Appraisal Scoop

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.

Runt Rants - The AMC "Business Model" - Myths and Perceptions

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.

We've talked about Acorn's experience with AMCs and our views of the pluses and minuses of those relationships.  There have been a number of comments on the series, some indicating their experience mirrors ours in some respects, some indicating the experience had been quite the opposite.  That's not at all surprising to me, and likely not to you. 

I'm reminded of the story of the blindfolded folks trying to describe their perception of what an elephant is, each from feeling a different part of that remarkable animal.  Differences are well founded and expected

What we want to do here is to share views and opinions...and let all readers come away with a broader sense of the relationships, and allow each access to a set of facts from which to base their conclusions.  Some appraiser readers may simply be deciding to enter relationships with AMCs, some considering exiting those relationships.  Some AMC Managers may look at this exchange and confirm that their business model is validated, some may conclude that changes might improve their business.  Regulators and elected lawmakers may gain additional insights which will ultimately influence future laws and regulations. 

Its a big tent I'm trying to raise here, large enough and open enough to include us all in the discussion.  With the help of the readers and commenters, we should get a better picture of the real situation...not one biased in one way or another.  As many of you remember, I'm for each of us making our own decisions, reaching our own conclusions. All I'm trying to do is paint a picture of what really exists.  That done, make your own decision and live with it.

Today I'd like to address some myths on the appraiser side....We've seen evidence of them already from the comments that have been offered.

One Size Does Not Fit All

Jonathan S. and RobB noted that clearly and well.  Rural markets are quite different than homogeneous  metro areas.  The Fannie standard of within six months and a mile of the subject are not relevant in rural markets.  It is exasperating for the rural appraiser to have to explain "those ARE the best comps"  over and over.  It is also a drain on profit.  I say in Acorn...each time the phone rings about a delivered report we lose money.  It's true of all of us when dealing with reduced fee clients.  The lender and the AMC should recognize what the local lender knew years ago; each market is different!  If it is efficient to centralize decision making, it is not prudent to make one size fit all!  A lender/investor in loans will lose their shirts if they try to ignore those local nuances.  As we tried to note in the early part of this series....the local realtor and the local appraiser are the last remaining market experts.  Lenders ignore them at  their peril, and lender or AMC attempts to marginalize them puts the economy in peril as well.  (That last point may appear an over statement.  It is not. Realtors and Appraisers are the last local experts and are crucial to the lending process.) 

Appraisers Who Work Alone Produce Inferior Quality

That was inferred a couple of times in comments, and I've personally seen that view often when this subject is addressed.  If appraisers think that of their competition, they might have an incorrect view of the situation which will lead them to make bad decisions. 

Acorn has lost two very qualified appraisers in the last two years, and they took large books of AMC client business with them.  They moved into that spare bedroom of their home.  Why not?  Rent is cheap there.  We spent years training and educating and supporting those fellows.  One left after two or three years, the other after seven years.  I have no doubt that both of those individuals remain true to the ethics and quality standards we taught, preached, demanded.  The quality they are now producing on their own is the same as what we demanded.   

Appraisal Businesses who serve the AMC market must create an average cost business model that supports the fees and the costs the appraiser incurs.  That extra bedroom office is one of the major ways to achieve that cost reduction.  If you think all appraisers who serve the AMC market are inferior you have a biased and mostly incorrect view of the market.  Make business decisions on that basis and you'll surely hurt yourself. 

AMCs Care Not about Quality and Service

A couple of commenters made reference to that fallacy.  Those who do business with AMCs know that's incorrect.  How often do they receive correction requests from the AMC client?  In Acorn we track that by appraiser.  We want to minimize that occurrence because 'each time the phone rings....'  Those calls most often are legitimate points.  Acorn's company policy is that those are dealt with the same day the request arrives.  High priority!  We correct and return the report.  If an appraiser has more than 5 percent correction requests we have a problem that Acorn needs to solve.  I'm sure there are poor quality and poor service appraisers out there.  But they don't last.  The appraiser, the appraisal business, ends up on a do not use list and the client is lost. 

