Recently an appraiser friend contacted me and explained that he and his wife were considering growing their appraisal business into something larger with more revenue stability. They sought a plan to move toward managing the growing business, and ultimately to create a business structure that would allow them free time to enjoy life beyond the business, while still ensuring that quality and service remained the key principles of the enterprise.
They asked me to share some thoughts that might help them toward their objective as they knew that we had embarked on a similar path several years ago. That lead to a series of email exchanges attempting to answer several direct questions that they posed.
Correspondence with others has convinced me that many are seeking to accomplish the same general objectives as my friends. They felt the discussion was helpful to their planning process, so we've decided that the points shared with them might be useful if presented here. We'll try to do that in a series of posts so that the material doesn't get lost in overwhelming detail. This is the first installment.
We adopted a business model years ago of working to make the appraiser more efficient by using technology and support staff to do everything possible for the appraiser thereby freeing them concentrate on seeing properties, completing analysis, and writing reports: the very things that they are trained to do. I believe that philosophy accounts for much of the productivity we have been able to achieve and is the principal reason we are able to compete in this tough, very tough, market.
We determined early on that we don't set fees in the appraisal business. The market does. We may start with a fee we would like and feel is fair, but if we don't get the business we haven't set fees; we've just taken ourselves out of the market. In a competitive market place when trying to grow a business, we simply can't do that.
Instead, we ask what fee is acceptable and then we look at the product requested and determine if we can produce it for a profit. If our current methods and procedures can't produce it for a profit, we try to figure out a way to make the process more efficient and able to produce at a profit. If we think we can become more efficient we will accept that assignment and use it to make the changes to our operation, confirm the changes work, and then be ready to accept the next assignment of that type.
We can do that because we have reached a certain volume level that supports transferring a lot of the clerical work in the appraisal business to administrative folks. We also have a good handle on our costs and we understand the important distinction between fixed costs and variable cost.
A sole practitioner (SP), which I have been also, or a husband and wife operation such as my friends may not have administrative staff, but they can and should look at the business in the same way. They can divide their time spent on an assignment into administrative tasks and appraisal tasks, estimate their fixed and variable costs, and estimate the time and cost each type of appraisal product represents in their operation.
Armed with that information, they can make instant decisions about accepting new business and at what fee. In short, they can compete and be reasonably assured that the fee accepted is one that will produce a profit for their company.
It's not hard to do, and it is the key to reacting quickly and correctly when one is trying to grow a business in an environment where they don't, where they can't set fees.
Click below to continue reading . . .
Let's start today with a basic, simple model, the sole practitioner or mom and pop business operating out of their home. We want to estimate the hourly earning rate of the appraiser/owner of the business. We begin by estimating the typical costs of such a business.
Let's estimate a typical home office monthly overhead:
- Telephone $50,
- DSL $50,
- Computer cost (including depreciation of equipment) $200,
- Software $75,
- MLS $100,
- Auto $400.
- No rent because of home office.
That totals $875/month, or $10,500 per year. Divide that by 52 weeks per year and we have $202 per week, divided by a 40 hour week....and that's $5.05/per hour of overhead. Let's round that to $5.00/hour.
Now let's consider clerical costs. We want to know what it would cost to pay someone to do the clerical/administrative functions needed to produce an appraisal. Right now in our market we are paying roughly $15/hour for data entry, probably $20/hour after taxes and benefits. So figure the fair market rate for clerical work is $20 per hour.
We now know our overhead per hour, and what the value of the clerical function is in our small business. Great! Next, let's consider how much time it takes to do a typical assignment, and divide that time between appraiser time and clerical or support staff time.
A typical 1004 might take 5 hours to complete, including drive time and field work. Let's assume 2 hours of that time is administrative and clerical, and three hours requires an appraiser's expertise. Let's assume several fee scenarios: $325, $250, $200.
No matter what the fee, this business is going to incur overhead at $5/hour times 5 hours for the typical 1004 assignment. That's $25. The admin/clerical time is $20/hour times two hours. That's $40. Those costs total $65 for the typical 1004 assignment. Finally, the appraiser is going to spend three hours applying appraiser expertise to the assignment.
We now have all the data we need to determine the hourly earning rate for this appraiser.
Let's run the numbers.
- At $325, the appraiser is earning $86.67/hour [ (325-65)/3]
- At $250, the appraiser is earning $61.67/hour. [(250-65)/3]
- At $200, the appraiser is earning $45/hour.
Not too bad for the appraiser/owner is it? If the appraiser is also doing the clerical work, an additional $40 has been earned at the going clerical rate. Summing up, a SP on this $325 1004 is earning $87/hour for three hours of appraiser work, and $20/hour for two hours of clerical work, an average $60/hour after the overhead is paid.
At $250 for the 1004 the SP is averaging $45/hour.
At $200 for the 1004 the SP is averaging $35/hour.
That's an average hourly income after overhead, but before taxes...which equates to the salary of an employee of a corporation.
The overhead of $5 per hour in this model represents fixed costs. They will incurred if one appraisal is done per week or if ten are completed per week. The clerical time and the appraiser time vary with the number of assignments. They are variable costs, costs that go up or down in direct relation to the number of assignments.
Pretty simple stuff, right? Using the same approach, plug in the numbers that represent the costs in your market for each of the items we've estimated. What are you earning per hour as an appraiser and as a clerical person based on how long it takes to complete the typical 1004 in your market?
Now that I've got you thinking this way, we'll consider next week how to construct a business model that will be appropriate for a start up company or an existing business that wants to grow. We will divide expenses into variable, those that vary with the volume of orders, and fixed, those that don't change with volume.
The point I will make is that any time you do an assignment for a fee that covers your variable costs, you should consider doing it, as that 'gross profit' will help to cover your monthly nut...the fixed expenses. Naturally, you'd want to do assignments for fees that cover both fixed and variable costs, but as a start up, you may not have that much work initially. Also, a growing business may want to use the additional business to lower costs, thus making all assignments more profitable!
We don't set fees in our business, the market does. But next week we'll give you the tools necessary to determine what fees you can logically accept and still contribute to your company's objectives.
We'll also provide a simple spreadsheet model you can use to calculate those price points for each product you offer. That tool alone should form the operational base to grow your business logically and profitably.
The author is the owner of Acorn Appraisal Associates, a 20 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA.
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