Appraisal Scoop

"Factoring" Accounts Receivable, or . . . .Where's My Money?!

GUEST AUTHOR: Ramir Rodriguez is a business development officer for Treasure Valley Factors. He helps real estate appraisers understand what factoring is and how it can help grow their business. He has a B.S. in Business Administration with an emphasis in Management from Eastern Oregon University. For more questions about factoring accounts receivables, please email him at rrodriguez@treasurevalleyfactors.com or visit our blog www.factoringhelps.wordpress.com or our website www.treasurevalleyfactors.com

Appraisers have shared a common concern with me when I visit with them and learn more about their businesses – “When am I going to get paid?” Many tell me that on average they do not collect their fees for 45 to 60 days. You have financial obligations to meet: payroll, taxes, travel expenses, etc. Cash flow delays can cause great stress for you and your appraisal business.

You must understand and be aware of the importance of cash. Cash is the lifeblood of any business and without it your business will fail. One of the main challenges that appraisers face is how to maintain a consistent cash flow in order to survive and grow.

Factoring is the solution!

What is Factoring?

This effective financial tool is selling your accounts receivables or invoices to get paid sooner for the work that has been done. Factoring accounts receivables is an effective way of improving and increasing the cash flow of a business. Factoring allows an appraiser to collect their fees easily and quickly. A factoring company can fund an appraiser 95% of the value of the invoices or accounts receivables submitted and such transactions are typically approved and funded to the appraiser within 24 hours (rather than waiting past 30, 60 or even 90 days).

Factoring Allows You to Do Much More

Receiving your fees much sooner allows you to meet your financial obligations. Most creditors require you to pay within 30 days and some charge interest. Having the ability to pay expenses and bills on time reduces or eliminates interest fees and improves the financial condition of your business. You can take advantage of early payment discounts in some cases also.

Factoring also helps you grow your appraisal business. Instead of spending time on the phone, email, or face-to-face to ask your client when you can expect payment, getting your fees paid quicker allows you to focus on what you do best, gives you more time market and sell yourself, and make more money!

Selling your invoices to a factoring company and receiving your fees within a day or two rather than an average of 45 to 60 days can reduce or eliminate stress of running a business. No more worrying about how you will pay your bills or how you will meet payroll if you have a staff.

Finding a Factoring Company

Not all factoring companies are the same. It is important to find the right factoring company that will customize a factoring program that fits your appraisal business. Good and experienced factoring companies can fund your business typically within 24 hours. There are factoring companies that do not require you to be in a long-term contract – meaning you are not locked in a contract where you have to factor your invoices for 6 months, 1 year, or longer. In addition, find a factoring company that has “no minimum volume” which means you are not required to submit all of your invoices… just those that historically pays slow. And finally, ask a factoring company if they offer “non-recourse” factoring. This means that once an invoice has been verified and approved the factoring company takes 100% of the collection risk. You can wash your hands of that invoice completely and move on to the next order.

GUEST AUTHOR: Ramir Rodriguez is a business development officer for Treasure Valley Factors. He helps real estate appraisers understand what factoring is and how it can help grow their business. He has a B.S. in Business Administration with an emphasis in Management from Eastern Oregon University. For more questions about factoring accounts receivables, please email him at rrodriguez@treasurevalleyfactors.com or visit our blog www.factoringhelps.wordpress.com or our website www.treasurevalleyfactors.com

2010 "Net" Annual Income from Appraisal Related Services Poll by AppraisalPort

 AppraisalPort has posted a new Weekly Poll as a follow-up to last week's.  THIS week, appraisers are asked to respond with how much Net Income they made (income after expenses & taxes).

  

Visit http://www.AppraisalPort.com to vote in the poll and be SURE to read and add YOUR comments below! 

The graph below shows last week's AppraisalPort "Gross Income" survey results (with 5,000 votes cast) from last week.  Check-out how the results compare!

CoreLogic VP speaks on upcoming changes to "Reasonable and Customary" appraisal fees

HousingWire author Jacob Gaffney interviews David Feldman, vice president, government affairs at CoreLogic Valuations. Feldman sat down with HousingWire to talk about the impending deadline on appraiser fees under new regulation.