It's the same with service.  Miss too many deadlines without adequate explanation of the reason why?  The appraiser and the appraisal business is moved to the bottom of the pecking order. 

AMCs care about quality and service.  They care because they are judged on those aspects by their clients.  The simple fact that appraisers receive legitimate correction requests and are dunned for missing deadlines testify to AMC concern for quality and service. 

AMCs Pay Market Rates for Appraisals

Read my lips....they don't as a rule.  The few that do pay market rates are the exception.  Anyone who suggests that the AMC Industry pays market rates are either ignorant of the current market (and shouldn't be offering an opinion publicly) or they've taken an ethics course from Ex President Bill Clinton.  The typical AMC takes a 30-35 percent haircut of the appraisers typical market fee.  That's a fact. 

From an appraisal business owner's perspective, a haircut of 7-10 percent could be justified due to the efficiencies that a good AMC offers.  However the remaining 20-28 percent haircut is obtained by the force of their having created an Oligopoly Market.  That an Oligopoly Market has been created is a fact.  The pricing structure of the AMC market for appraisals is a direct result of that Oligopoly.

I intend to address that Oligopoly and the resulting implications to the local, regional, national, and even global economies later.  I hope commenters will read and share their views when that subject is aired.  I hope regulators and elected officials (or their staffs) will read the exchange and consider how the ideas expressed can be incorporated into regulation and law which will improve the status quo of our country, because I really believe that is what is involved here.

Centralization of The First and Second Mortgage Origination Process Is Good and Necessary

Really now, good for who?  Has the borrower benefited?  How?  Have the Financial Institutions benefited?  How?  Have the purchasers/investors in Mortgage Backed Securities (MBSs) benefited?  How? 

AMCs are an outgrowth of Financial Institution dis-intermediation which resulted from forces initiated decades ago.  The S&L crisis created the opportunity for money center banks to purchase local and regional competitors.  The development of the personal computer, it's powerful growth in chip processing power truly permitted centralization and data exchange virtually impossible when I began my business career.  The World indeed "Flattened" as Freeman described.  We are part of a global economy on a scale that was not physically possible just a few decades earlier.

As the banks centralized demands on management grew complex.  Anyone who has been responsible for managing distant offices appreciates the problems. Few managers have the skills to do that well.  Profits from mergers generally did not materialize as expected and cost cutting resulted. Outsourcing of operations functions  resulted; customer service call centers, loan servicing, appraisal departments. 

Anyone who has dealt with those functions in a local institution, even a very large one, before the Great Dis-intermediation began knows that customer satisfaction has declined in today's centralized world.  Indian customer service call centers is an oxymoron and serves as the example of a depersonalized world that has evolved. 

I believe that local institutions with local management and local decision makers serve their communities better than ones with national or even global centralized management and decision making.  That's based on my experience as a customer over 50 years, and as a corporate manager over a twenty year span..a span that included the beginnings of that centralization process.

AMCs Are Responsible For All That's Bad in the Appraisal Profession

That is an overstatement of most appraiser's opinions.  No doubt in many's minds AMCs have no reason for being, contribute nothing to the appraisal process itself.  Lou M commented along those lines, but his reasoning was at least unemotional.  The AMC elicits some of the most emotional responses I see in our profession.  In my view that is understandable.  The AMC business model has truly brought major challenges to the Appraisal profession:  the reduced pricing structure combined with the dominance of the AMC as the process by which an estimated 80 percent of first and second mortgage origination demand is handled has dealt the profession major problems.

For those readers who are not appraisers, consider a business where product prices have not increased in twenty years yet operating costs have kept up with inflation over that period.  Consider a business which is totally dependent on maintaining local expertize, with very limited opportunities to achieve economies of scale.  Consider a business where eighty percent of the demand has been centralized into an Oligopoly which has reduced prices of the principal product by thirty percent. 

How many businesses would be able to survive in those conditions?!   

The obvious answer is not many.  Since the conditions of the business have been brought about by the business model of the larger AMCs it is understandable that appraisal business owners would identify the AMC as the culprit.

