Real Estate Appraisals and Copyrighting Facts
posted by Eric Goldman
As reported by the Washington Post, an interesting intellectual property dispute is brewing in the real estate appraisal business. On one side are traditional real estate appraisers, who charge several hundred dollars for an appraisal that typically involves an onsite inspection. On the other side are online appraisal services that, relying on their databases and some algorithms, offer lenders an instantaneous appraisal at a small fraction of the cost.
The traditional appraisers are upset because the online services may be extracting information from their appraisals and using that information to improve their databases (and thus the accuracy of their online appraisals). Taken to its logical extreme, as online appraisers get better databases by capturing data from the traditional appraisers’ inspections, traditional appraisers will destroy their own industry.
Not surprisingly, the traditional appraisers are looking for ways to preserve their market niche, and intellectual property doctrines can be great tools to hinder marketplace competition. So the WaPo article mentions that the traditional appraisers are considering their copyrights in their appraisals. After all, traditional appraisers put in their sweat of the brow, so shouldn’t they be rewarded? (The article provides some good quotes reflecting this paradigm).
We know how this argument goes. Copyright doesn’t protect the labor invested to generate facts. Appraisers probably can copyright the report in its entirety, and they may even be able to copyright their specific price estimate (see, e.g., CDN v. Kapes), but there should be no way for appraisers or anyone else to obtain copyright protection for a home’s basic specifications (e.g., square footage, age, number of rooms). As a result, copyright law does not provide appraisers with any effective way to restrict online databases from extracting facts from their reports. Thus, if traditional appraisers are looking for a tool to restrict competition from online factual databases, copyright law may not be very helpful.
Even if copyright law isn’t availing, traditional appraisers have other tools at their disposal, including:
* providing services that online database providers can’t, such as the increased accuracy associated with the onsite inspections.
* restricting access to the appraisals. Right now, it appears that the biggest online database service gets some data by providing an online tool for appraisers to submit their reports to lenders—thus, allowing them to extract facts from appraisals that cross the network. Traditional appraisers could try to discourage lenders from using this delivery service, thereby making it harder or impossible for the online service to see the appraisals. Alternatively, if they keep using this delivery service, traditional appraisers could negotiate a contract that limits the service’s ability to extract facts. (The contract is probably some standardized click-through agreement, but it’s negotiable in theory).
* if traditional appraisers really think they are losing money, they could just increase their fees to lenders to cover the lost value (good luck!).
But despite these options, the long-term prognosis may not be very good. A good appraisal always will need an onsite inspection, but just about every other aspect of the appraisal business can be replicated or eliminated through online mechanisms. Thus, it could be that the Internet is disintermediating the appraisal industry, and no amount of rear-guard intellectual property saber-rattling will change that fact.
January 28, 2007 at 11:59 pm
Posted in: Intellectual Property, Property Law
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Responses (7)
Frank - January 29, 2007 at 10:22 am
Justin Hughes gave a terrific presentation on this topic at the Berkeley conference in August 2006. He has some interesting philosophical takes on the process by which an opinion about something’s value may well become a fact.
Barrett - January 29, 2007 at 10:33 am
“restricting access to the appraisals.”
“if traditional appraisers really think they are losing money, they could just increase their fees to lenders to cover the lost value (good luck!).”
This is not an option. Most major lenders have felt pressure to use a middleman (that orders and manages the appraisal for them) to act as a chinese wall. These middlemen also sell data. But this has caused more problems than it solves. When I worked with Major Lenders I never felt pressure to inflate values. This type of pressure is usuallly felt from Brokers, who do not use middlemen.
These middlemen are Appraisal Management Companies(AMC). There are not many of them so there has been a quasi-consollidation. Instead of having 50 major lenders as potential clients, appraisers have to deal with 3 or 4 AMCs. This also creates a major shift in bargaining power.
Residential appraisals are now looked at as commodities. The only factor AMCs look at is price. If they have to choose between Joe, who has 20 years of experience and charges 350, or Bob, who just got his license but charges 300, they choose Bob everytime. The result is fee which have been cut by more than 50% in some instances. Why do they do this? Its in there best interests. The cost/benefit is in their favor. Even if the inexperienced appraiser screws up, they have a home as collateral and whatever the difference is the appraiser’s Insurance will pick up.