• HousingWire: On April 1, the new "customary and reasonable" appraiser fees under Dodd-Frank take effect. What are they and is the industry ready?
• HW: How are your clients going to determine "customary and reasonable?"
• HW: What kind of operational issues will this create for AMCs and clients? How real are the risks of fines?
• How much will this increase the cost of appraisals and who will pay for the increase?
• HW: Over time do you see appraisal business shifting to AMCs or away from them?

Click here to read find the ANSWERS to these questions !

 

 

2010 Gross Annual Income from Appraisal Related Services Poll by AppraisalPort

 

AppraisalPort has posted their Weekly Poll and it's generating a LOT of interest. Having watched the poll for the past couple of days the percentages haven't really changed much, whether there were 500 votes or 3,000!

• Are YOU surprised to see that over 30% of Appraisers Gross over $100k?  
• Wonder what an Appraiser "Nets" on earnings of over $100k?
• Wonder how many hours an Appraiser grossing over $100k works per week?

 Visit http://www.AppraisalPort.com to vote in the poll and be SURE to read and add YOUR comments below!

A Reality Check for the Appraisal Industry - Embrace Collaboration

GUEST AUTHOR: Ron Stickelman, Jr., MRICS, SRA -  President of Stickelman, Schneider & Associates, Founder of the Ohio Coalition of Appraisal Professionals (OCAP)

 "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." Charles Darwin

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.

Outsourcing

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.

Change

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:

1. Through a dynamic shift in business practice that challenges the hybrid appraisal firm, contracting of labor and splitting of fees.
2. 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.

 It is time for our profession to evolve from individualism towards unity, strength and cooperation. Only dead fish go with the flow.

AUTHOR: Ron Stickelman Jr., MRICS, SRA President Stickelman, Schneider & Associates, LLC 1130 Channingway Drive Fairborn, OH 45324  Phone: 937-879-6900 (office)  eMail: realitycheck@stickelman.com  Website:  http://www.stickelman.com

HVCC gone! Now what? - Setting Goals for 2011

GUEST AUTHOR:  Ms. Lore DeAstra, MBA, SRA, CDEI, ACB, CL has been involved in the real estate industry for over 24 years as a commercial and residential real estate appraiser, instructor, investor, sales person, and property manager. She has written many articles and courses, published nationwide. Her mission is to improve the real estate industry by offering practical information for real estate professionals and consumers. To contact Ms. DeAstra, please send an email to Lore@continental-appraisal.com.

Since last spring, most appraisers have been on a roller coaster ride unlike any other.Now that the HVCC has sunset, have you thought about your next steps? After all, this is a great time to plan your goals for 2011, while thanking your current and previous customers. First, you will need a target, right?

Diversification is the key to survival and prosperity in the new real estate world. This article gives you easy ways to set measurable goals that will increase business to diverse target markets. As a result, you will keep an eye on your goals, help others, and increase your income. Start where you are, really?

Questions to ask:

How much more business do I want?  Set a realistic goal that is measurable. For instance, “I want to increase our appraisal business 20% within the next 12 months” The easiest way to accomplish a goal is to break down the task into believable steps.

 

As shown, you will need to complete two additional appraisals per month to increase your business by 20%. Breaking down the task into small increments makes a daunting task believable.

Are you willing to spend ten minutes a day to increase your business? Start small so you can obtain effortless victories such as one phone call a day.  Earning new business has a 10% success rate, while referral business has a 65% success rate according to Tom Hopkins, the most successful sales trainer in the world.

Who do you contact?  Open up your database and contact everyone you know who fits your target market such as your attorney, banker, accountant, insurance agent, sales agent, or friends/neighbors.

What do you talk about?  According to Hopkins*, “Never begin any selling cycle until you have taken a few moments to put yourself in the shoes of the other person”.  (* Tom Hopkins, SELLING FOR DUMMIES. Foster City. CA. IDG Books Worldwide, Inc. p. 15.) 

For instance, ask them how they are, and how can you help them* per assignment or based on an hourly rate such as:

• Attorney: Appraise properties involved in estates and trusts.
• Banker: Appraise or review properties in their portfolio.
• Accountant: Appraisals for tax or trust purposes.
• Insurance agent: Appraise real estate via cost approach for their policies.
• Sales agent: Measure homes for their listings, complete a pre- listing appraisal, review their Competitive Market Analysis, or offer to answer questions at a sales meeting.
• Neighbors: Complete a market analysis of their home for tax and insurance purposes. If you are competent, offer to compile an energy audit for a small additional fee to help them save on utilities bills.