We've hopefully established that the Appraisal Profession is essential to a healthy local economy, and in aggregate very important to the health of the national and even global economies.  Shouldn't the elected officials, the regulators, even the Lenders themselves be concerned with the health of the Appraisal Profession?  Isn't it in the long term best interest of all to have a healthy Appraisal Profession?

I maintain that it is not the AMC that is the problem, but rather their business model. 

One Example of a Business Model Decision That Creates Major Problems

Centralization of Financial Institutions resulted in outsourcing of certain functions that were able to take advantage of economies of scale.  Lower cost per transaction likely was achieved by that process.  To the extent that AMCs resulted in greater productivity in the process, that's good for the overall economy. 

Appraisers want our local and national economies to grow and prosper.  If the outsourcing of the appraisal departments of lenders to AMCs improves the lenders business, great!  There are advantages to dealing with the competent AMC as we noted earlier.  Acorn could see 10-15% of price reduction from the One Off Market prices for those efficiencies.  But 30-35% is excessive. 

Who benefits from the additional 20% haircut?  Not appraisers!  The lender has reduced the expense of the appraisal department by outsourcing.  The AMC has transferred some of that expense to their own business, but by serving other lenders and increasing volume they should gain economies of scale to offset some of that expense. 

The lender should be willing to pay for the AMC services at least what they saved by eliminating the appraisal function.  Prior to the AMC the lender was paying On Off Market prices for the appraisals.  That shouldn't have changed.  But it did! 

The AMC should be charging the lender for the functions they perform and they should be paying the appraiser for the appraisals at the same rate as before, less perhaps that 10-15% that the appraiser finds in benefits from dealing with a competent AMC. 

Lets use an example.  A typical 1004 with MC whose On Off Market price is $350.  The appraisal business owner might see a reasonable fee for dealing with a competent AMC to be 10% of that fee or $35.  That would be a haircut to the appraisal fee.  If the current business model requires and additional 20% in order for the AMC to make a profit, they should charge that fee for service to the lender....$70 for each appraisal order processed and delivered through their systems.

That would result in the lender paying $420 to the AMC, of which $70 was billed to the lender from the AMC, the remaining $350 was passed to the appraisal business, with a deduction of $35 for the AMC services to the appraisal business vendor.  The Appraisal business nets $315.

Compare that to the current situation where the Appraisal Business nets $245 for that same 1004 appraisal because the AMC takes a $105 haircut from the Appraisal Business. 

The current AMC business model makes a pricing decision to take too large a fee from the Appraisal Business, simply because it can.  Remember AMCs have created an Oligopoly Market for their services.  They have cornered 80% of the first and second mortgage appraisal demand.  The top five AMCs are reported to control 80% of the AMC business.  As such they operate with extraordinary power to influence the market and for twenty years they have exercised that power to demand payments from the Appraisal Businesses who operate in a fully competitive market. 

That's one example of harmful business practices that can be, are imposed by Oligopoly Market participants.  Isn't it time that practice changed for the benefit of all?

Next time we'll discuss the AMC Oligopoly market in more detail, and discuss some of the movements underway to bring balance to that market.

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 - The Good and the Bad - AMCs from the Appraisal Business Perspective

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.

Runt Rants - A Brief History of the Appraisal Profession and AMCs

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.

Last week we presented the alternate view of the AMC market compared to the Coester Survey.  That Survey presented the findings of their 'thousands' of appraisers in their panel, and ended up with an unfortunate lead paragraph; 

"After further analysis of the data from the Annual Coester Appraisal Group Vendor Survey, it seems like many of the implications made regarding the state of the mortgage industry as a whole have been debunked."

I hope Acorn's experience debunked the debunking!  Our reported experience reasonably matched the Coester Survey in each of their findings...with the exception of 'rating of the AMC experience', and more importantly, the 'fee relationship'.

The Coester Survey reported appraisers rating the AMC experience as below average.  Acorn's rating of the AMC experience as above average seems easily reconciled.  Acorn has evolved over a ten year period to serve the AMC market.  We've made changes in our business model to maximize the benefits of an AMC client base and minimize the disadvantages.  The typical appraisal business does not cater to AMCs in my experience.  That explains the different ratings results in my view.

