A federal class action suit is focusing fresh attention on an issue that's important to homeowners nationwide: Who - or what - tells you how much your property is worth? Is it a live human being? A digitized substitute? Does it really matter?
A group of professional appraisers is suing a major mortgage technology firm, charging that it systematically takes their appraisal report information, warehouses it, and then markets it to lenders and developers of electronic substitutes for traditional appraisals.
The lawsuit was filed last month by appraisers in Maryland, Virginia and Oklahoma against FNC Inc. of Oxford, Miss. FNC markets a high-tech system that converts traditional appraisals into electronic formats, then sends them to mortgage lender customers.
FNC processes about 400,000 appraisals a month, according to the company, and deals primarily with the 45 to 50 largest mortgage lenders in the country.
The appraisers are seeking a minimum of $25 million, plus punitive damages.
The suit alleges that FNC has "duped" thousands of appraisers into using its AppraisalPort system with assurances that their appraisal data is "secure" and that FNC "does not have access" to any report or any intention to store or re-market it. In fact, according to the suit, FNC "downloads this data ... and then markets" it, cutting appraisers out of potential additional business with no compensation.
The suit quotes Bill Rayburn, FNC's CEO, as telling an industry publication that "when an appraisal is transmitted to the lender, we are able to pop it open and suck all the data out."
In an interview, Rayburn declined to comment on the suit but said information obtained by FNC is provided by lenders after they have agreed to accept and pay for an appraiser's report. Many appraisers are eager to work with FNC, he said, because they "find that they get extra business [since] FNC furnishes their names to lenders" who want property valuations in their market areas in electronic formats.
Though the litigation centers on the plaintiffs' claim that their appraisal information is being pirated and re-marketed illegally, the larger picture is probably more relevant to homeowners. When it comes to valuing a piece of real estate, do you need trained professionals on location, or are computer analyses of available data sufficient and cost-effective?
After all, popular real estate Web sites such as Zillow.com post satellite photos of 60 million-plus houses across the country, and offer free instant estimates of each property's market value. How tough could appraising really be in the digital age? Isn't the real dispute here an updated version of the 19th-century artisans' revolts against mass industrialization, with tradition-bound appraisers now playing the role of the Luddites, fighting new technologies at every turn?
During the past five years, mortgage lenders have moved aggressively toward wider use of "automated valuation models" as low-cost substitutes or backups for traditional appraisals. Not only are automated valuations cheaper - typically under $40 - but they're a lot faster.
Traditional appraisers concede that they're under intense pricing pressure, and that automated valuations have siphoned off substantial dollars from their annual incomes. But they reject the Luddite label, arguing that public data alone could never substitute for the eyes and ears and resources of a professional appraiser.
Tom Allen of Thomas E. Allen Appraisals LLC in Tulsa, Okla., who has no involvement in the FNC litigation, says many automated valuations come up with estimates "that are not even close" because "they are missing essential information you can only get by being there."
Allen says automated valuations are "just about worthless" in markets where value patterns are complicated - some segments declining, others flat, still others rising - as in many parts of the country today.
That's because the "public" information they rely upon heavily is several months old "at least," and cannot include factors that appraisers routinely build into their own reports such as interviews with local realty agents about pricing and sales trends and Multiple Listing Service data.
Nor can automated valuations do "site analysis" - is there a noisy or noxious activity nearby or upwind and what does that do to value? What about the condition of the property?
Bottom line: Even FNC calls appraiser-collected data "the gold standard." Automated valuations can be useful starting points - although Zillow's free "zestimates" have been criticized for frequent inaccuracy by the National Community Reinvestment Coalition, among others.
But if you truly want to know what a property is worth, don't settle for less than an experienced appraiser, live and on site.