Making Sense of the Changing Landscape of Valuation: Appraisers and Data Standards

By Mark Linné | October 12, 2007

The following article is an excerpt based on a presentation made by the author at the AppraisalPort Conference in Washington, D.C. in August 2007.

Change has defined the status quo for virtually all business and organizational structures in recent years, and the real estate and appraisal industry are the focal points for changes that are ongoing within the financial services and informational service sectors of the economy. The valuation segment of real estate is the critical driver to understanding the marketplace, and how profound the changes could ultimately be. Lenders rely on collateral valuation to quantify risk and to hedge potential losses. If real estate has lagged other industries in its drive to integrate technological and data standardization, then valuation and standards within valuation space represent the final frontier.

What are the drivers that are currently impacting our profession, and how can we leverage the current realities of the market to take advantage of these trends? It is clear that data, data standards, analytics, and the industry’s search for quality are at a critical juncture that is leading us as an industry to opportunity.

The Tipping Points for Appraisal
The key to understanding the future is to focus on the key trends that are manifestly impacting the real estate marketplace and by extension, the market for valuation services. These trends can be summarized as:

• The development of standards and best practices
• General consumer awareness of valuation
• Greater access to data
• Lenders, GSEs, regulators looking for a solution that involves appraisers and valuation technology
• Fears resulting from sub-prime problems—the flight to quality
• Rejection of BPOs
• Appraisers’ changing perspective on analytics
• Scope of Work and the ability to provide alternative products

While it is beyond the scope of this article to examine all of these trends in depth, it is relevant to start with an examination of the trend that is at the heart of many of the changes that will likely impact the appraisal profession over the next five to ten years. In looking at the intersection of the various trends that are most likely to rapidly impact the industry, it becomes increasingly clear that the one macro trend that appears to hold hegemony over all others is data. Every other trend, every other major initiative, is tied to data, specifically:

• Getting the data
• Organizing the data
• Making sense of the data
• Analyzing the data
• The technology to analyze the data
• Delivering the data securely

How Data is Analyzed
We are an industry in transition, with a number of different views from the same train. The two great divisions in the appraisal industry—mass appraisers who work for assessor’s offices and fee appraisers—have dramatically different viewpoints in the analysis of data. For single property practitioners, the greatest focus has historically been individual properties, with the single greatest risk being the inability to consider the property being appraised within the greater context of the market. Despite the implicit USPAP requirement to value by considering the entirety of the market, few appraisers had the tools, training, or data to properly implement such protocols. Indeed, the most powerful analytics that most appraisers employ is still comparatively limited, including undue reliance on the 25-year-old technology represented by the HP12C. The risk that single property or fee appraisers face is the loss of a consideration of the big picture of the dynamics of the greater market. Without adequate tools to process data, appraisers are increasingly at a disadvantage in processing the vast datasets that are available. The challenge will clearly rest with properly leveraging technology effectively; for with traditional tools, how can appraisers possibly make sense of the market?

Similar problems face those who have a responsibility for mass appraisal or are involved in the development of Automated Valuation Models (AVMs). Traditional AVMs have had a much different mandate; namely, the responsibility to value most properties with sophisticated statistical techniques. The risk with this directive is losing sight of the importance of accurate individual property values. It is very easy to get caught in the statistics while having less of a concern of the importance of accurate individual property values. With mass appraisal, the concern becomes how one makes sense of the market in an automated manner without the human touch.

The challenge for valuation is how both perspectives are truly brought together; how appraisers can leverage technology, data and standardized processes to truly meet their clients’ needs in a meaningful manner, bringing a true value add to the collateral process.

Data, Data, Everywhere: The Importance of Standards
It is truly all about the data. To understand data, it is first necessary to understand the role that data standards serve as the foundation for creating a framework for using and applying data.

Why are standards so important? In a very real way, standards improve efficiency and create clarity. They also create understanding through their imposition of rules. They enable and enhance interaction. Data standards create order from chaos, and give understanding to data and information. Ultimately, they lead to a flatter world in which interaction among the various real estate players can be affected more efficiently through a commonality of process and information transfer.