The Coester Survey reported that appraiser fees did not vary between those received from AMCs and those from 'one off' orders in the local market.  In Acorn's experience that is hogwash, and it is contrary to the hundreds, even thousands of appraisers I've visited with over the years.  As I reported last week, only one of the eighteen AMC clients Acorn is pleased to serve fits that fee model.   The rest take a hair cut equal to an average of 32 percent of the 'one off' local fee.  Coester may be, likely is, a AMC business that matches the business model of the one client Acorn has....but that doesn't mean they represent the market! 

Policy makers, Regulators, others of influence who read the Coester Survey report would be well served to continue to read Appraisal Scoop and learn 'The Rest of the Story'....because that's exactly what we plan to present!  More important will be the comments from the readers.  They will confirm some key points, but likely differ on significant points.  The net result will be telling it like is it from the appraiser's viewpoint.

Remember my background;  bank lender, bank executive experience in a Financial Services Conglomerate which included major Residential Mortgage Origination and Servicing Divisions.  Owner of Acorn Appraisal for 25 years, ownership now shared with the next generation.  Partner in Zone Data Systems, LLC (ZDS), a new venture that aims to provide innovative appraisal services nationally.  

I don't remind you of that to beat my drum but to establish credentials for this discussion.  I do want the reader to pay attention.  I'm not smarter than you...refer to the origin of 'Runt Rants'.  But by golly I am an experienced corporate guy and an experienced entrepreneur.  I'm wise because of those experiences.

 

The History of Appraisers

Homeownership is a foundation of our country, the entire array of businesses supporting residential homes, including the lending sector, represents a bedrock of our economy.  When the residential market goes in the tank as is has in the last few years, the national, even the global economy is affected.  If we had forgotten that connection we are now reminded. 

The Appraisal Profession...it is a Profession...grew in the last century as home ownership grew.  Appraisers occupy a unique position in the economy.  They are charged with being the single unbiased participant in the sale transaction...similar to what the Realtor was in the dual agency model until recent years.  The appraiser is charged with determining value...usually market value...that the lender uses as a major support for the underwriting of the proposed loan. 

The professional appraiser of today is increasingly more educated, both formal education and appraisal theory education.  He is charged with a fiduciary responsibility to his client within the constraints of the Uniform Standards of Professional Appraisal Practice (USPAP) and he is regulated by his State.  He is also expected to be an expert in the market in which he is appraising...familiar with the nuances of local conditions, exogenous and endogenous to the property in question.  In the vast majority of the cases, he meets all those qualifications and requirements and delivers quality results.

The Licensed and Certified Appraisers may be employees of Banks, other lenders, or support industries that serve the residential home market.  May be.  But most often, (and the ones I'm going to discuss) are Independent Fee Appraisers who are also Business Owners.  We, they, own businesses that provide Professional Appraisal Services under the constraints of USPAP, State Regulators, the Appraisal Associations we may be a member of, and the laws governing agency and fiduciary responsibility to their clients.  

If you consider the entire history of the Appraisal Profession; if you consider their performance in the various business cycles; if you compare that performance to the ups and downs of the business cycle, the catastrophic failures that have occurred along the way, one can't but be impressed with their professional results.

In each crisis there have been attempts to blame appraisers for the problems that arose.  Most such attempts have fallen short of making the case in the immediate aftermath of the crisis, and in all cases have proven inaccurate in the bright light of history. 

The Appraisal Profession has done its job. 

A Briefer History of the AMC

Since the consolidation of the banking and lending business began in earnest after the S&L Crisis the Appraiser has been called upon to provide even more of the local market expertise than previously.  Before the loan officer was also local, was judged on his portfolio performance.  After consolidation the loan decision marker was distant...at a regional or national corporate office, and often was rewarded on near term performance...number of loans made or dollar growth in his assigned market.   The Appraiser became the sole unbiased local market expert.

