Electronic Data Interchange and Electronic Commerce: The Future of Appraising.

Thanks to such vehicles as intranets and the Internet, electronic data transfer has been adopted by a growing number of industries, including manufacturing, health care, insurance, and retail establishments. Such information previously required a paper trail. The primary reason these industries have embraced this technology is due to the large volume of business-to-business transactions (e.g., purchase orders). The elimination of paperwork dramatically reduces the cost of a transaction by as much as 20 times.(1) The savings guaranteed through the electronic transmission of information are so substantial that many organizations are charging significant penalties for paper-based transactions.

Electronic data interchange (EDI) is the standardization of automating computer-to-computer transactions involving common business transactions. Electronic commerce (e-commerce) is the broader umbrella that encompasses EDI, electronic imaging, email, and other electronic technologies that allow businesses to operate more efficiently by reducing costs and improving service.

The traditional processes of requesting an appraisal and the receipt of the report have been largely paper based and dependent on phone calls, faxes, and courier deliveries. Usually lenders, upon receiving a request for a loan, load the required information into an information system and generate a document requesting an appraisal. Copies of this request are often forwarded to numerous departments, sometimes requiring additional signatures, before being sent to the appraiser via fax or courier service. Once the request has been forwarded to the appraiser's office, it may be forwarded to many departments before ever reaching the assigned appraiser. Further, upon reaching the appraiser, the request may be re-entered into another information system, with more copies generated.

Once the appraiser completes the request and is ready to return the appraisal report, the paper-laden process begins in reverse. Estimates show that a financial institution spends $20-$35 to process the appraisal manually. These estimates take into consideration the receipt of the appraisal request, processing the request, forwarding the request to the appraiser, receipt of the appraisal report, and report processing (based on hard costs such as average employee salaries, phone, fax, courier service charges, and supplies). These estimates do not take into consideration any indirect costs such as employee benefits, reduced customer service, or errors.

Technology is assuming an ever-increasing role in every business environment. One form of this technological movement is electronic communication that assumes a paramount position in many companies' daily business operations. Every business organization requires on a routine basis the exchange of information across functional departments as well as with other organizations. The federal government's commitment to e-commerce will affect more than 300,000 business relationships in which the U.S. government is involved.(2) More directly related to the real estate industry is the Department of Housing and Urban Development's (HUD) recent requirement that all claim forms for single-family applications for insurance benefits must be sent using EDI. Lenders have found that HUD's EDI program offers such benefits as faster payment and turnaround times on suspended payments, fewer "lost" mail problems, and better data quality. Further, HUD fines lenders $100 to process paper claims.(3) The Federal Home Loan Mortgage Corporation (FHLMC) as well as the Government National Mortgage Association currently require that customers send investor reporting in EDI formats. Electronic communication forces the collapse of barriers both within and across organizations as companies come to the realization that electronic data interchange is a competitive necessity.

ELECTRONIC DATA INTERCHANGE

Electronic data interchange is the computer-to-computer electronic exchange of business documents in a standardized format. This standard has been established and delineated by the Accredited Standards Committee (ASC) of the American National Standards Institute (ANSI). There are 12 subcommittees for EDI standards covering a vast range of business documents, one of which is the finance subcommittee dedicated to the standards of the finance industry, including the real estate appraisal industry. The concept of EDI transactions is based on computerizing common business transactions such as purchase orders, invoices, or real estate appraisals. The typical EDI transaction will involve two trading partners, two translation functions, and a telecommunication connection. Electronic data interchange has recently gained enormous attention and wide acceptance across a variety of industries providing such benefits as:

1. Paperless transactions

2. Faster transmissions

3. Data storage and retrieval (information sharing) within and across enterprises and

4. Centralized monitoring and maintenance of transactions

As with a traditional mail transaction, an EDI/electronic transaction includes an outer "envelope" containing the identification and address of the sender and receiver. Within the electronic envelope is a series of segments and standard codes which defines the data being transferred. Businesses that use and exchange documents via EDI are known as trading partners. In the appraisal industry this would most likely be the appraiser and the financial institution or private client. Appraisers and lenders will have to choose software that will convert data from existing software and systems to an EDI format. This translation software will vary in price according to functionality. Further, an infrastructure for communication between trading partners must be established that might entail trading partners exchanging diskettes or data via a modem, value-added network (VAN), or the Internet. The Internet provides the lowest-cost solution as estimates now indicate savings of up to 90% over traditional VANs.

This concept of e-commerce applied to the appraisal industry allows for the electronic transmission of documents, including the appraisal report, as well as a digitized picture of the property and a secured signature of the sender. Data transmitted in an EDI format is referred to as a transaction set (TS). Each TS has been identified by ASC X12 committees usually by a three-digit number. A TS used in the request of an appraisal report is known as a TS261 and the actual appraisal report is known as a TS262. Transaction sets are composed of data elements that make up an EDI document. An example of a data element in an appraisal request might be the zip code of the subject property. ([ILLUSTRATION FOR FIGURE 1 OMITTED] for additional EDI transaction sets used in the financial and real estate industries.)

Although e-commerce and EDI have not been officially addressed by the Uniform Standards of Professional Appraisal Practice (USPAP),(4) issues such as the electronic transmission of reports, electronic signatures, and security have been addressed along with the storage of data in Statement on Appraisal Standards No. 8 (SMT-8).(5) USPAP has acknowledged the electronic transmission of appraisal reports and simply states that such reports must meet USPAP reporting requirements. Statement No. 8 further delineates that an electronic signature to an appraisal report carries the same level of authenticity and responsibility as an ink signature on a paper copy report and that data/record storage of reports is permitted on electronic, magnetic, or other media.