Open data standards and technology innovation within the valuation and finance sectors of the real estate profession have reached a tipping point, and the drive towards wrenching the estimated $1 trillion in cost efficiencies will cause both chaos and opportunities to those who can provide a meaningful solution to the industry. Industry estimates project that the overall drive towards data and process standardization will be so significant, that the word “tectonic” has been suggested to describe the impact and scope.

The Importance of Standards
Standards for the mortgage and real estate markets continue to move forward. They represent a watershed in the greater macro economic environment, all of which is driving standardization in a broad variety of professions. Real estate is no different, representing the largest single segment of the economy in the United States, and the final frontier for data and process standards. Given their role in collateral valuation, there will be an impact on appraisers and valuation space in general. There are two major data standards efforts that have been ongoing on a national basis for several years—MISMO and OSCRE.

MISMO
The mortgage industry, an important driver in the greater real estate industry, has been working towards data standardization through MISMO, the Mortgage Industry Standards Maintenance Organization. MISMO’s primary goal since 1999 is to finalize the residential and commercial standards that will focus on an entirely electronic mortgage. It is the clients of appraisers who have been creating the impetus towards standards. Clients have been demanding more consistency, efficiency and transparency within the appraisal process. Clients have been moving in this direction because of the demands of their customers—the consumer.

OSCRE
OSCRE, the Open Standards Consortium for Real Estate, is a rapidly growing global organization that brings all of the data standards together from every sector of real estate. Appraisal is just one segment of their dictionary, with other areas including construction, government, management, and brokerage, among others. OSCRE is different than MISMO in that MISMO’s core focus is data standard specific to mortgage-related and real property reporting information, compared to OSCRE, which goes beyond data standards into business process standards.

The Future of Standards
The bottom line for standards efforts in real estate space is that standards will enable innovation. They will also be the catalyst for redefining real estate analysis. The access and movement of data will likely change lending and change the relationship between appraisers and their lender clients.

Data standards and the resulting analytics will change the appraisal paradigm. Appraisers need data sifted, analyzed, and pushed to them. Alternative information should be suggested and presented. Adjustments should be extracted from the market and offered to the appraiser. All of the essential data necessary for whole market analysis should be provided to enable a more complete understanding of the subject and its market. Ultimately, it is about putting the appraiser in control and leveraging the available data and technology to empower the appraiser and benefit his or her client. Data standards will begin the movement to more advanced analytics, and tools are being developed today that will enable appraisers more so than ever before.

Staying Ahead of the Curve
As with everything else in our lives today, there is almost too much going on with data, technology, and software to stay abreast of the changes. How does an appraiser maintain an edge in the market? How do they stay ahead of the curve? It is important to note that appraisers should not function in isolation. There are both traditional and non-traditional groups that can help leverage information and act as a clearinghouse to gather further information and pass it to members. Sharing information within a collaborative environment is perhaps the single most important way that an appraiser can understand and take advantage of the trends, the tools, and the opportunities that we will face in the future.

There are a number of ways to do this. For many, conferences such as the AppraisalPort conference or other yearly valuation conferences might prove one way of maintaining an edge. For others, monitoring magazines such as the Appraisal Journal, Collateral Vision, or Valuation Magazine might be appropriate. There are several new collaboration venues that have emerged that might also serve to benefit the interests of appraisers.

A first significant effort in this area is the Technology and Appraisal Practice Shared Interest Group (TAPSIG) by the Appraisal Institute, the most significant player in valuation space. TAPSIG has undertaken to connect Appraisal Institute members with an interest in technology and has identified two critical issues as its focal points: AVMs and standards.

TAPSIG is working to provide the first comprehensive overview that begins to address the issues of what an appraiser has to do in order to interact with more advanced valuation technology. It is attempting to eliminate many of the barriers towards constructive discourse and further, provide an opportunity for all stakeholders to work together.

Some Conclusions
The foundation for the future of appraisal and appraisal analytics is being developed now. It is up to the profession to rebuild itself to truly achieve a lasting and meaningful change in how we are perceived by the real estate industry and by others for whom we provide services. Data standards will drive more information to appraisers, and they must be ready to provide the level of analysis that the market increasingly will demand.

As an industry, appraisers must take advantage of and thrive in the environment of the future. Appraisers have an opportunity to reshape the discussion, to create a collaborative environment, and provide better services to their ultimate stakeholders—the public. The market wants appraisers to participate in this process. And finally, appraisers appear to have a place at the table.