, and must be performed by a state
licensed or certified appraiser who is subject to USPAP standards. It is illegal for an unlicensed person to
prepare a USAP defined “appraisal.”
Neither an AVM report nor a Broker Price Opinion (or “BPO”) is an “appraisal” as defined by USPAP. A
BPO is sometimes referred to as a Competitive Market Analysis or “CMA.” USPAP defines an “appraisal”
as an “opinion of value” of a parcel of real estate that is rendered by a state licensed or certified appraiser.
BPOs, on the other hand, are performed by real estate brokers or agents, most of whom are not licensed
real estate appraisers. Unlike a USPAP appraisal, which is typically performed by an appraiser for a
mortgage lender, a BPO is normally generated by a real estate broker for a seller who is determining the
price at which to list a property for sale, or for a buyer who is determining the price to offer to purchase a
property. Because a BPO is a judgment about the “price” at which offers to buy or sell a property should be
made, rather than a judgment about the “value” of a property, a BPO is not considered an “appraisal” for
USPAP or state real estate appraiser license law purposes.
Certain mortgage lenders, however, request real estate brokers to perform BPOs for the purpose of
estimating the value of a property without any intention of listing the property with the brokers performing
the BPOs. Some state real estate appraiser license laws prohibit a real estate broker or agent who is not
also a licensed or certified appraiser from performing a BPO for a mortgage lender or other lien holder that
is not incident to the potential listing of the subject property.
While also an “estimate of value” of a real estate parcel, an AVM report is not a URAR appraisal or a BPO
for the purposes of USPAP or state real estate appraiser license laws. Both a BPO and a URAR appraisal
are the results of a broker’s or appraiser’s selection and analysis of real estate data on which to base the
broker’s or appraiser’s professional judgment about the “price” or “value” of the subject property. An AVM
report, on the other hand, is not the result of any human analysis or judgment. It is a computer generated
calculation performed by software interacting with an automated real estate database compilation. Because
an AVM report does not include any human judgment or analysis, it is not considered an appraisal or a
BPO and may not be represented as being the equivalent of an appraisal or BPO to any user or institutional
customer. The AVM reports delivered by Participants to End Users through the Clearinghouse include clear
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and conspicuous disclosures that the AVM reports are not appraisals or BPOs, and cannot be relied upon
as such.
Notwithstanding its limitations, an AVM report may be used by financial institutions for purposes that do not
involve the valuation of property as collateral for a mortgage loan. For example, AVM reports may be used
for “quality control” purposes to determine if URAR appraisals performed for the institution are within
acceptable ranges of accuracy. AVM reports may also be used to monitor the value of the collateral
securing promissory notes that are in a pool of mortgage backed securities to assess the quality of the
security, or predict the likelihood of borrower default. Because they are not the product of human analyses,
AVMs are also not susceptible to human error or manipulation, which is why they are used to double check
human generated appraisals or BPOs.
NAR’s Code of Ethics Permits Realtors to Perform Property Valuations Other Than Incident
to a Listing Opportunity or to Advise a Buyer Client.
The NAR Code of Ethics expressly permits Realtors to provide property valuations independent of listing or
selling property under certain specified conditions. The NAR Delegate Body and Board of Directors
amended Article 11 of Realtors Code of Ethics and Standard of Practice 11-1 at NAR’s 2009 Annual
Convention to address Realtor preparation of property valuations other than incident to a listing
presentation or in support of a customer’s or client’s attempted acquisition of a property. The amended
Standard of Practice 11-1, which took effect on January 1, 2010, provides:
“When Realtors prepare opinions of real property value or price, other than in pursuit of a listing or to assist
a potential purchaser in formulating a purchase offer, such opinions shall include the following unless the
party requesting the opinion requires a specific type of report or different data set:
1) identification of the subject property
2) date prepared
3) defined value or price
4) limiting conditions, including statements of purpose(s) and intended user(s)
5) any present or contemplated interest, including the possibility of representing the seller/landlord
or buyers/tenants
6) basis for the opinion, including applicable market data
7) if the opinion is not an appraisal, a statement to that effect”
Standard of Practice 11-1 was adopted for the express purpose of setting standards by which Realtors can
create estimates of value for monetary compensation other than incident to a listing or purchase of the
subject property. More recently, NAR has, through its Realtor University, published a training course to
instruct Realtors on how to supplement their income by performing BPOs for third party valuation services
companies. This training course demonstrates how to create BPOs using MLS data. See
https://www.learninglibrary.com/aspdotnetstorefront70/p-616-bpos-the-agents-role-in-the-valuationprocess.aspx.
