GUEST AUTHOR: Ron Stickelman, Jr., MRICS, SRA - President of Stickelman, Schneider & Associates, Founder of the Ohio Coalition of Appraisal Professionals (OCAP)
A few weeks ago I visited an old appraiser friend at his office in a nearby city. Like me, he owns and operates a moderately successful regional operation. This office, once the spawning ground for some the best appraisers in the state is now virtually empty. The only occupants are a small team of processors and my friend who sits behind a massive computer monitor, talking into a headset while the stock prices run silently on a TV in the background. Wondering through this office in search of a cup of coffee I came across the “appraiser workroom.” Battered metal filing cabinets lined the walls, between shelves lined with ancient MLS books, long-expired flood maps, defunct binding machines and standing proud in the middle, a vast tall solid wooden table. The table was scarred, chipped, etched, colored and marked by time; a symbol of collaborated individualism that was and may never be again.
The Hybrid Appraisal Firm
The appraisal “firm” I visited that day no longer “employs” appraisers. The company is owned and operated by a state certified and nationally designated appraiser. The company “contracts” with all the appraisers that perform appraisal assignments for the company. Several of these “contract” appraisers have been with the firm for over 20 years and some less than six months. All are state licensed or certified, some designated but all work independently and non-exclusively for my friend. He employs no trainees or non-certified appraisers. The company is an example of the new “hybrid” appraisal firm, both AMC and Appraisal Firm. The evolution of the Hybrid Appraisal Firm is a direct result of, not only economic forces, but the potentially destructive individualism that pervades our industry.
The business model of “outsourcing” labor is common to many industries: it provides a buffer to economic cycles permitting a readily liquid work force; reduces the costs of labor and goods; contains the costs of real estate; allows growth and shrinkage to occur with minimum interruption and minimizes the expense of management. Independent contractors are free to diversify their work with multiple clients; operate on flexible schedules; individually own and operate a company and expand and contract as work flow demands. But this is a short-term fix to a long term problem.
In reality, most independent appraisers will never grow their business because of insurmountable economic barriers. For many, appraisal is a lifestyle and not a profession; an opportunity to work “around” the demands of life. Work schedules expand and contract based upon the demands of their clients, not as a result of business planning or development. Few independent appraisers employ office support, other appraisers or appraiser trainees. They operate from a home base, take minimum continuing education and have little or no contact with their peers.
Customary and Reasonable Fees
As appraisers, it seems that we cannot open an e mail without being barraged by yet another “fee survey” on what is a customary and reasonable fee for appraisal services. Since the first mention of this concept in the Dodd-Frank Act, appraisers have clutched to this phenomena as the great savior for the industry. But, appraisers are mistaken if they believe that Dodd-Frank will be the proverbial goose that lays the golden egg.
The recent Interim Rules are very clear that “the marketplace should be the primary determiner of the value of appraisal services and hence the customary and reasonable rate of compensation for fee appraisers.” The rule specifically excludes a fee appraiser (or organization) paying another fee appraiser (a state-licensed or state-certified appraiser). But, what constitutes a fee appraiser or organization under the rules and more importantly within the business model that hybrid appraisal firms operate?
The Interim Rules define fee appraisers (organizations) as entities that “employ” state-licensed or state-certified appraisers to perform appraisals. The definition of an appraisal management company includes the terminology, “recruit, select, and retain fee appraisers” and “contract with fee appraisers to perform appraisal services.” Furthermore, there is no minimum size requirement for an AMC under the rule. Consequently, the same mandate for customary and reasonable fees applies to an AMC that contracts with a panel made up of a single appraiser or one with a thousand appraisers. By definition, the fee appraiser that “contracts” with a hybrid appraisal firm should be paid a customary and reasonable fee.
In reality the definitions of Appraisal Firms and AMCs has very little to do with the reality of customary and reasonable fees set in the marketplace. For example, and this is controversial, I believe the “true billable appraisal fee” for a URAR residential appraisal report in most markets is between $200 and $250.
My friend’s company will receive a $350 fee for an appraisal and pay the appraiser a 65% split ($227.50) that represents the true cost for appraisal services. The company gets paid for and bears the expense of managing the service (managing, reviewing, processing, delivering etc); the appraiser gets paid for performing the appraisal service and bearing cost of performing the service (data sources, E & O, software, licensing, education etc.).
My company (that employs over 50 staff appraisers) may receive a fee of $350 for an appraisal assignment, we in turn could pay an employee a 50% split ($175). Again, part of the fee is for management but we bear the cost to employ the appraiser (health care, workmen’s compensation, retirement etc) and perform the appraisal (data sources, E & O, software, licensing, education etc).
An appraiser who performs appraisal services for an AMC may receive a $200 to $250 fee for appraisal services they bear the cost for those services and not management. In reality, and on the presumption that it takes approximately 5 hours to complete a URAR, the billable rate for residential service is approximately $40 an hour. That compares to $75 per hour for a plumber or contractor and $150 an hour for an accountant.
I believe this disconnect is a result of the default structuring of our appraisal industry and how we do business. It is unrealistic to expect the federal government to legislate fees that will compensate appraisers for their competency, ethics, experience and education. Fundamental change must occur in how we operate, organize and master our business. Appraisers will survive if they shrug off the cloak of individualism and are willing to embrace collaboration.
This can be achieved in two ways:
- Through a dynamic shift in business practice that challenges the hybrid appraisal firm, contracting of labor and splitting of fees.
- Through willing and active cooperation in appraisal organizations, groups, and coalitions.
The business model for the appraisal industry has always revolved around a “lump fee” and how it is carved up or “split”. Few other industries or professions operate in this capacity. Appraisal firms and talented professional appraisers must re-examine the dynamics of employment structure, costs, profit and time-management. Eliminating the concept of fee-splits will liberate the appraisal professional and allow them to consider compensation in terms of scope of work and billable hours.
Traditional appraiser-client relationships have changed and the appraisal profession must adapt to a restructured monopolist and anonymous client base. .Appraisal firms hold the key to maintaining and preserving an appraisal profession faced with the reality of extinction through attrition and alternative, cheaper methods of valuation. Appraisal firms provide mentoring and training to new appraisers; guidance, benefits and services to existing appraisers and a career-path that allows appraisers to grow in their profession.
Appraisers remain unconvinced and ambivalent about the necessity of belonging to a professional organization or coalition. Until they change, appraisers will never realize their true professional potential. Traditional appraisal organizations such as the Appraisal Institute provide excellent education and guidance. Designated appraisers (rather than just state-licensed or state-certified) command the highest fees and professional respect. Grass-root organizations have successfully lobbied state legislators for the passage of appraiser-friendly legislation. Appraiser Coalitions sponsor education, seminars, and chapter meetings. Appraiser blogs, forums and message boards are available 24 hours a day for guidance and discussion. As Appraisers we must be active participants in our own profession.
AUTHOR: Ron Stickelman Jr., MRICS, SRA President Stickelman, Schneider & Associates, LLC 1130 Channingway Drive Fairborn, OH 45324 Phone: 937-879-6900 (office) eMail: firstname.lastname@example.org Website: http://www.stickelman.com