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Must Zillow, the Online Home Price Estimator, Be Licensed as a Real Estate Appraiser in Arizona?
Why The State Bill Making Clear that the Answer is No Should Become Law


Wednesday, May. 09, 2007

In July and November 2006, the Arizona Board of Appraisal issued two cease-and-desist letters to the company that operates the popular real estate website Zillow, saying that Zillow needs an appraiser license to offer its "Zestimates" in Arizona. This matter recently was turned over to the Arizona Attorney General's Office. In the worst-case scenario, the state could file criminal charges against the company for defying its cease-and-desist order.

Currently, the Arizona Senate is considering a bill - already approved by the House - that would make it clear that the outputs of Zillow's automated valuation models (AVM) are not, in fact, real estate appraisals, and as such are not subject to regulation in Arizona. Indeed, as Zillow points out, the national Appraisal Standards Board has already issued an advisory opinion, which states that "[th]e output of an AVM is not, by itself, an appraisal."

In this column, I outline the basis for the Arizona Board's claims, and explain why I believe they are ill-founded, serving only to stifle competition and inhibit consumer access to valuable information.

For these reasons, I strongly believe that the bill currently pending in the Arizona Senate, which would protect Zillow, should be enacted into law.

How Makes Clear Its Zestimates are Not to be Confused with Appraisals is one of the most popular real estate sites on the Internet. It provides home valuations for millions of homes and properties throughout the United States, called "Zestimates." These valuations are derived by a computer program that sifts through property records and recent sale figures. Consumers can simply click on a property and a "Zestimate" will appear,

The Zillow website is very clear that a Zestimate is not an appraisal. It plainly states that " The Zestimate (pronounced ZEST-ti-met, rhymes with estimate) home valuation is Zillow's estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home's value." Zillow also notes that "[w]e encourage buyers, sellers, and homeowners to supplement Zillow's information by doing other research," indicating that consumers should not rely solely on the Zestimate.

By making clear the Zestimate's limitations, Zillow conveys the message to consumers that its should be use to supplement - not replace - the work of traditional appraisers and real estate agents. The website makes clear that the Zestimate provides a starting point with which buyer and sellers can educate themselves about a particular housing market - not the endpoint that should determine their ultimate decisions.

Why the Stakes for Zillow Are High

Zestimates are the reason consumers visit Zillow's Website. According to Zillow, its AVM is used to provide Zestimates on more than "50 million homes nationwide and is used tens of millions of times each month." Thus, if Arizona's Board of Appraisal wins this battle, other states may also try and regulate Zillow as an appraisal service.

But will other states follow Arizona's lead?

Twenty-five states including Texas, Pennsylvania, Michigan, and New Jersey, have appraiser licensing laws that are similar to Arizona's. Real estate brokers and professional appraisers have differing opinions a sto whether Zillow's presence is a good or bad thing for local real estate markets.

The Arizona Board of Appraisals' Argument, and Its Posssible Motivation

In its communication with Zillow, the Arizona Board of Appraisal made the following argument to support its view that Zestimates are appraisals: "The Uniform Standards of Professional Appraisal Practice define "appraisal" as "an opinion of value," and a Zestimate "is an opinion of value."

But this argument is unpersuasive. An appraisal is commonly understood to involve more specific analysis of a house and of comparable properties sold in a neighborhood than a Zestimate provides.

Why is the Arizona Board pursuing Zillow? It may be that local appraisers are worried that they will lose business if consumers rely too heavily on Zestimates. If so, this motivation is anti-competitive - and the Board should not stifle competition by trying to close Zillow out of the Arizona marketplace. Zillow's estimates are a valuable pro-consumer tool, allowing consumers to make more informed decisions in today's marketplace.

The Current Statute, as Interpreted by the Arizona Board, May Be Unconstitutional

As UCLA law professor Eugene Volokh noted on his blog, the statute as interpreted by the Arizona Board may be overly broad and unconstitutional. Requiring a license to give an opinion about a property's value would mean that anytime someone made a statement in writing (for example, in a magazine or a newspaper) about the value of a property, the writer would be acting as an appraiser, and could be punished for offering an opinion without a license to do so. That raises clear First Amendment problems.

In the end, however, the best result will be if this issue never gets into the courts - and is resolve by the Arizona legislature in favor of Zillow.

The Arizona Senate should adopt the pending amendment so that Arizona consumers can keep viewing Zestimates and educating themselves about the real estate market.

Anita Ramasastry is an Associate Professor of Law at the University of Washington School of Law in Seattle and a Director of the Shidler Center for Law, Commerce & Technology. She has previously written on business law, cyberlaw, computer data security issues, and other legal issues for this site, which contains an archive of her columns.

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