Standard of Practice 11-1 clearly permits a Realtor ethically to create a BPO other than incident to a listing
presentation for a buyer client. While an AVM report is not a BPO, the AVM report is a “valuation” of real
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property. Therefore, Standard of Practice 11-1 supports the conclusion that a Realtor may supply AVM
reports to interested third parties provided that the requirements of Standard of Practice 11-1 are met.
NAR has Recognized the Legitimate Role of AVMs in the Independent Valuation
of Real Property
In February of 2012, NAR published its “Responsible Valuation Policy” statement. In that Policy NAR
supports “independent valuations of real property” and states that when Realtors provide “non-appraisal”
opinions of value they are ethically obligated to do so in an independent and objective manner by citing
Article 11 of the Realtors Code of Ethics and Standard of Practice 11-1.
NAR’s Responsible Valuation Policy also addresses AVM reports. NAR’s Policy acknowledges that AVMs
are often used by originators or secondary market investors to determine the collateral worth of mortgages
secured by a consumer’s principal dwelling. NAR’s Policy commentary on AVMs goes on to state that
individuals or companies that create AVMs should ensure that AVMs:
1.
2.
3.
4.
5.
6.
Protect against the manipulation of data, including disassembly and redistribution without
explicit authorization
Employ appropriate quality control measures, including disclosure of a confidence score
calculated using a statistical methodology, such as forecast standard deviation
Utilize only data which has been explicitly licensed and authorized
Avoid conflicts of interest
Require random sample testing and reviews
Not be used as the principle method of valuation in mortgage origination
NAR’s Professional Standards Policy, therefore, acknowledges that Realtors may ethically create “nonappraisal” estimates of value that adhere to the provisions of Standard of Practice 11-1. NAR Responsible
Valuation Policy further acknowledges that AVM reports may legitimately be used by originators or
secondary market investors to determine the collateral worth of a mortgage secured by a consumer’s
principal dwelling provided that such AVM reports conform to the criteria set forth in that Policy.
When generating AVM reports for End Users through the Clearinghouse utilizing the licensed AVM
software Participants will comply in all respects with Article 11 of the Realtors Code of Ethics and Standard
of Practice 11-1. The Participants’ AVM reports will also conform to the criteria for permissible AVM reports
set forth in NAR’s Responsible Valuation Policy.
NAR MLS Policy Permits Participants to Use MLS data to Generate AVM Reports
The NAR MLS Policy also expressly authorizes MLS Participants to use MLS data to generate estimates of
value for real property. NAR’s MLS Policy defines an “MLS” to include serving as:
“a means by which information is accumulated and disseminated to enable authorized participants
to prepare appraisals, analyses, and other valuations of real property for bona fide clients and
customers.”
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The NAR Model Rules for MLSs that are owned or operated by associations of Realtors includes Rule 12.2
governing the use of the MLS’ copyrighted compilations, which MLSs are required to adopt. Rule 12.2
states in part that:
“None of the foregoing shall be construed to prevent any individual legitimately in possession of
current listing information, sold information, comparables, or statistical information from utilizing
such information to support an estimate of value on a particular property for a particular client.
However, only such information that an association or association-owned multiple listing service
has deemed to be nonconfidential and necessary to support the estimate of value may be
reproduced and attached to the report as supporting documentation. Any other use of such
information is unauthorized and prohibited by these rules and regulations.”
Emphasis added.
NAR has also issued interpretations of its current VOW Policy that state that Realtors operating VOWs
may use MLS sold data to support CMAs provided to customers or clients, whether through a VOW or
otherwise. To assist MLSs in implementing the revised VOW Policy, NAR has issued a series of answers to
Frequently Asked Questions (FAQs). Question 5.8 of NAR’s VOW Policy FAQs states as follows:
“Q 5.8 Where sold data is not ‘publicly accessible’ and the MLS prohibits sold data from being
displayed/accessible on VOWs under optional Rule 19.15(f), the rules require an ‘equivalent
requirement must be imposed on Participant’s use MLS Listing Information in providing brokerage
service through all other mechanisms.’ What requirement must be imposed on use of sold data in
the ‘bricks and mortar’ context? Does that mean that a broker may not use and disclose sold
listings in connection with CMAs or other advice to a client or customer—either in their offices or via
their VOWs?”
