Author: David A. Braun, MAI, SRA (President, Braun & Associates, Inc.) I have been actively engaged in real estate appraisal, review, and consulting since 1976. In this period, assignments have been performed throughout East Tennessee for numerous clients. The properties have ranged from vacant land, single family, condominiums, multi-family, developmental, and commercial.
In the following discussion I will address how to develop your personal hourly billing rate; how technology can improve your earnings; and how to properly price “odd” jobs. A program written in MS Excel is provided to help you develop your hourly billing rate. - David Braun
Three criteria for evaluating the importance of any new appraisal technology were listed in the open letter found on the a la mode labs website home page. They were:
- It will improve the quality of the appraisal and/or the report;
- It will enable shorter delivery times; and/or,
- It will result in the appraiser being able to gross more money per hour.
Numbers 1 and 2 above basically address the effectiveness of our service in relation to our customers’ (clients’ and intended users’) needs. The long-term future of the appraisal profession will depend on appraisers successfully meeting these challenges. Appraisers must provide valuation products that are cost effective for our customers. This is the big deal about the appraiser being able to vary the scope of work based on the dynamics of the assignment, the most important of which is the client’s problem.
In my 30-plus year career as an appraiser I have devoted a lot of time to Numbers 1 and 2. I have published short articles, developed the first seminar on scope of work, written a book on scope of work, and developed software to help appraisers better document their appraisal reports. Today, I am really fired up about Number 3: the appraiser’s gross earnings per hour.
I have developed a really bad attitude concerning the financial rewards associated with a good residential appraisal practice. I know that there are many residential appraisers out there who are exceptions to the rule and make more money than is typical. I will go on record here by saying that about 50 percent of those appraisers are not doing a very good job of meeting Number 1 above. These appraisers are like a virus that has infected the appraisal profession.
This discussion is not for those appraisers as they believe the best way to achieve a higher gross income is by taking the “let’s not but say we did.” philosophy in appraising. What is a fair charge for the appraisers who complete each task with the diligence necessary to contributing to the solution of the intended user’s needs? Antitrust laws prevent me from discussing the amount appraisers should charge for a specific job, or from setting a standard hourly rate for appraisers. This is alright, because there is no one hourly rate that is right for each appraiser and no one fee that is right for each type of assignment. While I think that the residential appraiser is having a much harder time in terms of earnings than the commercial appraiser, this discussion applies to both.
There are a couple of things appraisers must understand:
- It doesn’t matter how much money you gross, only how much money you get to spend.
- Clients do not care what you earn on an hourly or yearly basis; they only care how much you are going to charge to complete the next assignment.
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Many appraisers who are obsessed with their gross income have no idea what they really make in terms of disposable income. If you have an annual tradition of getting a large second mortgage in March or April of each year to pay the tax man then you probably fit in this category. It is often two or three years down the road before some appraisers realize he/she is apparently not making as much as they thought. You might believe that it is good if your competitors are earning less than they think and possibly getting into money trouble. Quite the contrary, these appraisers are bidding against you with unrealistically low fees based on their distorted view of what they are earning. Once they realize they are in money trouble they often quote even lower fees based on their need for immediate cash.
A good way to get a handle on what you really make in terms of disposable income is to properly formulate a target income that considers expenses, income taxes, retirement, health insurance, etc. The smaller the time increment that this is monitored on, the more accurate it will be. A targeted hourly billing rate is excellent in this regards and it is useful in quoting fees for odd jobs such as updates and very low end valuation assignments.
The first step is to decide upon a proper annual income figure. This is done by comparing the appraisal profession to other similar professions such as title abstractors, real estate sales persons, home inspectors, accountants, etc. Factor in your regional area, your level of training and education, and years of experience. Keep in mind that many of these competitive salaries include benefits such as income taxes, retirement, health insurance, and paid vacations. If you are an appraiser that is paid on commission as a contract labor you will have to add for these.
Next be sure to include an accurate picture of your business expenses. Whether you work for yourself or for an appraisal company somebody is paying from 25-35 percent in business expenses. Let’s consider three scenarios with targeted annual incomes of $30,000, $55,000, and $75,000 respectively. In these scenarios the appraiser is paid on commission as contract labor. These savvy appraisers understand that about 25 percent of their payroll check must be set aside for income taxes and retirement (15 percent for taxes and 10 percent for retirement). This means that they will effectively have to gross about $40,000, $75,000, and $100,000 to realize the $30,000, $55,000, and $75,000 of income to live on respectively. In addition, they know that they will have to gross the company much more than that if they are to realize their personal income goals. How much will they have to gross to achieve their targeted annual income?
That depends on the following things:
- The split you are paid.
- The amount of other expenses you pay such as driving, license, E&O, camera, etc.
- Average hours worked per week
- Number of weeks worked in a year
- The ratio of billing to office time (this is basically the time you spend in the office, but are not working on valuation services. This can be low for company owners).