These AMCs charge less but get more. They now extract the data from the reports to use in their AVMs and other products, which directly compete with appraisers.
You see the government has put pressure on major lenders to make sure there is no pressure put on appraisers. This was done to increase the quality of appraisals. But the consequence has been lenders using AMCs which in turn has decreased the quality of appraisals, decreased appraisal fees, and is pushing appraisers out of business.
Sorry to vent, but I am an appraiser (and a law student).
Eric Goldman - January 29, 2007 at 12:22 pm
Barrett, thanks for the perspectives. There’s nothing like the voice of an insider. Based on your description, maybe it’s not disintermediation but reintermediation by AMCs. If I read your description correctly, the AMCs consolidated power after lenders outsourced their appraisal requirements in response to previous efforts by appraisers to seek government protectionism? Sounds like the industry’s future isn’t promising… Eric.
Shane - January 29, 2007 at 5:06 pm
This is a subject that I am surprised that anyone outside to the appraisal industry has picked up on. The issue of data has been around in the appraisal industry for many years. If you contact some of the older appraisers they will be able to refer you to a time when the Appraisal Institute and its appraiser members had some relationship problems over a software that gathered data and later sold it to avm’s. That has seemed to die down over the last few years but the data issue has once again came up. The one driving issue is the amount of business available in the market right now and so now becomes a competing for business subject.
The subject just scratches the surface, but I am glad to see that industry issues are starting to be taken notice of outside to the appraisal industry. First it should be understood what an appraisal management company is and how they came about, how many are owned by major lenders and also the relationship of the lender to the appraiser, last but not least the relationship of the lending industry to the appraisal industry, as you can see the issue goes deeper then just a copyright.
Issues of quality and consumer protection are at play here too, while they are a little more detailed issues. The fact that the avm’s are using appraisal data is because the data that is generated by online methods is not as accurate in many cases and is hard to gather from local government data harvesters such as assessors.
So now is to see what the next installment will be in this saga.
Barrett - January 29, 2007 at 6:51 pm
“Sounds like the industry’s future isn’t promising”
Hence why I am in law school.
The business is in flux and the future is not clear. In many industries (e.g., stockbrokers, insurance), technology has brought more value to end users and has gotten rid of the middle man. In this case, the middleman is shoplifting the data, charging more, and paying less. So the added value is not being passed on to the consumer/borrower. If it was, then perhaps there would be some social benefit. But the AMCs and banks are just fattening their pockets. I am all for technology and I believe in the utility of AVMs. My problem is with the lack of bargaining power of the typical appraiser; and the lack of transparency from the consumer’s end. The consumer gets charged $600 for an appraisal; the appraiser gets paid $200; the AMC takes its cut; and the bank takes the rest.
Mike Madison - January 31, 2007 at 8:31 pm
Barrett’s comments indirectly confirm what I learned years ago in financial services litigation (this was following the S&L crisis of the 1980s): One, the purpose of the appraisal isn’t really to protect the borrower. The primary purpose of the appraisal is to protect the lender. Consumer protection arises indirectly, because proper underwriting by lenders protects the public treasury from having to bail out over-extended lenders. Two, the lender cares partly that the appraisal is accurate (up to some reasonable point), and it cares partly that the appraisal comes certified by someone whose authority is recognized in the banking community. But if there are inefficiencies to be squeezed out of the system via dis- and re-intermediation and technology, it’s plausible to me that the banks and their agents, not consumers or appraisers themselves, should be the beneficiaries.
Does the new order offer a more efficient method of satisfying the underlying interests? AMCs seem to satisfy the certification interest. As to the quality interest, it’s not clear whether appraisal quality is suffering. If not, I don’t see a policy problem, and as Eric notes, the IP claims are hindering marketplace competition. If so, then the right response may be intervention by bank regulators. IP claims are often imperfect spear-carriers for quality arguments, and copyright law is especially imperfect.
Iso Belgesi - April 16, 2011 at 8:59 pm
Interesting point, i’ve never think about it like that..
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