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.
Background
Last week we provided a brief history of the Appraisal Profession and the Appraisal Management Company (AMC). We received good comments from appraisers and an AMC who shared their thoughts on what was written. Very helpful folks, thanks! The week prior we discussed the Coester Survey, an AMCs survey results of their appraiser panel survey...what we agreed with in our experience, what we didn't find as representative of the market as we saw it. Good comments from folks there also...and another great help.
Our intent is to set the record straight...no spin allowed...as our appraisal firm sees the market from a major MSA in the country. We've all seen the influence of public writings on our profession. Look no further than the HVCC impact...a result in part of the New York Attorney General reading the October Research Survey Results which proclaimed over several years that their Appraiser Surveys reported Value Pressure a major problem in the market...one problem appraisers evidently couldn't control themselves.
The Coester Survey was an example of public writings that generally spoke to an issue of the day....one of which was appraisal fees paid by AMCs...but their findings and conclusions were opposite of what appraisers have been reporting for years. If we don't set the record straight with reasoned alternative views, we'll have yet another well meaning effort to solve problems that don't exist...or which produce changes which make matters worse because the true picture was misconstrued. Not that Coester spun their results...it's just that their results weren't reflective of the market.
Why Is This Important?
Professional Appraisers must answer to the requirements of our Profession (USPAP), Regulators (State License Departments), and our Clients. Appraisal Businesses must also conduct our appraisal activities within the prudent constraints of good business practice. If we don't meet both of those needs, we'll eventually be out of business.
We hopefully established last week that Professional Appraisers provide an important role in the real estate market, both Residential and Commercial...a market that represents a key component of our country's Gross Domestic Product, and indeed a major component of the world economy. The current global recession started with the collapse of the USA residential lending market, and we are still trying to recover worldwide from that crisis. That's support enough to emphasize the importance of maintaining a healthy market in which all participants can contribute and be compensated adequately for their contributions.
Appraisers didn't cause that market collapse, if anything we reined it in somewhat. In the current environment of various groups trying to recommend changes to prevent another credit crisis from occurring, we'll see many views written, recommendations floated.
Some recommendations will be made to correct certain elements of the market. Appraisers and Appraisal Businesses will be affected by those recommendations. It is important to the US economy and even the global economy that the facts are presented without spin, that recommendations are made based on those facts, not on misconceptions. Congress, Regulators, Lenders, AMCs, Appraisers, all need the facts.
AMCs From An Appraisal Business Perspective
Appraisal Management Companies have been around for decades, but have come to dominate the market within the last 15-20 years. Major lenders sought to outsource certain functions in an effort to achieve greater efficiency and lower cost. The Appraisal Department was one of those functions outsourced. Most major lenders have done that now, often by spinning off major functions of the appraisal department to another entity in which they sometimes maintain some ownership and control.
It has been estimated that 80 percent of the residential valuation products are ordered through AMCs. It has also been estimated that the majority of the AMC business nationally is done by the top 3-5 major firms. AMCs are now a major funnel of appraisal demand from the lenders and brokers, and they represent a major client niche for the Appraisal Profession.
The larger AMCs function as a classic Oligopoly Market, in which those few providers define and influence the market within their sphere of control. It is quite factual to state that two markets now exist for residential appraisal services; the AMC Market, and the Lender/Broker/Special Use Market, referred to as the 'one off' Market.
What's Good about AMCs from Our Prospective
As noted before, Acorn is a major supplier of appraisal products in the Houston MSA for AMCs. Years ago we determined that they would be a major factor in the business for the future and we organized our business to serve them, and we market to them, now serving up to twenty AMCs on a regular basis. We also provide our services directly to lenders and brokers who prefer to deal directly without the AMC middleman; the 'one off' market. In our twenty year experience with most of the major AMCs, here is what we find good about the relationships.
AMCs provide a steady and dependable volume - Whether it's five orders a day or five orders a week, that volume forms the foundation of our work flow and creates certain efficiencies within our business.