* Make sure you apply the competency rule according to USPAP.

Bottom line: you will receive a better reception with less effort by contacting people who are familiar with you and your work. If you are like me, rejection is demotivating.

Are there any meetings that your target markets will attend?  Search in your area for functions this year and 2011 based on your target market.  Functions might include conferences or luncheons attended by real estate sales agents, appraisers, attorneys, paralegals, bankers, accountants, government agencies, or mortgage companies.

What else can you do? 

• Deliver candy attached to your business card to everyone in office. 
• Do you blog?  Offer to mention them and their company.
• Send an eCard to those in your contact list. 
• Use the social media sites (Facebook©, LinkedIn©, MySpace©) to keep in touch, advertise or send information that interests your target market.
• Ask your target market who they can refer that will benefit from your services.

There are many books, classes, seminars and others available nationwide: many online that will help you with various topics. You may learn a new skill and earn continuing education (CE) at the same time. As your confidence and script improves, so will your pocket book. How do I know? While writing this article, I made three phone calls that took about half an hour. Within a few days, I received an appraisal assignment from a referral. Besides the extra income, it was easy and fun to re-connect.

Take a few minutes, NOW, to determine the type of clients you have, who you want to work with, and how you can diversify while developing mutually beneficial target markets. Many of the software programs used for our bank accounts compile a report in seconds. Determine a believable amount of money you want to earn and let your fingers go crazy! Who knows, you might even enjoy catching up with folks you have not connected with for awhile.

Last, if you pass along your success stories to: Lore@continental-appraisal.com , I will compile a follow-up article that is a win-win for everyone. Make sure to let me know if you would like credit, or not. Thanks!'

AUTHOR: Ms. Lore DeAstra, MBA, SRA, CDEI, ACB, CL has been involved in the real estate industry for over 24 years as a commercial and residential real estate appraiser, instructor, investor, sales person, and property manager. She has written many articles and courses, published nationwide. Her mission is to improve the real estate industry by offering practical information for real estate professionals and consumers. To contact Ms. DeAstra, please send an email to Lore@continental-appraisal.com.

When are Usual and Customary Fees’ applicable to appraisal assignments?

Appraisers…….

I spent time Wednesday 8/04/10 discussing the Dodd-Frank law, and the “Usual and Customary Fee” mandate within it, with an experienced appraiser on the east coast. Also Wednesday, two e-mails arrived which ask appraisers to fill out a ‘fee survey.’

The basic question is ‘when are Usual and Customary Fees’ applicable to our assignments? The actual answer is July 22, the day after the President signed the bill. That fee implementation language is contained in the bill and is separate from Appraisal Independence issues that regulators will define up to 90 days later.

Some people are under the impression that there is a 90 day waiting period before fee implementation. In my opinion, that is incorrect, because the ‘up to 90 days’ as mentioned in the bill applies to the Appraisal Independence aspects of appraisal ordering only, not to fees. It is designed to allow the new “Bureau” time to write and distribute their new Interim Final Regulations (which is an oxymoron!) concerning independence issues. Those probably will be very similar to FIRREA, HVCC, FHA, and other regulators’ policies.

So what are “Usual and Customary Fees?” The answer: It Depends. There is NO one mandated fee that must be charged by the appraiser. “U&C” fees vary by region, and frankly, between appraisers in the same region.

The bill does say that “U&C” fees “may” be based on ‘evidence…established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies SHALL EXCLUDE assignments ordered by known appraisal management companies.’ The bill says ‘lenders and agents SHALL compensate fee appraisers at a rate that is customary and reasonable….in the market area…’ Complex assignments can have a higher fee than a typical basic assignment based on difficulty and additional scope of work requirements.

So, in my opinion, appraisers are free to consult various fee schedules, and decide for themselves what they will charge any client for a particular service. But I will tell you (from personal experience since July 22) that AMC’s are still ‘shopping’ appraisers to find the lowest fee.

For 20+ years, the agent business model for assignment fees has been ‘mandated’ by lender agents – for those assignments in which an agent is involved. In effect, it’s been price fixing, which is illegal. But nobody had the gonads (or desire) to seriously challenge this, and individual appraisers were powerless to reject it if they wanted to continue working for particular lenders who were using agents. Now, with the Dodd-Frank law, that model has been overturned. And with it, if the agent or lender refuses to pay a “U&C” fee to the appraiser, they can be heavily fined.

