Bright MLS Urges Transparency in AVMs as Regulators Consider New Rules

The appraisal, either from the buyer or seller’s standpoint, is a point in a real estate transaction full of pitfalls. Technical complexities, consumer expectations, personal biases and tight timing all combine to potentially sink an otherwise agreeable sale. While there are already plenty of regulations around appraisals, the current model is still criticized for its subjectivity and propensity to create and compound racial biases.

As a federal interagency panel begins considering new rules around how appraisals are appealed and supplemented, Bright MLS is highlighting the role of one particular technology—automated valuation models, or AVMs—in both contributing and potentially solving some of these issues.

“The increase in real estate technology and the availability of real estate data have increased consumers’ expectations,” Bright wrote in a letter to the federal panel. “The current, consumer-oriented, online tools are flawed.”

Consumer-facing AVMs like Zillow’s “Zestimate,” which offer a rough, instant evaluation of property’s current worth, can inspire consumers to inaccurately believe they were given an incorrect appraisal, Bright argued. At the same time, an AVM that is transparent in its methodology and supplemented by a human professional could become an important part of the appraisal process.

In the proposed rules, the government does not mention AVMs, and most of the other comments from real estate and appraiser groups focused on more traditional ways to bolster appraisals—second opinions, education for real estate agents or consumers and more standardized guidance across federal agencies.

Any finalized rules would be considered guidance, and would not “have the force and effect of law and (would) not impose any new requirements on supervised institutions,” according to the guidelines the agencies put out.

Speaking to RISMedia, Bright MLS Chief Marketing Officer Amit Kulkarni says that this is a perfect time to talk about the role of AVMs, and how to improve them both in this capacity and more broadly as a tool across all of housing.

“I think making sure there’s transparency around the pricing of properties, it just helps everybody. It’s so critical to having a healthy, equitable housing market in the United States,” he said.

Kulkarni is clear—as is Bright’s letter to the regulators—that the company concurs with other industry groups that a human element is needed at all stages of the appraisal process. But as federal agencies and lenders begin incorporating more technology into their processes and guidelines, Kulkarni and Bright are urging a stronger, more critical assessment of the technology.

“I think the onus is on folks like Bright to say that transparency in online valuations is important. Our agents work with consumers every day, and the business we do is based on accuracy and trust,” Kulkarni explains.

But these tools have become a less trendy topic over the last couple years, overshadowed by AI and other recent proptech innovations. AVMs are also key in the execution of an iBuying business, and the struggles within that sector may have also contributed to waning interest from real estate insiders.

A road less traveled

The impact of AVMs in the long run could prove much larger than many of these other trendy topics, however, particularly in the realm of appraisals. Back in the summer, a separate but overlapping selection of federal agencies proposed new rules specifically governing AVMs, with a similar aim to what Bright is advocating for—ensuring that these tools are accurate and transparent.

And these rules, which were mandated by Congress, will be binding when finalized, applying to lenders when “used…to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.” AVMs used by appraisers are specifically exempted, however.

Kulkarni emphasizes the urgency of having quality control on AVMs.

“There’s material financial decisions being made now about how property is valued by agencies that underwrite mortgages,” he says.

While both proposed federal rules are more focused on the structural, behind-the-scenes functions of AVMs, Kulkarni turns the spotlight on consumers, and what they are (or aren’t) seeing out of the tools that evaluate their properties.

“If you’re going to give a value for somebody’s most valuable asset, I think some transparency around how you’re deriving that value is critical,” Kulkarni says. “If there are reasons for these properties to be valued the way that they are, just share those reasons so everybody understands.”

Bright is itself involved in the creation of a consumer-facing AVM for its portal, Nestfully. But Kulkarni says that Bright’s interest in pushing for AVM transparency and bringing attention to the issue goes beyond this, and says he is surprised that more real estate organizations aren’t also reaching out to federal agencies on the issue.

“It’s just good for everybody. If everybody can see why those AVMs are pricing a home the way it is, I think it’s a win for consumers,” he says.

Consumer-facing portals like Zillow and realtor.com® have heavily featured their AVMs as often one of the first numbers a person sees when pulling up a listing on their website or app. There is little explanation for the number on the page, but some companies have attempted to provide details on how their calculations are done. 

On a separate page of its website, Zillow explains that the Zestimate “is based on complex and proprietary algorithms that can incorporate millions of data points,” including home characteristics like square footage, listing price, tax assessments and even market trends.

A letter authored by Ken Wingert—Zillow’s director of Government Relations—and sent to regulators noted that the Zestimate “is not authorized for use as an AVM for credit decisions.”

Wingert went on to mostly laud the proposed ruling, emphasizing that any regulation of AVMs needed to be “flexible” to allow the fast-evolving field to innovate without undue restriction.

In Bright’s letter commenting on the proposed appraisal guidelines, the MLS cautioned that using current commercial AVMs for reassessing home values would be “problematic” due to a lack of transparency in how those values are calculated, and claiming that consumers don’t have any path to update their AVMs if they think the number is inaccurate (Zillow has a tool to update “home facts” on its website, and also urges consumers to contact their tax assessor to rectify inaccuracies).

As more lenders and government agencies begin to embrace AVMs, Bright says the transparency of any individual tool needs to be part of the consideration if it will be used for important functions. They should also include “a real estate professional’s input.”

Kulkarni goes further, saying that AVMs need human support always. He uses an example of identical houses, where one owner had “thousands of cats” living with them, while the other didn’t.

That would never be tracked by an AVM, but would almost certainly have a big effect on the value of the cat house—and would be immediately obvious to someone who visited both properties.

But that doesn’t mean AVMs can’t be improved for the purpose of appraisals, Kulkarni continues, and real estate professionals should be very invested in making sure there is quality and transparency going forward.

“The closer you get to those AVMs actually having a material impact on somebody’s transaction, I think the transparency becomes even more critical than it is today,” Kulkarni says.