NAR’s Answer to Question 5.8 is as follows:
“If the MLS chooses to prohibit display of sold data on the VOW (or, for that matter, expired,
withdrawn or pending listing data), Participants may still provide clients and customers with a
limited number of such listings in connection with providing brokerage services, including CMAs.
This is permissible both on a VOW and ‘in the office’.”
Emphasis added.
The NAR VOW Policy permits an MLS operating in a state in which sales price information is not on the
public record to refuse to permit sold data from being displayed on a VOW. But if an MLS makes such an
election, it must also forbid the equivalent use of sold data in a “bricks and mortar” setting. The purpose of
Question and Answer 5.8 is to make clear that, even in those circumstances in which an MLS has
prohibited the display of sold data on a VOW, an MLS must still permit an MLS Participant to use sold data
to deliver CMAs to customers or client, including by electronic means through the MLS participant’s VOW.
According to NAR’s VOW Policy, an MLS cannot prohibit a VOW operator from providing VOW registrants
with CMAs (or BPOs) through a VOW, so long as the VOW operator only provides the customer or client
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with the CMA or BPO results, and not full access to the MLS’ sold data inventory. Relying on the logic of
NAR’s Answer to Question 5.8, if a VOW operator can use MLS data to provide CMAs to customers or
clients through a VOW, the VOW operator should also be able to use the same MLS data to provide AVM
reports to customers or clients through other electronic means, such as the Clearinghouse.
The NAR VOW Policy also has been interpreted by the United States Justice Department (“DoJ”) to permit
a single Affiliated VOW Partner or AVP to operate a single VOW platform for the benefit of two or more
MLS participants. The DoJ’s Competitive Impact Statement filed with the court in conjunction with the
court’s approval of the NAR/DoJ settlement of the DoJ’s antitrust complaint against NAR provides as
follows in footnote 15:
“Nothing in the Modified VOW Policy requires an AVP to hold a broker’s license. An unlicensed
technology company would be permitted under the Modified VOW Policy to host a VOW for a
broker or brokers (or for one or more agents or sales associates, with the consent of their
supervising brokers).
Emphasis added.
Therefore, the current NAR VOW Policy as interpreted by the DoJ permits a single unlicensed technology
company, such as the Participants’ AVM software licensee, to operate a VOW that is used or “shared” by
more than one MLS participating broker. The Clearinghouse as described above, while not a “VOW” per
se, as that term is defined in the NAR VOW Policy, is operated by an unlicensed technology company (the
AVM software licensor) that serves as a single technology platform at which multiple Participants deliver
real estate related services (AVMs) to registered End Users. As such the Clearinghouse serves the same
purpose as a VOW operated for multiple brokers as expressly permitted under NAR’s VOW Policy.
The NAR-DoJ Final Judgment in the VOW Antitrust Litigation Expresses the DoJ’s Views
on Anticompetitive Restrictions on the Online Use of MLS data
The NAR-DoJ Final Judgment (the “Judgment”) applies to the manner in which NAR and the MLSs subject
to NAR’s MLS Policy must administer MLS Policies applicable to VOWs. MLS Participants use of MLS data
to generate and deliver AVMs is not, strictly speaking, the same as displaying MLS listing and other content
to registered users of a VOW. Nor is the Clearinghouse functioning identically to a VOW, since the
Clearinghouse is a means through which End Users order and receive the Participants’ AVMs, rather than
view information about properties available for sale in the local real estate market.
Having said that, Section IV of the Judgment entitled “Prohibited Conduct” includes Subsections A and B,
which prohibit NAR from adopting, maintaining or enforcing any Rule that
“A.
prohibits a Broker from using a VOW or prohibits, restricts, or impedes a Broker who uses
a VOW from providing to Customers on its VOW all of the Listing Information that a Broker is
permitted to Provide to Customers by hand, mail, facsimile, electronic mail, or any other method of
delivery;
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B.
unreasonably disadvantages or unreasonably discriminates against a Broker in the use of
a VOW to Provide to Customers all of the Listing Information that a Broker is permitted to Provide
to Customers by hand, mail, facsimile, electronic mail, or any other method of delivery;”
These provisions of Section IV of the Judgment set forth the underlying antitrust policy upon which the DoJ
based its attack on the prior version of the NAR VOW Policy. According to the DoJ’s Complaint, NAR
violated the federal antitrust laws by applying more restrictive rules to MLS Participants’ use of MLS data
when dealing with customers and clients through a web-based automated applications than the rules
governing the MLS Participants’ use of the same MLS data to deliver services to customers or clients
through agent or broker intervention using non-internet based technology, or through a “bricks and mortar”
setting.