As a result of this legislation, agents and lenders are renegotiating their contracts now, anticipating that appraisers will begin asking for fees more in line with what they would normally charge local clients that don’t use agents for order placement.

There are currently two ways to research “U&C” fees in your area…VA fee tables and the alamode anonymous survey for the entire country, broken out by county.

Two other established companies are also attempting to collect fee info. One is entirely anonymous, but based on an entire state only.

The other is designed to collect contact info of the survey participant and you cannot fill out the fee survey until you provide contact info….but the survey drills down to the county level in each state and includes several different report types. I don’t appreciate this data collection aspect used to promote the sponsoring company. You can decide for yourself how accurate of required contact info you want to provide, but it may be interesting to see what kind of fee data they obtain. The other aspect of this survey is a ‘subscription’ feature which will allow lenders and agents to gain access to the data……..and possibly the contact info of the survey participants who provide the fee data. That makes me very uncomfortable.

AUTHOR: Dave Towne Towne Appraisals dtowne@fidalgo.net Washington State 360-708-1196 & Appraiser Education Service

Runt Rants - The Appraisal Business Versus the Appraisal Professional - The AMC Discussion Continued

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. 

This series has generated much good comment and views from various readers.  Thanks to all for taking the time to add to the discussion!

We've tried to focus on several basic points in this series...points which not everyone agrees with, but which I believe are quite crucial to our understanding of where the Appraisal Profession is today, and what fundamental changes should be considered to ensure it's viability for the future. 

The Fundamentals

• The Appraisal Profession is a vital part of the Loan Origination Market - The existence of an Appraisal on each property adds confidence and security to the underlying asset which therefore extends to packages of loans sold in the market.
• The Professional Appraiser is the single unbiased supporter of the loan transaction and that position aides in the confidence created in the Collatorized Mortgage Obligations (CMO) that are offered to the global market.
• Appraisal Management Companies (AMCs) have been created to facilitate the interaction between the lender and the appraiser to achieve transactional efficiencies vital to current and future markets. 
• The AMC market is composed of a few large firms that control 80 percent of the appraisal demand in the USA, and many smaller firms that compete for the remaining business.
• The large AMCs that control 80 percent of the market function as an Oligopoly which results in inordinate power over the market.
• The Oligopoly has created a two tiered pricing structure for appraisal products services which serve their short term purposes, but which fundamentally damage the working of a competitive market.
• The resulting problem is not with the existence of Appraisal Management Companies, but with the business model of the top firms which are able to distort the market by virtue of their Oligopoly status.

Let's be very clear.  The result is the imposition of a two tiered pricing market for appraisal services; the 'one off' market, and the AMC market. We've described that stark contrast earlier parts of this series and the impact on the Appraisal Profession is very significant.   

There is one last fundamental part of the AMC business model that affects the Appraisal Profession adversely and should be addressed whenever the opportunity for change presents itself.  That fundamental is recognition of the role of the Appraisal Business as a separate reality, apart and distinct from the Appraiser.  That's the subject of today's post.

The Appraisal Business Versus the Appraisal Professional

 We've discussed previously the changing market...moving from local to regional to national to global.  As the market for securitized loans has evolved, the lenders have moved from being the holder of those loans to the originator and seller role.  The lenders are now selling the loans to investors who ultimately buy the loan packages as a simple investment...much like a bond. 

The lender/originator is now more of a retailer; using their retail outlets to originate loans, packaging them into like groups, then offering those packages to the market.  When the package is sold the lender then uses the proceeds to originate more loans which are in turn sold. 

As that market evolved new businesses evolved to serve that changing  market: the AMCs, Mortgage Servicing Companies, Automated Valuation Companies, the Wall Street "Bankers" who sold the packaged loans, even Appraisal Businesses that employ a number of appraisers.  Each of these business models evolved to serve the needs of a changing market.

It is a long standing tradition that users of appraisal services engage the appraiser directly for the appraisal.  That arrangement was quite efficient when local lenders made local loans to local borrowers and a local, lone appraiser was engaged to provide the appraisal.  For some appraisers, that model still best characterizes the way they do business: they are sole entrepreneurs working alone, perhaps with an clerical assistant.