Shortly after consolidation of the lending business the Appraisal Management Company business model began to make significant inroads into the lending profession.   Large, even bloated central bank offices had to reduce expenses. The Appraisal Department was 'out sourced' to an intermediary...the AMC.  Often the Conglomerate retained ownership of the AMC through intertwined subsidiaries. 

As an outside observer, it is easy to surmise the objectives of that out sourcing effort: reduce HQ overhead, shift the cost of the Appraisal Department to another company, yet continue to control the processes necessary for processing a loan application.  Since the other company was often part of the conglomerate, there was interest in reducing the cost of the appraisal management function in the process. 

A business model of the AMC was created at that beginning by those conglomerate financial services corporations, a business model that was copied by others, including those AMCs which were started independently.  It is a business model which is most typical today, including the pricing strategies.

The Current Environment

The AMC Business Model has dominated the bridge between the lending business and the Appraisal Profession for decades now.  Estimates I've seen suggest that 80 percent of the first and second residential mortgage appraisal demand in the USA routes through AMCs.  Other estimates are that 80 percent of that business is done by the top five AMCs.

That is a critical funnel for a critical process in our nation's economy, in the global economy!  It is important that we all understand how that business operates; its strengths and its weaknesses as they affect a cornerstone of the nation's economy.

There are many advantages to that business model, advantages to the lender, the borrower, and even to the appraiser.  There are also some disadvantages to the lender, the borrower, and to the appraiser. 

Next week we'll talk about those advantages and disadvantages, what's right and what's wrong with the AMC Business Model...touching on the lender and the borrower, but focusing on the appraiser.

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 - Coester Survey Compared to Acorn Appraisal

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.

 I'm sure we all read the Coester Survey link in Appraisal Scoop March 8th with interest. I certainly did. It was a broad survey; 1,569 appraisers all 50 states. That's gotta be pretty representative. Large sample sizes almost always are, assuming the sample is not biased in some way. Often times biases are unintentional. What really caught my eye is the following was the following quote in the introductory paragraph.

"After further analysis of the data from the Annual Coester Appraisal Group Vendor Survey, it seems like many of the implications made regarding the state of the mortgage industry as a whole have been debunked."

What a teaser!  Since my company does a lot of business with AMCs I was quite anxious to compare their findings with our experience.  Seems fair.  Acorn is a mid sized appraisal firm that does business with many national lenders, many of which now order appraisals through AMCs.  We are located in a major SMSA, Houston, TX, which is very competitive, thousands of appraisers doing quality work.

The Coester Survey was for 2009, so I selected the same period for comparison.  In 2009 Acorn was privileged to serve 130 clients, the vast majority repeat clients with years of history with Acorn.  We completed around 4,000 appraisals in that period.  There were 18 AMCs in that book of business.   That's a fairly good sample size to compare with Coester.

Let's look at each of the categories Coester reported on....

Distance - Coester found 65% traveled between 10-20 miles per assignment.  Acorn averaged between 20-22 miles per assignment round trip, including all field work.

Response Time - Coester reported 2-3 day turn time for the typical Conventional 1004.  Acorn averaged 3 business days for AMC assignments.  Acorn averaged an additional 1-2 business days for non AMC assignments.

Fees -  Here it gets interesting.  Coester reports that 64.65% of the appraisers in their survey charge the same fee for AMC assignments as for non AMCs.  Acorn's experience is quite different.  The typical, vanilla 1004 in Acorn is $325-$350 for non AMC clients, which matches the most recent alamode National Survey through their Mercury network, of which Acorn is a part.  Of the 18 AMC clients Acorn serves one accepts fees equal to Acorn's non AMC client charges.  One provides accepts fees equal to 90 percent of our non AMC clients.  The remaining AMC clients average fees equal to 68 percent of our non AMC clients.  To Summarize: Sixty five percent of Coester's survey charges equal fees.  The vast majority of Acorn's AMC clients accept fees equal to 68 percent of our non AMC clients.

