By: Miles G. Michaud
To give an opinion of value in Massachusetts a real estate appraiser must comply with M.G.L. Ch. 112 § 173-195. Basically, the statue requires the individual to attend classes followed by an examination. By taking and passing increasingly harder classes and examinations, the appraiser can obtain more advanced licenses. For example, at the lowest end there are state-licensed appraisers; at the top end there are state-certified general appraisers. The progressive licensing allows appraisers to valuate increasingly complex properties. On the other hand, the statute indicates that each license only lasts for two years. So, all real estate appraisers are required to renew them, which requires additional education. T The renewal process for appraisers is set up this way because public policy desires opinions of value on real estate to be delivered by well-educated and qualified appraisers.
Appraisals need be accurate because buyers, sellers, and lending institutions rely on them in all types of real estate transactions. For example, a bank issuing a thirty-year mortgage to a homeowner wants to know that if the borrower defaults, their collateral will satisfy the deficit. Additionally, a seller listing their property for sale wants to know how much money they can reasonably expect for the property. High-quality valuations provide market players with accurate information. They can also safeguard novice homebuyers from overpaying or developing an inaccurate perception of their home’s fair market value.
Zillow is an online real estate platform which provides its customers with a free home valuation model that renders fair market value opinions. Zillow claims that their Zestimate tool delivers an “estimate of a home’s market value,” which touts a median error of less than three percent (3%) for on-market properties. The tool uses Zillow’s proprietary formula and compiles data from public and customer submitted sources which then renders a market value. However, the tool does not take into account private factors that are interior to the property such as finish quality or internal capital expenditures. Essentially, the model does not account for those items that cannot be seen from the outside of the property or are unavailable on public databases, such as the Multiple Listing Service.
Along with the valuation model, Zillow provides numerous disclaimers which state that their Zestimate “is not an appraisal and can’t be used in place of an appraisal.” However, they have not dissuaded prospective buyers from using them as such. For example, the disclosures themselves take some digging to find on their website.
In 2017, a group of sellers in Illinois brought an action against Zillow claiming that the Zestimate tool caused prospective buyers to be driven away because it generated an artificially low valuation of their property. The homeowners alleged that the Zestimate value of their home was up to eight-hundred thousand dollars ($800,000.00) less than the appraised value and buyers were driven away by the substantial disparity. In fact, the low Zestimate caused some of the sellers to entirely remove their property from the market. In their complaint, the homeowners sought relief under the Illinois Real Estate Appraiser Licensing Act (“IREALA”). Simply, to render an opinion of value under the act one is required be a licensed appraiser as defined by the statute. Thus because Zillow’s Zestimate tool was akin to an appraisal, the online real estate platform was in violation of the statue.
The IREALA states that “[i]t is unlawful for a person to . . . act, offer services, or advertise services . . . [to] develop a real estate appraisal, . . . practice as a real estate appraiser . . . [or] advertise as a real estate appraiser without a license issued under this Act.” Yet, the statue creates an exemption for automated valuation models (“AVM”). An AVM is a tool that uses publicly available data to derive property valuations. The court concluded that as a matter of law the homeowners could not be granted relief under the statute because a Zestimate was a AVM.
Similar to IREALA, Massachusetts has a statute that states, “[n]o person, other than a . . . real estate appraiser . . . shall assume or use that respective title or any title, designation, or abbreviation likely to create the impression of certification or licensing as a real estate appraiser . . . .” The statute also provides an exemption. Although, the exemption is not for AVM’s, but for real estate brokers. The exemption protects brokers because the price or value of real estate is inherent to conversations with their clients.
Zestimates have not yet been challenged in Massachusetts. However, because there is no exemption for AVMs in their appraisal statue, Zillow may be vulnerable to litigation. For example, the homeowners in Illinois would not have suffered loss but for the inaccurate Zestimate valuation. Since most homebuyers today search for properties online, Zestimates are the only means by which they valuate and compare properties. Thus Zestimates have created an impression of value on the consumer in the same way does an appraisal. This is a problem because sometimes the tool is inaccurate. First, the tool readily omits internal property factors that may have a large effect on valuation. Second, Zestimates circumvent the public policy behind appraisals because they are rendered on all property types and created by a computer algorithm rather than a well-qualified and practiced appraiser. However accurate and convenient Zestimates are to consumers they have certainly caused some recognizable loss.
Student Bio: Miles is a second-year law student at Suffolk University Law School. He is a staff writer on the Journal of High Technology Law and member of the Real Estate/Trust & Estates Association. Miles received a Bachelor of Arts from Bates College in Lewiston, Maine.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