MLSs run the same risk of a federal antitrust violation when they permit Participants to use MLS data to
deliver human-generated estimates of value, such as BPOs, to the same customers and clients through
non-web based technology and communication media, but prohibit Participants from delivering “automated”
estimates of value (AVMs) through the Clearinghouse to the same financial institutions to whom the
Participants are permitted to deliver BPOs using MLS data.
Many providers of valuation services to financial institutions, such as CoreLogic, LPS, and Clear Capital,
have formed networks of real estate brokers and agents through which the providers deliver BPOs to
financial institutions. None of these companies are themselves participants in MLSs; however the brokers in
their networks are MLS Participants. These companies receive orders for BPOs from their financial
institution customers, often through a web-based portal. The companies then route the BPO order to a real
estate licensee in their network doing business in the market where the subject property is located. The real
estate licensee prepares the BPO, typically on a form mandated and branded by the provider, and not the
broker, using MLS data from the MLS in which the licensee participates. The real estate licensee then
typically returns the completed BPO to the valuation services company, who in turn delivers it to the
requesting financial institution as the company’s work product. The company collects a fee from the
financial institution and remits a portion of that fee to the real estate licensee that created the BPO.
As discussed above, Standard of Practice 11-1 of NAR’s Realtors Code of Ethics confirms that Realtors
may ethnically create BPOs in accordance with the Standard of Practice, and NAR has developed a
training course instructing Realtors on how to supplement their income by creating BPOs for financial
institutions using MLS data.
In sum, NAR MLS and Professional Standards Policy permits, if not encourages, Realtors to generate
BPOs for financial institutions for a fee by participating in networks organized by companies providing
valuation services to such institutions. Many MLS Participants do in fact participate in such networks, create
BPOs that are branded by the companies providing the BPOs to the financial institutions, and are paid a fee
for having done so without regard to whether the companies’ customers intend to list the subject property
for sale with the MLS Participant who created the BPO.
MLS Policies that allows MLS Participants to use MLS data to create BPOs for compensation as part of
valuation service company networks, but allows MLSs to prohibit the same Participants from using MLS
data to create AVMs for compensation through an online Clearinghouse, discriminates in the permissible
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use of MLS data based on the method and medium used to generate and deliver the valuation products to
the end user. This type of discrimination that disadvantages an MLS Participant’s use of automated
methods of delivering services to a customer or client is same type of conduct that the DoJ attacked when it
challenged NAR’s prior VOW Policy as a violation of the federal antitrust laws.
MLSs May Require Participants and Their AVM Software Vendors to Enter into License
Agreements Limiting the Use of the MLS data to Permitted Purposes
TRA recognizes that MLSs have legitimate interests in insuring that Participants and their technology and
software providers use the MLS data in accordance with license agreements that limit the use of the MLS
data only for purposes permitted under the MLS’ Rules and applicable NAR Policies. These license
agreement may properly include provisions addressing, among other things, authorization to the MLSs to
periodically monitor the operation of the Clearinghouse to be sure that the MLS data is being used for
authorized uses, and that the AVMs delivered through the Clearinghouse are being delivered to permitted
End Users as work products of the Participant
CONCLUSION
For all of the foregoing reasons, TRA and its members respectively request that, if changes are made to the
language of current policy in this area, that NAR’s MLS Issues and Policies Committee recommend to
NAR’s Board of Directors that NAR’s MLS Policy be amended to clarify that an MLS must provide
Participants, upon request, with a data feed, or permit Participants to download the MLS data from the
MLS’ database compilation, for use by the Participants to create and deliver AVMs to customers and clients
through automated means, such as the Clearinghouse described above. This result could be accomplished
by amending the MLS Policy to provide that the same data feed that MLSs must provide to Participants in
as required by NAR’s VOW Policy may also be used by Participants to create AVMs as described above,
subject to reasonable license agreements among the MLS, the Participant, and the Participant’s technology
or software vendor.
Thank you for your consideration of this input. We are happy to provide a representative to speak to these
matters via teleconference or in person at a future meeting of any subcommittee equivalent’s upcoming
meeting(s) and/or at the full committee meeting itself if you wish. Just let me know in advance and we will
make the arrangements at our expense, if necessary.
Sincerely,
Craig Cheatham
President and CEO
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c:
Bill Lublin
Jeanne Radsick
Linda Lee
Clifford D. Niersbach
Gary Thomas
Dale Stinton
Robert Moline
Joe Horning
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Page 21

Broker AVM: Exploring the Controversy

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