This is part three in an x-part series (I promised four parts, but who knows?) on the question of whether and how brokers participating in MLS may use listing data of other brokers to power AVMs sold into the real estate vertical. See Part 1 for an intro and Part 2 for advice that NAR gave MLSs in 2013.
In a letter dated January 27, 2014, Craig Cheatham, CEO of The Realty Alliance (TRA), made a recommendation to the National Association of REALTORS®:
NAR’s MLS Policy [should] 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….
(page 9; all page numbers in this post refer to TRA’s letter) The Clearinghouse is a project supported by TRA and described in the letter (see page 2) that permits participating brokers to work with TRA and its technology partner (which we understand to be a company called Collateral Analytics) to use MLS data to deliver automated valuations to third parties for a fee. An automated valuation model or “AVM” is “a service that can provide real estate property valuations using mathematical modeling combined with a database” (according to Wikipedia as of April 18, 2014). In this case, the database is the MLS database, including not just the listings of the broker developing and delivering the AVM, but the listings of all MLS participants.
TRA’s letter makes arguments in support of two contentions:
- “Current 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.” (page 1)
- “MLSs subject to [NAR] Policy cannot 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 fee to create the AVMs.” (page 1)
This post considers why TRA needed to write this letter, some definitions for key terms adopted in that letter, and the arguments TRA makes in support of its claims.
Why bother?
As I noted in the second post in this series, NAR staff has already communicated the view that (a) a broker participating in MLS can use MLS data to build an AVM, “provided it can fairly be characterized as a valuation of real property (i.e., appraisal, CMA, BPO, etc.)”; and (b) an MLS refusing to provide a participating broker a data feed for this purpose, results “in participants not being able to performs certain types of valuations that they would otherwise be able to perform under their real estate license and status as MLS participants or subscribers…not a result contemplated under the existing definition of MLS.” This seems like a pretty clear signal from NAR’s policy staff that they agree with TRA’s two contentions above.
But if you read Part 2, you no doubt noted some important hedging language from the NAR staff: “[W]hat you suggest would need to be considered by the Committee before we could provide a definitive answer.” This isn’t NAR policy staff being wishy-washy. They advise that:
[If an MLS] believes that MLSs should be able to limit use of the data they provide in such a way that participants, either on their own or with the assistance of their vendors, would not be able to provide clients and customers with automated valuations, that would be an issue requiring consideration by the Committee and the Board of Directors, assuming the idea first survives antitrust scrutiny by NAR’s Legal Affairs staff.
Thus, a good reason for the NAR staff’s less-than-definitive position here is that the NAR committee responsible for multiple listing policy has never adopted or rejected either of the following two positions:
- That for purposes of NAR multiple listing policy, an AVM is indistinguishable from a BPO, CMA, appraisal or other opinion of property value rendered by an MLS broker or appraiser.
- That MLSs must provide a data feed enabling any activity that a broker is permitted to do under the NAR policies.
As you can see, these two apparently ‘open’ questions correspond closely to TRA’s contentions at the heart of its letter. TRA needs to succeed on both these points to get what it wants.
What is an AVM per TRA?
TRA’s letter makes several characterizations of AVMs and other practices:
- AVMs “are automated estimates of value generated solely by computer software programs operating real estate information databases” (page 3)
- “[G]eneration and delivery of AVMs to financial institution end users is not, strictly speaking, an ‘IDX’ and ‘VOW’ use of the MLS data” (page 1).
- AVMS are not “ordinarily being delivered to the financial institution end users in the course of marketing the property that is the subject of the AVMs” (page 1).
- A broker price opinion or “BPO is a judgment about the ‘price’ at which offers to buy or sell a property should be made” (page 4).
- “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” (pages 3-4)
- But BPOs are sometimes requested by mortgage lenders (and others) who have no intention of listing the property with the broker providing the BPO (page 4).
- The letter says a BPO “is sometimes referred to as a Competitive Market Analysis or ‘CMA'” (page 3). I always had a sense that BPOs and CMAs were somehow different, but I don’t know exactly how (maybe you can comment). I also think some of our clients call CMA’s “comparable” or “comparative” market analyses. I don’t think the terminology difference matters.
- Appraisals, broker price opinions (BPOs), and competitive market analyses (CMAs) are NOT AVMs.
- Appraisals, BPOs, and CMAs are “expressions of professional opinions about the values, or the prices at which properties should be offered for sale or acquisition” (page 3, my emphasis), that are the “results of a broker’s or appraiser’s selection and analysis of real estate data on which to base…professional judgment about the ‘price’ or ‘value’ of the subject property” (page 4, my emphasis).
- An “AVM report does not include any human judgment or analysis” (page 4, my emphasis).
- An “AVM report is legally distinct from a CMA,” but “the AVM report is an ‘estimate of value’ of real property” (page 3).
- BPOs, CMAs, and AVMs are NOT appraisals. The latter are generally regulated by the federal Appraisal Standards Board (page 3).
Is an AVM indistinguishable from a CMA or BPO?
In the simplest terms, if an AVM is indistinguishable from a CMA or BPO for policy purposes, then brokers are entitled to use MLS data to create AVMs without listing broker permission, just as they are entitled to create CMAs and BPOs without listing broker permission. In that event, AVMs would be considered part of the core purposes of MLS, those purposes to which every listing broker is presumed to consent merely by the act of submitting a listing to the service.
