The Zaio Experiment

By Terrie Petree

 

Nicholas Bolving earned a master’s degree in real estate and construction in his native Sweden before coming to the United States. On a sunny afternoon in February he walks slowly down Devon Court in the Mission Bay neighborhood of San Diego, California. Devon Court is not a street. It’s a cement lane about the width of a city sidewalk. On either side of the lane are beachfront residences that face each other and are steps away from the Pacific Ocean. The houses on Devon Court are decidedly west coast in their décor, and most of them have well-kept lawns complete with tall trees and flowering shrubs. The trees and shrubs make Bolving’s job more difficult. He stops in front of 801 Devon Court and takes a picture of the house. He holds his right hand up to shield the camera lens from the sun. Then, he holds the camera up to his mouth and speaks into an embedded microphone, “801 Devon Court.” So it goes for every house on Devon Court. He takes a picture, records the address in his digital camera/voice recorder, and moves on to the next house.

 

It’s mid-afternoon and there are few people around to watch this young, blonde man taking pictures of every residential property in the neighborhood until he turns the corner to begin photographing San Gabriel Place. San Gabriel Place is a small beachfront lane just like Devon Court, but it’s not as unpopulated at this time of day. The mailman delivers the mail and watches Bolving. A woman in a wide-brimmed hat is gardening in front of her house. She eyes Bolving for a few moments, and then puts down her trowel and walks toward him stopping just on her side of the low brick wall that separates the sidewalk from the lawn. Bolving is quick to respond.

 

“Hello. Good afternoon. I am Nicholas. I am taking pictures for Zaio,” he says, and hands the woman in the wide-brimmed hat a brochure that he has taken from his shoulder bag. Bolving explains that Zaio is photographing the houses in her neighborhood from the street in order to form an appraisal database. The woman in the wide-brimmed hat is suspicious. It is unclear whether she is put off by the Orwellian implications of the Zaio project or by the sudden appearance of the young, camera-wielding Swedish man on her quiet lane. She reads the brochure while Bolving takes a picture of the house across from hers.

 

“No,” she says, “you’ll have to come back when the owner is home.”

 

Bolving puts the camera to his mouth and says, “914 San Gabriel Place. No picture.” He moves on.

 

Later he explains that a quick response is the key to avoiding conflict. If anyone would know how to avoid conflict with property owners, it is Bolving. In late March, he had been a Zaio photographer for six months and had taken between 30,000 to 40,000 photographs. He is one of many photographers who are painstakingly taking pictures as part of Zaio’s ambitious experiment; the goal is to photograph, record, store and update data on every residential property in the metropolitan United States. Again, that’s every residential property in the metropolitan United States. Once the photographs have been taken, Zaio delivers them to appraisers who are appraising each and every residential property. The appraisals are actually dubbed “pre-appraisals” by Zaio and are defined as “an instant, high-quality appraisal, not influenced by an existing transaction value.” Essentially, it is a drive-by or 2055 exterior appraisal, but that doesn’t make the undertaking any less ambitious.

 

Zone Appraisal and Imaging Operations (Zaio) was founded in 1999 by Brad Stinson. Before founding Zaio, Stinson spent four years overseeing a similar project in Canada that involved the mass photography of the residences in sixty-five Canadian cities and towns totaling 1.7 million photographic images. Although he founded the company, Stinson currently works as the vice president of business development. Thomas Inserra has been the president and CEO of Zaio since July of 2006. In addition to Inserra and Stinson, the company is manned by a roster that reads like a veritable “Who’s Who in the Appraisal Industry.” Big names are being drawn into the company at a rapid pace. Inserra himself was the national chief appraiser for the Federal Deposit Insurance Corporation (FDIC), and after being named CEO of Zaio, he has welcomed other well-known’s like John Ross, former CEO of the Appraisal Institute, and Doug Vincent, formerly the executive vice president and chief collateral officer with Countrywide Bank.

 

Industry giants. Millions of photographs. A “pre-appraisal” for every residence. Zaio’s ambitions don’t stop there; the company has created a media whirlwind. Between January of 2006 and the end of the first quarter of 2007, Valuation Review, the online and print news source, mentioned or headlined Zaio in forty-six articles. That’s 3.1 Zaio-related news pieces per month not including advertisements. The majority of the Valuation Review articles chart the progress of Zaio’s accelerating growth and its acquisition of new employees. However, not all of the media coverage has been positive. On February 26, 2007, the Arizona Daily Star published an article entitled “Huge Database aims to include photo of every Tucson house.” Much like the San Diego woman in the wide-brimmed hat, the article featured Tucson resident Jo Ann Larsen who stopped a Zaio photographer from including her home in the massive database. “I know it’s legal, but I don’t think they should be able to put it on a Web site and make money off it without your permission. I get enough junk on a daily basis without this. I don’t want any easier access into my life by anybody,” Larsen told the Arizona Daily Star. On January 26, 2007, the SpokesmanReview.com, reported that Spokane, Washington was Zaio’s original test market. The article explained that over the course of four years Zaio photographed 100,000 Spokane properties before rolling out the program in other cities across the United States. One of the article’s sources, Tony Higley, president of Certified Appraisal Inc, told the SpokesmanReview.com that “A half-dozen lenders now accept Zaio appraisals.” A “half dozen” means that after four years and 100,000 properties, only six local lenders were accepting the Zaio pre-appraisal in January of this year.