However, as the market has evolved and grown the efficiencies required that spawned the specialization of efforts such as AMCs has also required response by appraisers who wish to serve the mortgage loan origination market. The Appraisal Business Model employing several appraisers has evolved to meet that need.

The majority of appraisal businesses now are multi appraiser firms.  I did a survey of 174 appraisal businesses last year.  Sixty percent of those firms employed multiple appraisers, with the average employing three full time appraisers.  Generally, the more appraisers employed the more efficiency the appraisal business achieved.

The efficiencies that result  are significant.  In the survey I conducted, the Appraisal Business that employed five appraisers was on average four times more productive than the single appraiser business as measured by the average monthly output per appraiser. 

The typical multi appraiser business is owned by one or more appraisers.  They invest in offices, hardware, software, and data bases that are needed to produce appraisal products.  They employ administrative staff to provide clerical and administrative support services to an appraiser staff who are W2 employees, not independent contractors.  The appraisal business provides marketing, training, customer service and quality control to the lender/clients. The appraisal business guarantees quality, service times, and regulatory standards for each assignment they accept.

If my survey is representative of the market today (and I believe that it is) sixty percent of the appraisal firms employ multiple appraisers, and because they are much more productive, they produce the vast majority of loan origination appraisals completed by appraisers each year.  In my survey, over eighty percent of the appraisals delivered were completed by multi appraiser firms. 

That should not be a surprise.  The evolving mortgage origination market requires shorter response times, more efficient participants, all while maintaining quality standards.  The multi appraiser business model is a response to those demands, just as is the Appraisal Management Company. 

Yet the process of ordering appraisals is often according to the old standard, when sole proprietors were the dominant appraiser business model.  That is, some lender/clients insist on specifying the appraiser to assign the order to, rather than assigning it to the appraisal firm.

That old standard works for the sole proprietor, but it doesn't work as well for the multi appraiser firm.  The multi appraiser firm guarantees the quality and performance of their employees.  The advantages they provide to their clients are dependable service, consistent turn times, consistent service.  They achieve that by taking advantage of the efficiencies that the larger business model provides.

One of those advantages is the ability to deploy the firm's resources in the most efficient way possible.  Assigning appraisal orders to the staff as appropriate results in significant efficiencies.  Studies we've done in our own firm suggest that we achieve a 30 percent increase in field efficiency by assigning each appraisal to the employee who can best meet the performance required.

Many, even most, clients recognize that reality.  They assign the appraisal to the Appraisal Business and allow the firm to deploy their resources in the most efficient way to meet the client's needs. 

The Oligopoly does not. The top AMCs require that they assign appraisals directly to the employees of the appraisal firm, bypassing the ability of the multi appraiser business to control and allocate their resources in the most efficient manner.

The result is that the Oligopoly creates a market in which they force the appraisers to accept a 30-40 percent lower fee for the appraisals they order, and they refuse to allow the appraisal business to deploy their resources in the most efficient and profitable way, reducing field research efficiency by 30 percent in multi appraiser firms operating in large metropolitan markets.

Since the vast majority of The Ologoply's appraisals are delivered by multi appraiser businesses, the effect is to threaten the long run health of the entire Appraisal Profession. 

What industry or profession could remain healthy when their market is dominated by an unregulated Oligopoly that forces the market to accept price discounts in the form of kickbacks equal to 30-40 percent of the competitive one off price for the product, and in addition bypasses the major efficiencies created by those businesses to deliver service to their clients?

If we all can accept that a healthy local, regional, national and global market place for mortgage originations depends in part on a healthy Appraisal Profession, isn't it reasonable to demand that the Oligopoly make simple changes to their business model which cause that health to be threatened?

Isn't that in part what HUD/FHA recognized when they attempted to adopt rules which would force AMCs to unbundle their pricing, pay appraisers for their services equal to the "one off" standard fee which prevails in each market? 

Simple Changes For the Betterment Of All

I don't consider AMCs to be evil. I consider them to be a positive development in the evolution of the global market for first and second loan originations.  My firm's personal, in depth, and long term experience with AMCs is that they are generally well run, efficient, even pleasant to deal with.  I recognize that they provide a very needed service to the large national lenders and mortgage originators and I welcome them in the industry. 

The two simple changes to the business model of the Ologopoly members that I propose would change the market for the betterment of all, including the lenders and orginators they serve. 