AMCs provide efficient communications channels- Most are web based portals which allow communications back and forth to be posted and the history of the assignment retained automatically. The Scope of Work, contact details, pertinent data, unusual conditions, are usually posted on web sites for download or sent as attachments to the order form as a PDF document. We strive to establish an honest and friendly relationship between our Administrative Manager and the AMC staff to handle all but appraisal issues. The AMCs tend to do the same.
AMC staffs are reasonably knowledgeable of Appraisal Issues- Most AMCs train their staffs and provide clear procedures to guide them. Our experience is they are also open to being educated about special situations relative to our market. Our staff appraisers are trained to be non confrontational in dealing with appraisal issues when informing the AMC staff of those special situations that occasionally develop. We don't take the position of preaching, but rather of informing. It generally works.
AMCs provide no value pressure- We can't remember the last time an AMC tried to influence our value conclusions. That's a huge plus in dealing with the client....the issues are very straight forward and clear cut, and never about hitting a certain value.
AMCs often provide quality control- Many AMC clients conduct reviews of our reports for certain technical requirements, and will return those for correction before the report is delivered to their customer. We never like to receive such returns....but they become high priority for the appraiser when they do arrive. We strive to correct and return all such returns within the same day. Such efforts on the AMC's part aid us in ensuring quality to our end client...something we both are interested in achieving.
AMCs process invoices on dependable schedules - We do very little follow up on outstanding invoices. We experience very little collection losses.
That's not a small list of positives AMCs bring to the market. Not all AMCs provide those strengths, but most provide the majority of them.
What Could be Improved From Our Perspective
Most business relationships can be improved. That's certainly true of the relationship we have with AMCs. I'm a reasonable entrepreneur. I don't expect to be protected from the market. I expect to compete for business on quality, service, and price. I acknowledge it when someone else provides better quality, service, and price. I hope others share that approach. That is certainly the spirit in which this is written. There are two policies that could be changed in the AMC market, and if they were, the niche would be profitable and a positive contributor to our economy for many years to come.
AMCs should acknowledge the existence of Appraisal Firms in Addition to Individual Appraisers - Many appraisers operate as a sole proprietor, with a single appraiser. Many operate as a Partnership or C Corporation with a staff of appraisers. The multi appraiser firm tends to be a Partnership or C Corp.
There is a long tradition in the industry for specifying the name of the appraiser when placing an appraisal order. That should remain an option. Historically, the lender/loan officer had relationships with the appraisers and they were comfortable and confident in that appraiser's opinion. Where that continues to exist, it should be allowed.
However, the tendency now due to the centralization of the loan underwriting and decision process is that those personal relationships are much less frequent or important. The HVCC requirements for a firewall between the lending officer and the appraiser make that personal relationship even less prevalent.
In multi appraiser firms, it is the Appraisal Firm that trains and supervises the quality and performance of the staff appraisers. It is the Appraisal Firm that carries the E&O Insurance, that monitors service commitments, that maintains the proper license status of it's appraisers.
AMCs should adopt the policy of assigning orders to the Appraisal Firm when orders are placed, rather than to individual staff appraisers. Many do. A few do not. The few that do not create significant inefficiencies in the performance of the Appraisal Firm, inefficiencies that over the long run impact service and quality. Let the Appraisal Firm determine who best among their staff can handle the assignment.
Studies in Acorn suggest that having the Appraisal Firm assign the order to the appraiser best suited for that assignment results in a 30 percent improvement in field efficiency in our firm. That is huge. The efficiencies are brought about principally by allowing the Firm to schedule assignments in large Metro areas grouped by location.
For example, Certified Appraiser A has two assignments scheduled for field work tomorrow morning. A third assignment arrives within that same quadrant of the market. It is immediately assigned to Appraiser A. The travel time in the field is reduced by 30 percent on all three assignments. If it is one assignment scheduled tomorrow and a second one arrives, the field travel time is reduced by 50 percent.
There are other efficiencies that are gained by this simple change, but field work and turn times are the most significant.