 

Mr. Higley’s comment inevitably begs the question: Amid the well-publicized and rapidly-expanding growth of Zaio, what happens to the average appraiser? Zaio’s Web site somewhat paradoxically states that “Zaio is restoring the competitiveness and independence of appraisers who are banding together to inspect and appraise virtually every home in America.” For an initial investment of $9,000, the average appraiser can buy in and therefore garner the restored “competitiveness and independence” proffered on Zaio’s Web site. $9,000 buys the rights to photograph and pre-appraise one Zaio zone. A zone is usually the portion of a metropolitan area that is covered by one zip code. However, a city’s suburban and outlying areas may be sparsely populated enough that a Zaio zone may include multiple zip codes.

 

San Diego appraiser, Kevin Allin, bought fourteen zones in September of 2006 at a discounted rate of $8,000 per zone. “Both my partners were in Hawaii when I went to the meeting, so I had to make the decision without them,” said Allin of his $112,000 investment in Zaio zones. For Allin, the size of the investment was outweighed by what he considers the value of the final product. “I feel like it’s a product that appraisers have some control over unlike AVM’s. I don’t know if they [other appraisers] will be out of business, but they will definitely miss out on not being able to offer it as a product,” Allin said. However, Allin, and other San Diego appraisers who invested in Zaio zones, are discovering that what they hope will someday be a lucrative final product is not yet readily available.

 

Sara Schwarzentraub bought two zones that cover all of La Mesa, California in September of 2006. In November she was “getting all the equipment together and waiting to get photos from Zaio.” In December, Schwarzentraub was still waiting. In January and February of 2007, Schwarzentraub still waited. In early February, Schwarzentraub said, “We’ve kind of been flopping around not knowing what to do. It’s time to take the bull by the horns on this thing,” of her Zaio experience. Allin was waiting on Zaio, too. They weren’t just waiting on photos; Nicholas Bolving and the other Zaio photographers were taking pictures of San Diego residences as quickly as they could. Schwarzentraub, Allin, and others were also waiting on the arrival of the mass appraisal software and the Pocket PC application that would allow them to view and rate, from the curb, all properties for which the appraisers have purchased “exclusive geographic rights.” They were also waiting to be able to download the public record information that Zaio has to negotiate and buy in order to round out the complete suite of data, software and hardware that appraisers are to be supplied with as part of their zone purchase. “Zaio is on an aggressive growth track, so it’s a little frustrating because they aren’t as in touch with zone owners,” Allin said in February, “We want to see a return on our investment.”

 

In March the software had arrived and the photos were completed, but Schwarzentraub was still waiting on the public record download. “I was actually on vacation last week,” Schwarzentraub said at the end of March, “but they [Zaio] said I should have everything by the beginning of April.” If all goes according to plan, eight months after she purchased two zones, Schwarzentraub will have all the tools necessary to begin the Zaio “pre-appraisal” process. The “pre-appraisal” process for one zone is estimated to take about one month to complete. If that holds true, Schwarzentraub can expect to be finished “pre-appraising” her Zaio zones just short of one year after she purchased them.

 

But, once all the initial work is finished, when can Schwarzentraub, Allin and others begin to see a return on their investment? According to “Creative Solutions Needed! The Changing Appraisal Market,” a mortgage industry discussion paper written by Victoria Cassens Zillioux and published by Strategic Development Worldwide, “a typical appraiser might be able to inspect and appraise about 500 properties per year.” The Zaio Web site says, “We believe it is reasonable to expect each zone to generate twenty appraisal reports per month, or 240 per year.” Although it is uncertain how Zaio arrived at the estimated 240 appraisal reports per month, the assertion is that the demand for and use of Zaio appraisals could generate almost 50% of an appraiser’s business. Zaio plans to charge between $200 to $300 for each exterior appraisal report. The zone appraiser earns 44% of that fee. In other words, Zaio’s best case scenario is that a zone appraiser could earn up to $132 per exterior appraisal report reaching a total of $31,600 annually if twenty appraisal reports are purchased each month every year.

 

Many of the banks and lenders in one of the zones that Kevin Allin purchased have not yet heard of Zaio, and they don’t consider drive by or 2055 appraisals to be a significant part of their business. Washington Mutual, CitiBank and Bank of America all have branches on the same street in Pacific Beach, California where Allin’s appraisal office is located. This street is also a major thoroughfare in one of the zones that Allin owns. At all three offices, bank employees in the home loan departments had never heard of Zaio.

 

When asked under what circumstances CitiBank uses drive by appraisals, Frank A. Rozsnyoi, a personal banker in CitiBank’s Pacific Beach branch said, “Anything over $250,000 must be a full appraisal with full interior and photos,” In Pacific Beach, a house worth less than $250,000 is difficult to come by; virtually all of the houses are worth “$750,000 to $2,000,000 and those are single family homes,” Rozsnyoi said. Within this “zone,” CitiBank has very little use for a drive by appraisal.