• First, unbundle fees they charge for their services; bill the lender for the outsourcing services, and the appraiser for the efficiencies they provide to appraisal firms who work with them. Pay the true market rate for the appraisals they order, without requiring the haircut, the kick back, that is deemed illegal in other markets.
• Second, contract appraisal services with Appraisal Firms, and allow the Appraisal Firm to assign the appraisal to appraisers in their employ who are best qualified to deliver that particular service at that particular moment.

Those two changes would correct the injustices perpetuated over the last two decades, restore the health of the Appraisal Profession, and improve the overall business of the first and second mortgage loan origination markets, markets which have grown to be a significant engine of prosperity for local, regional, national and global economies.

Isn't that in everyone's best interests?

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. 

 

Runt Rants - A "Two Tier Pricing Structure" for Appraisal Services

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. Overview

We've had a good discussion of the volatile and emotional issue of the AMCs impact on the lending transaction and on the Appraiser Profession specifically.   Several appraisers have added their views.  At least two AMCs have provided their views.  Many of the comments challenged my views and assertions.

It's all good. 

Both AMCs and Professional Appraisers Are Important and Necessary

What I hope I've established is that the Appraisal Profession is a positive force in the local, regional, national, and now global communities.  Professional appraisers are one of only two unbiased participants to most lending decisions these days....the other being a Professional Realtor. 

There is arguement that the Realtor in this age of declining dual agency is no longer unbiased.  That has some merit.  However Professional Realtors have laws governing their conduct as well as a strong code of ethics to follow.  If they remain true to both, their position is largely unbiased and positive.

Professional Appraisers are unquestionably unbiased, they perform their duties admirably.  We only need look at the current discourse over the causes of the current credit credit crisis and note that no one even attempts to blame the appraiser.  Our job was done and done well.  We know from talking to our E&O Insurers that appraisers are being named in foreclosure suits at an alarming rate, but the majority of those are lawyers casting wide nets to bring all into the mess that they can.  Such is the weakness of our litigation system today.

We also contend that the AMC is a legitimate industry, has been around for decades, and serves a useful purpose...for both the lender and the appraiser.  Many appraisers dispute that, several here have voiced that view and I'm glad they contributed.  But those arguements don't carry the day in my view.  AMCs are here and will continue to be the principal conduit of appraisal ordering and therefore demand for appraisers working in the mortgage origination niche.

It's Not The AMC That Is The Problem

My view is that the problem is not with the AMC industry, but with the business model that many have adopted, driven by the top 5 representing over 80 percent of appraisal demand.  The problem with that business model is that the vast majority of the AMC volume operates by charging the independent fee appraiser for services that should rightly be charged to their client...the lender or broker.

That charge is 30-40 percent of the fee that the appraiser receives for providing their professional services.   I've offered my opinion that I can see a 5-10 percent charge to the appraiser due to the efficiencies that the AMC can provide to the organized and professional appraiser or appraisal firm.  But that leaves 25 to 30 percent that is a gross over charge....appraisers are paying the price in the form of that haircut for services that the lender or broker client of the AMC are receiving. 

Let me state the problem in dollars.  If the typical appraisal fee is $350, the appraiser is forced to pay the AMC $105 to $140 for the privilege of working with that AMC.  If one accepts my view of a legitimate charge of 5 percent for services the AMC provides to the appraiser, ($17.50) then the appraiser is being over charged $87.50 to $122.50 on each appraisal they perform! 

The appraiser is being forced to subsidize someone one else in the transaction.  That someone else is the lender or broker client of the AMC.  In a competitive market that would not happen, it does not happen.

I've stated that there are two pricing markets in the appraisal process:  the One Off Market, and the AMC Market.  In the One Off Market the fee to the appraiser or appraisal business is $350.  In the AMC Market the fee to the appraiser is $350-140 or $210.

How Can Two Pricing Markets Exist?

Many appraisers, some commenting here, state that two pricing markets exist because of inexperienced, fraudulent, bottom feeding-corner-cutting appraisers allow it to exist.

The top five AMCs argue that the AMC Market IS the true price market by virtue of the fact that they demand and obtain the haircut from the appraiser. 

Both are empty charges in my view. 

The two tier pricing structure of appraisal services is a result of the Oligolopy Market that has been created by the top 5 AMCs who provide over 80 percent of the appraisal demand.   