Un-bundle the AMC Fee for Service from the Appraisal Fee- As we noted in our review of the Coester Survey, the typical AMC takes a 30-35 percent haircut from the Appraisal Fee as it's charge for providing the advantages of their central ordering and control function. The haircut means that the typical Appraiser or Appraiser Firm is paid 65-70 percent of the 'one off' fee in that local market for completing the assignment.
To put that in dollar terms, the 'one off' fee for a typical 1004 residential appraisal is $350. The AMC places the order at 30-35 percent less, or $227 to $245. In some cases it is reported that the AMC may charge their customer $400-550 for that same 1004 appraisal. Most appraisers and Appraiser Firms will agree that the 30-35 percent haircut is too large and results in margins that are too thin to maintain a professional business in the long run.
The AMCs will likely respond that they do not set the AMC fee...that the market does. That is true to an extent. Remember my point earlier that the AMC Market for residential appraisals is an Oligopoly Market? A study of the history of AMCs would demonstrate and conclude that by virtue of the Oligopoly status, AMCs have been able to influence appraisal product prices and have thereby created a two tier pricing market.
One off appraisal fees in the market have held at $350 for typical 1004s for the last twenty years. There have been significant improvements in the efficiencies Appraisers and Appraisal Firms have adopted over those twenty years. When inflation is taken into consideration, the fee of twenty years ago in today's dollars is reduced by roughly 40 percent. The $350 equates to $211 in today's dollars, which suggests that the appraisal fee should have been adjusted up to $583 when inflation is considered. Yet in the typical AMC market, the appraiser or appraisal firm is paid a lower fee not higher....
AMCs provide some efficiencies for the Appraisal Firm...that's an impressive list of 'goods' above. From Acorn's perspective I'd feel comfortable paying a 10 percent haircut for those advantages. Any additional efficiencies or savings provided by the AMC accrue to the lender. Un bundle the fees; let the AMC bill the lender for that additional fee for service.
That's essentially what FHA was encouraging when they announced the adoption of a modified HVCC. Un bundle the fees AMCs charge for their services, separate those fees from the appraisal fee. Pay the standard fee for 'one off' appraisals in each market for the FHA appraisal ordered. Darn positive step forward!
Since the implementation of the FHA Modified HVCC in mid February, AMC fees have begun to rise in Acorn's experience. There are significant exceptions, but the trend is in the right direction...fostered by FHA's stand. However, Oligopoly Markets tend to be able to resist changes that fully competitive markets adapt by the actions of the participants.
Summary
Many AMCs currently assign appraisals to the Appraisal Firm and depend on the Firm to determine how best to handle the assignment within it's staff and time constraints. A significant few do not. If that change were made in those remaining few the business would improve for all parties.
Several AMCs provide 'one off' fees the Appraiser, and have for years. Since they have remained in business and provide high quality services from the Appraisal Firms' perspective, they most likely adopted an unbundled fee structure from the beginning. It can be done, and all parties to the transaction are better served. If the FHA unbundled fee model were adopted for all appraisal ordering the lender and the consumer would know what the cost breakdown really is and each party would make better decisions.
Finally, let us be clear on the points made here. Recent events have underscored the importance of the residential finance market to the overall national economy. It is important to the health of the US economy and to the global economy that the residential finance markets function in a prudent and efficient manner.
The Appraisal Profession provides an important service to that market as the only unbiased local market adviser/expert to each transaction. AMCs also provide an efficient and useful service. Lenders utilize both appraisers and AMCs to provide important information to support their loan decision process. It is in the best interests of the lenders and the economy to ensure the long run financial health of all participants in the loan processing system. The One Off Market for appraisal services is a fully competitive market, where the market truly sets prices. The AMC market is an Oligopoly Market, and those AMCs who exert influence on that market should consider the consequences of their actions and adjust if necessary for the financial health of their customers and their vendors.
That's why it is important that the facts and records be clear. If one party or another attempts to spin the facts or records in order to create a false impression of activity that does not exist, we are all damaged in the long run. If one party provides a snapshot of data that is accurate but not representative of the full picture, we need to correct that record so that the best decisions are made...among the parties....by regulators or elected officials.
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.
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