When is an AVM controversial? When it’s free and named Zillow.

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There has been a lot of talk in the RE blogosphere about the pros and cons of Zillow and its offering in the current real estate space. There are people who hate the idea and those that are in full support of a more open information society. Zillow strikes a nerve in the real estate space because it takes some of the most protected sources of information in the industry: listing information and property value information and democratizes it. This democratization by rule has to destroy pieces of the competitive advantage that the holders of previously private information once held.

Let’s start with the listing information. The Realtors’ most coveted asset is the home listing information. Previously this information was only available through Realtors and their access to the MLS. This made Realtors (and still makes them today) the monopolistic gate keepers of information that is material to selling a home. (If you don’t know which homes are for sale and the details of the asking price, etc. you cannot play in the home sales game. By keeping this information behind the Realtor’s passwords and proprietary system Realtors have monopolized home sales.)

Now Zillow comes along and makes the same information free and available to anyone; it also lets anyone play the role of Realtor by posting a home as for sale on the site. This has made many Realtor’s disgruntled, and I can’t blame them. No one likes seeing their golden goose taken out from under their arms.

As Greg Swann at Bloodhound Blog says:

The interesting question I asked then is even more interesting now:

How much future is there in a job that millions of very smart people are willing to do for free?

This is the dilemma that Realtors can see coming quickly in to focus. Web sites are popping up all over the place that are aggregating and presenting sales information in ways far superior to the current offering. They take the locks off of the gates to the listing information and therefore democratize information that once was a competitive advantage to the Realtors who held the keys.

Greg Swann further correctly argues that industry opponents to sites such as Zillow make hollow arguments from a position of trying to keep change from sweeping away their competitive advantage.

The Babbitts who wrote the real estate laws did so in the hope of creating a cartel, with correspondingly higher fees, by forbidding non-licensees from listing and selling real estate for compensation.

This is a criminal conspiracy against the consumer, the use of the coercive power of the state â?? guns and prisons â?? to forbid consumers and vendors from trading freely by their own free choices.

Not only does this new model challenge Realtors by providing any consumer a skeleton key to the MLS cash cow it also unlocks another part of the puzzle – the home value. The home value vault is unlocked via the Zestimate.

To start we need to understand what the Zestimate is: The Zestimate is simply an automated valuation model that Zillow has developed to calculate your home’s estimated worth based on previous home sales. The Arizona Board of Appraisal wants Zillow to stop offering Zestimates because they (wrongly) conclude the the Zestimates are appraisals. This argument is laughable and is a clear example of an industry trade association feeling threatened by new technology.

The reason it’s laughable is that the use of Automated Valuation Models (AVMs) is widely accepted across the industry as one tool available to value property. For example, in my company we use AVMs to check any appraisals on loans that have over a 90% loan to value ratio. If the AVM comes in significantly lower than the field appraisal we have the ability to order a drive-by appraisal or desk review of the appraisal to make sure that the value of the home is properly documented. Other banks will take AVM values for some of their loan products without the need of an actual appraisal.

This common use of AVMs makes the contention that Zestimates are appraisals seem almost pathetic. What is the difference between Zestimates and other AVMs? Well opponents of Zillow will say accuracy – but there is a more important difference: Zestimates are free and available to the public. See, AVMs had a similar quality to MLS listings. Only lenders had the ability to pull AVMs on properties, and they had to pay for the privilege to do so. They weren’t cheap either, anywhere from $20 to $5 per AVM. This made the impact of AVMs minor in terms of being used as adjunct services to an appraisal. Appraisers don’t get ruffled at lenders using AVMs , because they were limited in use and didn’t represent a threat to cut in to their business.

But now Zestimates present free automated valuation models to anyone who wants one. And this can be seen as a clear step in a direction that appraisers don’t want to see taken. What happens to the value of an appraisal when most of the heavy lifting is completed for free by computers? How much will I pay for an appraisal when I can get AVMs on 20 homes in about 30 seconds free of charge? It’s a scary question to ask if you are an appraiser.

While the accuracy of such Zestimates should rightly be questioned and refined regularly to ensure an accurate value as possible; they should not be made illegal under the guise of being an appraisal simply to stop the democratization of previously closely held information.

Those that refuse to embrace the Zillow concept using its flaws (and there are many) as grounds to denounce the democratization of information put them on the wrong side of the pending sea change. It puts them in a zero sum game against change in the industry. They will scratch and claw to protect the status quo, because the status quo protects their pocket books. Every so often there is a paradigm shift in industries which completely rewrites the way business is done. Those that embrace the shift and leverage it stand a far better chance than those that deride it for being ~~unfair~~ different.

If you are a consumer I highly recommend that if any one tells you to ignore Zillow, Trulia, Google Base or other similar tools that you choose instead to ignore them. They are not acting in your best interest, they are acting in their interest in protecting the status quo. If you use Zillow and others (and I hope you do) I hope it encourages you to take a more proactive approach to your real estate transactions. Your increased understanding, inquisitiveness and interest can only benefit you in the long run. While the sites mentioned above are not perfect, they can help encourage meaningful discourse between you and a professional Realtor. Do not let the dinosaurs talk you out of learning as much as possible under the guise of "consumer protection." They are just trying to keep their day jobs.