GUEST AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets. He served as a staff appraiser at several local firms before forming AM Appraisals, Inc. with business partner J.M. Massey. e-mail: firstname.lastname@example.org web address: www.amappraisals.com
How many licensed and certified appraisers remember logging hours for their exam application? The most frequent question always seemed to be just how many hours could be included for a typical appraisal assignment. Obviously, a multi-unit income producing property was going to require more than a typical single family unit so most just penciled in hours per job based on a formula according to property type.
Estimating time to complete an appraisal after it is done is one thing and quite another if the purpose is to conduct a profitable business. Accepting an assignment and quoting a fee for a client must include an understanding between both parties of what is expected in the final product or service. For many years, lending work has been largely based on Fannie Mae form reporting and the expected Scope of Work has been fairly uniform until recent months.
With a financial crisis, government bailouts, real estate market collapse, and monumental new policies and regulations, the system has produced higher expectations for appraisal reporting. While many will agree that this is good, it has also increased the work load for each assignment but fees continue to stagnate and even decline. Those involved in project management know this concept by the term “Scope Creep.” When fees fall out of balance with the amount of work required to produce a product, it often leads to a breakdown. This is commonly caused by a gradual drift to more expansive expectations without a renegotiation of terms. Ultimately, it is the responsibility of the contracted party to insure balance between the scope of work and fees.
Recent trends have seen dramatic shifts in scope of work expectations driven by Fannie Mae and implemented primarily by AMC quality assurance systems. It began with the Market Conditions form and then two active or pending listings as a minimum standard. Now appraisers are commonly being asked for detailed analysis on items like support for adjustments, client-defined search parameters, and are even being asked to explain why specific sales were not utilized.
None of these requests are in any way unreasonable or are beyond an appraiser’s requirement to fully support his or her work. They are however, beyond the scope of work that was historically expected for the majority of residential lending appraisals. Every individual appraisal does not require unabridged research and exhaustive analysis of every market nuance. Expertise and competency within a market presumes that the appraiser is aware of general trends that can adversely or positively affect a specific property. In reconciling a conclusion, there must be adequate support based on quantitative analysis but the degree to which appraisers disclose the amount of data can vary widely. The appraiser is ultimately liable for all conclusions as well as errors and omissions. They must, at a minimum, perform the research that is necessary to produce a credible, reliable and supportable report.
For instance, making a line-item adjustment for an amenity may yield relatively small or large numbers depending on the market demand for that feature. When an appraiser works in a specific market, they understand what impact a garage will have based on periodic data review by way of methods such as matched pairs. When familiar with a market, appraisers are unlikely to run a matched pair for every adjustment they may possibly make to that individual report. Requesting supporting data for this after the report has been submitted, would not be unreasonable but in most cases, would require the scope of work to be expanded. With ever-increasing minimum reporting requirements, most appraisal offices will have difficulty in charging an additional fee therefore it is most plausible to increase fees on the front end. =
With all the current talk of customary and reasonable fees, has the Dodd-Frank Act addressed scope of work concerns? If an appraisal request now has numerous pages of report requirements and additional commentary is likely, then that is fine. Appraisers must then demand proportionate compensation for the added work.
The resulting pressure that comes through scope creep without increased fees is likely to increase problems such as an aging appraiser population, a significant drop in license renewals and reduction of new license applications across the country. People are simply not choosing to enter the appraisal profession any longer which should be of concern to those making policy within the system. At what point, does the current business model in lending become problematic?
A lack of proportionate pay can also cause appraisers to look for new efficiencies to make up for a loss of time, resources and money. This often ends up being translated as cutting corners as most appraisers have long ago implemented processes to save time and money. What else can be expected when work load goes up and compensation goes down? The system will clearly not keep sustaining this balance that has been occurring in the industry.
Independent appraisal operations and mid-sized firms must properly price their services and demand fees commensurate to the projected scope of work. If not, lending-based clients will continue to draw from the well until it is empty.