We will assume that the appraisers in these three scenarios are paid on a commission basis. We will use some generic parameter values (you can click here Download HRLYRATE.XLT (38.5K) to download an Excel program that will allow you to try out different parameters). The information interface in the Excel program is presented below.
In scenario one, the appraiser must gross (charge the customer) $43.84 per hour. To earn $75,000 and $100,000 the appraiser must gross $82.20 and $109.60 respectively assuming the same parameters are used.
Summary of information:
| Scenario | PDI Target* | TDI** | PHBR*** |
|---|---|---|---|
| 1 | $30,000 | $40,000 | $43.84 |
| 2 | $55,000 | $75,000 | $82.20 |
| 3 | $75,000 | $100,000 | $109.60 |
*Personal Disposable Income Target represents the income you require to meet your living expenses not including 15 percent for income taxes and 10 percent for retirement.
**Total Disposable Income is your total take home pay. This is the annual income you found by comparison to what other similar professions are earning.
***Personal Hourly Billing Rate required to meet your PDI and TDI targets.
If you are an owner and not on a split the following parameters might be applicable:
Anyone who works for themselves knows that a considerable amount of time is spent in running the business-of-the-business. In this scenario a billing rate of $79.72 is required to achieve an income level of $75,000. To prevent mismanagement of money, I suggest that anyone who works for him/herself should pay themselves on a split basis as the money comes in.
PRICING ODD JOBS
Once you have developed your own personal hourly billing rate you are empowered in pricing odd jobs. Take a request to “reassign” an old value opinion. You know this is really a new assignment. If the intended use was for secondary market and the updated assignment is also for secondary market then little additional work may be required, often as little as an hour if it is almost a copy over. However, if it was originally done as a drive-by and the new lender requires an interior inspection you might figure it will take 3 hours to do. Simply multiply your personal hourly billing rate times the time you estimate the job will take (If your billing rate is $80.00 an hour then your fee would be $240.00 (3 hrs. x $80.00).
Another example might be some work you are doing for a divorce situation. At this point they are not sure what they will need, maybe just the residential house, but maybe an office building as well. A good way to price this job is to simply quote your hourly rate to them. After all, lawyers do it, plumbers do it, and therapists do it. Performing work on an hourly basis is not traditionally done in the appraisal profession because we have historically focused mainly on lending work. Lenders ask for a fixed fee quote for filling out the “Good Faith Estimate”. In reality, a good faith estimate is just that, an “estimate”. As such, it does not require an exact appraisal fee, but it may be difficult to change everyone’s mindset on that. Certainly, non-lender work is not shackled with an inclination towards set fees. In my personal practice I have found that an hourly fee basis is acceptable for most non-lender work when tempered with a maximum limit. For example my quote is, “x dollars per hour and the fee will not exceed $3,000.00”. Keep in mind that if you charge per hour you must keep a work log that justifies your charges.
THE VALUE OF TECHNOLOGY
If you have instituted the use of some new technology that saves 10 percent in work time over your competitors then you should quote set fees based on the amount of time it would take your competitor to complete the assignment (not the time it would take you). If you quote your fee on an hourly basis you should add 10 percent to your personal hourly rate to pay for the cost of the technology. The benefits of state-of-the-art technology are leveraged in a highly competitive market. A good example of the technological benefits to the appraiser is illustrated in the “Bear Story”. The story goes like this:
There were two hikers that unknowingly walked up on a grizzly bear. Startled the enraged bear charged them. As the two hikers were running away as fast as they could one hiker yelled, “We can’t outrun that bear!” The other hiker replied, “That’s OK because I only have to outrun you.”
The bear represents the appraisal profession and the two hikers represent appraisers. The moral of the story is that even in a market where appraiser fees are low it is possible to succeed if you can “outrun” (out perform) your competitors. The advantage of appraisal technology cannot be over-stated.
This short writing only scratches the surface of the topic of earnings and billing rates. I hope this is enough to enlighten appraisers on the benefits of utilizing a well thought out system for setting fees; as well as the pitfalls of relying on a haphazard system with little or no cognitive input. This writing is not intended to advocate artificially high appraisal fees; as our work must be cost effective to users of our services. However, if enough appraisers are ignorantly setting fees artificially low then this will adversely affect the over-all market for fees.
Many competent appraisers will be driven out of the profession if the market dictates artificially low fees over a long period of time. A balance in fee structure (not too high and not too low) will ensure that reliable cost-effective appraisal products and services will be available to the general public.
You can download a copy of “Hourly Rate Setter” program I wrote in MS Excel by clicking here. You must have Excel loaded on your computer to run this program. Before running this program open Excel click “Tools” on the menu bar, choose “Macros”, choose “Security” and set to “low”. This will enable the Excel macros to run. When finished set the security setting back to “high”.
I invite, and look forward to reading your feed back on this topic.
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