BENEFITS OF EDI AND ELECTRONIC COMMERCE

Electronic data interchange format standards allow for data to be transferred, stored, and used from a database rather than formatted as an image file. There are a number of benefits to EDI as opposed to image-based data. First, image files do not allow data to be stored in a database format and require the needed data to be retyped. In addition, image files require substantially more memory and transmittal times. Finally, image-based data cannot be easily searched, sorted, or analyzed. The electronic transmission of appraisal requests and reports also provides a record of the receipt of the order by the assigned appraiser. Further, electronic communication allows appraisers, management companies, and financial institutions to communicate better with one another without the hassles of missing or returning phone calls, messages not received, or jammed fax machines.

FIGURE 1 EDI Transaction Sets for the Finance/Real Estate Industry

197       Real estate title evidence
198       Loan verification evidence
199       Real estate settlement information Mortgage credit report
201       Residential loan application
202       Secondary mortgage market loan delivery
203       Secondary mortgage market investor report
205       Mortgage note
206       Real estate inspection
208       Income property appraisal report (in development)
209       Condominium appraisal report (in development)
245       Real estate tax service (in development)
246       Real estate listing information (in development)
260       Application for mortgage insurance benefits
261       Real estate information request
262       Real estate information report
263       Residential mortgage insurance application response
264       Mortgage loan default status
265       Real estate title insurance service order
269       Mortgage or property record change notice
775       Broker price opinion (in development)
833       Mortgage credit report order
872       Residential mortgage insurance application

EDI formats allow the completed appraisal report to be stored as data and electronically sent back to the client. After this data has been inputted, numerous statistical and other analyses can be performed on the data, providing both the client and the appraiser with invaluable information, such as compliance or noncompliance with the rules and regulations of the financial institution, as well as regulatory agency compliance imposed by the secondary mortgage market.

Although appraisers have not been among the quickest to adopt technology, there is certainly a trend toward the use of e-commerce and EDI. A recent survey of residential appraisers indicates that 85% of appraisers have an Internet account. In fact, an Internet search for "appraiser" yields some pretty impressive and sophisticated homepages. Appraisers' homepages serve a variety of purposes, including providing information, advertising, as well as a forum for placing an appraisal order. Many appraisers use e-mail as a means of communicating with their clients.

Several software companies such as United Systems, Day One, h la mode, ACI and FNC now offer the capability to order appraisals as well as receive appraisal reports electronically. Although capabilities will differ from software to software, most packages will allow financial institutions to place orders using the TS261. However, due to the variety of forms processing software used by appraisers, none of the current EDI software packages actually transmit the appraisal report (TS262) via EDI. Although many do allow for the electronic transmission of the report, sketches, and signatures, they are typically using a transmission other than, for example, an SMTP (email). This method of transmission does not allow for database storage or data analysis.

As participants in an EDI program, appraisers, appraisal firms, management companies, and lenders will enjoy a number of benefits:

* Faster delivery of appraisal requests

* Increased savings through reduced fax, phone, and courier charges

* Increased data integrity through reduced data entry

* Reduced storage costs

* Increased accuracy in tracking appraisal return times

* Easy access to data providing for quick analyses of data

Electronic transmission of the appraisal request and delivery process will eliminate the need for faxes, overnight mail, or other more expensive options for data transmittal. The paperless transmittal of appraisals will allow those in the mortgage lending business a means by which to reduce costs while improving overall speed, efficiency, and monitoring capabilities. Estimates show that up to 70% of all data input into a computer had been previously entered. Estimates further indicate that costs of an EDI can be as little as 1/10 of its paper equivalent. An EDI can shorten the time between the appraisal order and the receipt of the appraisal as well as the lag time between the delivery of the appraisal report and the receipt of payment.

CONCLUSION

Electronic date interchange and e-commerce as a whole provide the appraiser with the means for becoming more competitive, taking advantage of new markets, and refining and redesigning business processes through better communication, increased efficiency and service, and a reduction in costs. Strategic areas like customer service and marketing competitiveness may very well be the greatest value of EDI and e-commerce. In addition, the collection and storage of EDI-transmitted data into a database provides a valuable source of data that can be used for marketing research, forecasts, and a variety of other analyses.

Since the only constant in technology is change, appraisers need to be ready. Some have taken a reactive position to EDI and will not implement the new technology until they are forced to do so. For those, the best advice is to recall the words of Charles Darwin: "It is not the strongest species that survive, nor the most intelligent, but the one most responsive to change."

1. Electronic Commerce Systems, Inc. "The Most Commonly Asked Questions About Internet EDI," 1996. http://ecweb.com.

2. Ibid.

3. U.S. Department of Housing and Urban Development, Mortgage Letter 97-25, May 29, 1997.

4. The Appraisal Foundation, Uniform Standards of professional Appraisal Practice (Washington, D.C.: The Appraisal Foundation, 1999).

5. USPAP, Standards Statement No. 8.

REFERENCES

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Bennie D. Waller, PhD, is at Francis Marion University, Florence, South Carolina. He received his PhD in finance from the University of Mississippi. Dr. Waller's research interests include alternative valuation methods and electronic commerce. Contact: [phone]. [e-mail].