In the One Off Market the fee for a typical 1004 mortgage origination appraisal is $350.  The One Off Market is a fully competitive market with many buyers and sellers of appraisal services.  The price settles in at $350.  If any buyer or seller attempts to influence that price...higher or lower...they are rejected.  That's the way free markets work.

The AMC Market fee for that same appraisal is $210.  The AMCs are able to obtain that fee because they are part of an Oligolopy.  Together the top five AMCs represent 80 percent of the demand for mortgage origination appraisals.  That is not a fully competitive market; that is an Oligolopy.  In Oligolopies the power shifts to the few who control demand.  They set the price. 

The appraiser in such a market can't afford to ignore 80 percent of his source of demand.  If the client requires such an ignomonious haircut the appraiser has no choice but to accept it.  That's a classical result of an Oligolopy!

The No Spin Wrap Up

Remember the old phrase "What's good for General Bullmoose is good for the USA"?  Originated in the Little Abner comic strip I think, and was a parody of what big business was claiming at one time in defense of the Oligolopy/Monopoly General Motors created and was using to abuse other market participants.

The last twenty years the claim could have been "What's good for the Financial Congolomerates is good for the USA."  The top five AMCs are creations of large Financial Congolomerates.  They created the Oligolopy Market, they set the prices to their advantage because they can.

But just as the General Bullmoose claim was false, so is this current claim.  We've seen what is good for the Congolomerates is not good for the USA.  The Credit Crisis worldwide is a result of short sighted business practices on Wall Street, aided by lax government oversight, ignored by legislators influenced by lobbyists.

HUD/FHA recognized that and is attempting to correct the situation by requiring unbundling of the fees reported on HUD 1 Statements to borrowers.  FHA is attempting to return to One Off Pricing for all FHA loan appraisals. 

HUD acknowledges that a healthy Appraisal Profession is vital to our local, regional, and national communities.  They recognize a healthy Appraisal Profession is even vital to the global economy.

Professional Appraisers agree.  They should be supporting HUD/FHAs courageous effort to correct the situation. 

The largest threat to the Appraisal Profession is the Pricing Structure created by the Oligolopy of the top AMCs, who were created by the large national financial institutions, and which force appraisers to pay for the benefits those same lenders receive from outsourcing their appraisal departments to the captive AMCs. 

Professional Appraisers have endured that Oligolopy enforced artificial pricing for long enough.  It has weakened the Profession which is vital to our local, regional, and national interests.  That Oligolopy has forced the appraisal businesses to accept fees which are below that necessary to maintain a competitive and profitable business.   

The Lenders themselves are damaged when the Appraisal Profession is weakened.  A healthy Appraisal Profession provides underlying value support for the CMOs that the golbal market invests in today, and those CMOs are vital to the continuing business of the national lenders and mortgage brokers.

The time has come to change the AMC business model.  Charge a fair price for the services provided and charge it to those who receive the benefits.  Eliminate the haircut to the appraiser.  Charge the Client for those services.  Do that and the single most damaging problem in the mortgage origination market will be resolved. 

Next time we'll discuss the one remaining thing that must be changed in the current AMC business model in order to restore the Mortgage Origination market to a fully competitive state where all can participate and which supports our local, regional and national communities best.  (Hint...we identified that in the first of this series.)

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.

Calyx Point Integrates a non-AMC Appraisal Firewall - HVCC & FHA Compliant

 Spokane, Wash.-based SharperLending LLC, a provider of appraisal and settlement services technology solutions, says its Appraisal Firewall product has been integrated into San Jose, Calif.-based Calyx Software's Point software. 

Through the integration, Point users can access the Appraisal Firewall valuation technology from within their familiar Calyx Point system. Appraisal Firewall is a non-appraisal management company tool that is Federal Housing Administration- and Home Valuation Code of Conduct-compliant, SharperLending says. 

"The goal of Appraisal Firewall is to lessen the impact of appraisal regulations on lender business, which it does by allowing lenders to keep working with their trusted appraisers while being HVCC and FHA compliant,” says Dave Black, president and CEO of SharperLending. “Now that we’ve worked with Calyx to extend appraisal access into Point, this promotes our focus by allowing Point users to stay in their current [loan origination software] package - further lessening the impact of appraisal regulations.” Learn More 

SOURCES: Calyx Software, SharperLending LLC and MortgageOrb.com