 

Mindee Kissinger is a licensed financial representative and a licensed insurance agent for one of Washington Mutual’s Pacific Beach branches. “We never use them [drive by appraisals] to be honest, but that’s because our appraisals are handled by LSI and eAppraiseIT. They use them if it’s a low loan-to-value or if it’s a slam dunk loan,” Kissinger said.

 

Mark Smith is the San Diego branch manager for Accredited Home Lenders, one of the nation’s largest non-prime mortgage specialists. He had never heard of Zaio before the day in late March when he took a look at their Web site. “In this market, I honestly can’t see people using drive by’s like that,” he said. His company doesn’t use many drive by’s. “Not even one out of ten. Maybe one out of fifty,” he said. He also pointed out that a standard drive by “is not going to be more than $150 to $200,” compared to the $200 to $300 that Zaio plans to charge for its drive by or “pre-appraisal.”

 

Mark Smith’s brother, Jason Smith, is also in the real estate industry. Jason Smith has been a broker in Santa Ana, California for five years and has done “thousands of residential loans.” His self-owned company doesn’t use drive by’s either. “In a tightening market, lenders are hesitant to lend without a full appraisal,” he said. “I don’t know of any lenders who use drive by’s.” Jason Smith is also concerned about the quality and upkeep of the photographs that will come with the Zaio “pre-appraisal.” “I doubt that a lender would want a drive by that uses an old photograph. There could be roof damage or an addition,” he said. Although Zaio does require its zone owners to update the property data for the entire zone once a month, Smith has a hard time believing they would be able to update photographs at the same pace. “I think drive by appraisals are a corner of the market that doesn’t even exist,” Smith said.

 

In Spokane, Zaio’s test city, the real estate market is a little different from the market in San Diego. Property values are not as high and the Zaio “pre-appraisal” seems to have more of a place. Todd Powell is the CEO of the Spokane Firefighters Credit Union. Powell has worked very closely with appraiser Michael Hartman for nearly ten years. When Hartman bought Zaio zones in the Spokane area, Powell was pleased with the product. “We use it for our valuation. What we get out of the system is a full-blown appraisal,” Powell said. He also added that, “There are occasions when we’ll say ‘this value doesn’t check out’ and order a complete appraisal,” but overall, Powell is happy with the Zaio “pre-appraisal.”

 

Arizona is not Zaio’s official test market, but it is the home of Zaio CEO Thomas Inserra. Inserra owns thirty-five zones in the Phoenix, Mesa and Scotsdale areas. In February Zaio announced that the entire city of Mesa (population 500,000) has been “pre-appraised” and that the Zaio appraisals are now available to lenders and brokers. Daniel Beaugy is the manager of the Scotsdale, Arizona branch of Federal Mortgage Funding. Although Scotsdale and Mesa are less than fifteen miles apart and both are suburbs of Phoenix, Beaugy had never heard of the Zaio “pre-appraisal.” “If it’s not a full appraisal, it’s no good. A drive by is not enough for a lender especially in today’s market,” Beaugy said. Beaugy estimates that drive by’s are applicable to about 1% of his business and that he pays between $100 and $150 for drive by appraisals.

 

When asked about the number of lenders and brokers who don’t see the need for a drive by appraisal in today’s market, Inserra remains confident in the Zaio product. “Our appraisers are equipped with photographs and all the data and they carry it with them at all times in their handheld devices; the Zaio appraiser already has 90 to 95% of the interior appraisal finished,” Inserra said. If a lender or broker needs more than an exterior appraisal, they can easily upgrade to an interior appraisal because “all of the market analysis, the comps, listings, county record data, and sales history is already completed before they even go inside the property,” Inserra said.

 

Inserra is also confident about the $200 to $300 price tag on Zaio’s “pre-appraisal.” “We do have a standard retail price, but if they’re a lender we’re going to negotiate a contract with them that’s in keeping with what they are accustomed to paying. We have a very flexible pricing program based on the volume of their orders. The more orders you plan to place, the lower the price you get,” Inserra said.

 

And what about all those lenders who have never heard of Zaio? “They don’t know us by design,” Inserra said. “We’ve purposefully not marketed to large regional and national lenders. We’ve already talked to them and they’ve said, ‘Great sign us up,’ and then we haven’t got the data ready yet. The strategy is to start with smaller, local players and then start to market regionally. About eighteen months from now we’ll have a large enough geographic footprint that we’ll be able to market nationally,” Inserra said.

 

Lastly, what about Allin, Schwarzentraub and other San Diego area appraisers who invested in Zaio and are still waiting to get to work? On April 3, Zaio signed a national data contract with an as of yet undisclosed provider and according to Inserra, “We’ve established San Diego as our first priority.” The data is on its way to Zaio’s San Diego appraisers and soon they will be following in the footsteps of Zaio photographer Nicholas Bolving who is most likely taking another picture of another house and recording the address in his camera at this moment. Now, the only waiting left to be done is by all of those who are watching for the results of the Zaio experiment.