TRA’s principal arguments in favor of this view are these:
- “The NAR Code of Ethics permits brokers to perform property valuations other than incident to a listing opportunity or to advise a buyer client” (page 4).
- “NAR has recognized the legitimate role of AVMs in the independent valuation of real property” (page 5).
- AVMs are sufficiently like BPOs/CMAs and VOWs that the NAR policies permitting those practices should be read as applying to AVMs (pages 6-7).
- The Department of Justice would support TRA’s view because of its stance on VOWs.
But is this the slam-dunk that NAR staff and TRA think it is? TRA’s letter expressly acknowledges that CMAs, BPOs, and appraisals are all judgments or opinions by brokers and appraisers–they are professional judgments by such practitioners regarding value, based in part on listing data. By contrast, “an AVM report does not include any human judgment or analysis” (page 4). The practice of rendering an appraisal or a CMA/BPO is an exercise of professional judgment for which one must hold a license or appraisal certification. Anyone can build an AVM and operate it without a license, subject to the need to disclaim that it is functioning as an appraisal or BPO/CMA. TRA essentially assumes that this difference is inconsequential for policy purposes.
So, the question for NAR’s policy committee (expressed in as provocative a way as I could think of) is whether there is really no difference, for policy purposes, between broker and appraiser activities that require the exercise of professional judgement on the one hand, and on the other hand the application of a machine learning algorithm to a hunk of data to get a guess about a property’s value. I don’t think the committee has ever considered this question.
I think it’s telling that TRA’s letter spends most of its time arguing for this first contention, which TRA says repeatedly has already been settled. It’s a good rhetorical strategy: saying that your innovation is so similar to well-accepted practices that the innovation should be embraced as indistinguishable from the practices. The committee and industry leaders, however, have a duty to deliberate regarding the validity of that claim.
The data must flow(?)
TRA’s letter spends comparatively little time expressly on its second contention. It seems to assume that if a participating broker is permitted under the rules to do something, then the MLS must provide a data feed to support that use. But such a contention is really a radical departure from historical practices. For years, MLSs have taken the view that they need to provide data feeds–thick pipes of fast-flowing data–to participating brokers only for those purposes for which they are required by policy: IDX and VOW. This makes sense, really, because it’s hard work managing and monitoring the use of such data feeds. Ask your MLS about its IDX and VOW enforcement activities.
Many MLSs have chosen to provide other types of data feed. The most common kind is sometimes called a “back-office” feed. Such feeds often include listing statuses and fields not available in IDX feeds. Brokers use them to manage their businesses; some use them to assess the productivity of agents in MLS (their own and other brokers’) to support recruitment efforts. The problem is that unlike IDX and VOWs, these uses are not exposed to the public: MLS staff and competing brokers can’t ‘log in’ to these back-office systems to ensure that they are not violating MLS policies. Thus, some MLSs have chosen not to provide this type of data feed.
TRA’s AVM product seems more like back-office feeds than IDX or VOW feeds. In fairness, though, TRA says it would accept license agreement terms, including “authorization to the MLSs to periodically monitor the operation of the Clearinghouse to be sure that the MLS data is being used for authorized purposes” (pages 8-9). Though helpful, this is less rigorous than the VOW policy’s requirement that other MLS participants be able to view and use a broker’s VOW to assure its compliance with policies. Requiring that other participants be allowed to view what the broker is doing is a way of enlisting participants as assistants in the enforcement process; many MLSs have found that their own participants are at least as strict when policing each others activities as the MLS itself is. I don’t know whether TRA would accept that requirement in a license agreement or not.
But most importantly, TRA’s position appears to be that if a broker has a colorable claim that some activity is allowed by MLS policies, then the MLS must provide a data feed supporting it. I don’t think NAR’s committee has ever considered this question, either.
Do listing brokers’ views matter?
If AVMs and BPO/CMAs are indistinguishable for policy purposes, then each MLS participant is entitled to use the listing data of all other participants to build AMVs with or without listing broker permission. That is a consequence of TRA’s request about which TRA’s letter is strategically silent.
I wrote last fall about the tendency of some big brokers to be ‘strategically hypocritical.’ I used TRA’s project as the prototypical example of that. Even some of the brokers who support TRA’s position (directly or indirectly) might be distressed to have it applied widely. For example, what does it mean for the debate about “paper brokerages”?
There may also be unanticipated consequences of this policy change. For example, appraisers are permitted under NAR policy to do property valuations; are appraisers entitled to receive fat pipes of MLS data? Could we see “paper appraiser firms,” companies that go around joining MLSs in order to get data feeds to build AVMs? Appraisal participants in MLS are not required to meet even the basic requirement that brokers must to be actively engaged in brokerage. Such an appraisal firm might never actually do appraisals, it would just sell AVMs. Could MLSs deny participation to such appraisal firms?
Candidly, I’m not sure whether an appraisal firm could do this under state law, etc. But the point is that TRA’s letter is only one turn in a debate that the industry should have about this issue. These posts are another turn.
What do you think?
-Brian
Note/reminder: Our firm has previously represented The Realty Alliance, though not in matters related to MLSs. We currently represent the Council of MLSs, but these posts do not necessarily represent the position of CMLS or any of its members. Our MLS clients have a variety of views on this subject, all of which appear to us to be supported by rational arguments. Finally, we also represent a few of the larger brokers in the U.S., some of whom are members of TRA; again, we don’t represent them with regard to their relations with MLSs. I have not consulted them regarding their views on this issue, and I therefore have no idea what their views on it are.