Rating of the AMC Experience -  The Coester survey indicated an average experience, with quick turn times, lower fees, and abundant 'report stips' cited as the reason for average.  Acorn's experience would be generally rated above average, with steady volume, generally efficient communications systems, reliable borrowers, few 'report stips', no value pressure, and reliable payment experience as the reasons for the above average rating.

Payment - Coester reports a considerable number of comments regarding slow pay among AMCs.  Acorn's experience is little need for follow up with AMC clients, more follow up with certain non AMC clients...mainly in the mortgage broker category.  I haven't run actual numbers, but my guess is AMCs generally have about a 45 day receivable cycle. 

General Feedback -  Coester reports concerns with turn time expectations and pressure (evidently not value pressure, but delivery pressure), too much follow up required, better communication needed (concerns that their questions are not answered quickly enough), uneducated personnel, broadcasting of assignments.

Acorn's experience would not match these concerns.  Turn times are part of the Scope of Work and delivery dates we accept when accepting the assignment.  Follow up and feedback systems are generally internet web based and very efficient, with quick response from the AMC and Acorn.  We find the personnel of the typical AMC to be educated and informed, and open to our instructing them on the issues in a non vanilla assignments and unique characteristics of our market.

 Conclusions -   As I read Coester's report I found that their survey matched our 2009 experience in several ways; distance, response time, receivable turn times.  What didn't match is the experince in fees.  Acorn doesn't do business with Coester so we have no idea what their general range of fees to the appraiser are.  One of our AMC clients would rate similar to what Coester reports....but only one.  The overwhelming majority accept fees significantly lower than our non AMC clients.  We also differ in the AMC experience.  I would rate it above average overall from a total business relationship.  Coester's experience is just average.

Why the difference?

Readers of Appraisal Scoop may remember Acorn's history which we've described here over the years.  Acorn made a conscious decision nearly ten years ago to build a business model that met the needs of the AMC market, reasoning that was likely to be a major funnel for appraisal demand in the future.  It certainly has turned out to be so.  

We organized and continue to develop our business model to give maximum administrative support to the appraiser.  We take advantage of working in a market that provides an above average source of data from our various counties, and from our outstanding MLS.

A full time Administrative Manager provides the interface between our clients and the field appraisers.  All non appraisal related questions and messages flow through that Manager, mostly through the various client web sites, but also all phone calls.  We are organized to schedule all necessary appointments each afternoon, with those appointment being set for the next morning. 

All feedback on schedules are immediately sent back to the client as each step is completed.  Our objective is to minimize the times a client has to call us for information. If the phone rings, it's either because the client didn't check their website, or we failed to follow our procedures. 

We monitor the 'stips' returned by each appraiser, and focus on getting those down to a minimal number. Each time an appraiser must open a completed file due to a 'stip' we eat into our profit.

Our non AMC clients benefit from our business model.  We treat orders from either group exactly the same, same research, same scheduling (although we allow a little more leeway for borrows of non AMC clients), adherence to the standard SOW for that client.  Turn times are generally set at the shortest, communications are set at the highest, research and analysis are treated the same....to do otherwise would be inefficient.

However, it took Acorn years to achieve the business model we operate in today.  If other appraisal businesses focus on different niches, such as local lenders or mortgage brokers, expert witness, various forensic niches, then their business model and support operations are not likely geared to serve the demands of first and second mortgage AMC niches.  I can certainly envision where occasional orders from the AMC sector could cause major disruptions on such businesses.

The only thing that Acorn's experience doesn't support or I can't explain by our different business model is the claim that the fee issue is debunked by their survey.   In our experience there is generally a 30% haircut in appraisal fees in the vast majority of the AMCs in 2009 in our market. 

Hopefully readers of the Coester Survey will look to other sources such as Appraisal Scoop to get....'the rest of the story....' 

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 - Highly Honed Powers of Observation and Analysis Make Us Different

I don’t really know where it started. Maybe born into a family of mental giants, where the only option for the runt is to observe and listen.

Maybe it’s a small town environment, lots of experience with outdoor life learning to observe, listen, drawn conclusions.

Maybe it was the years in correspondent banking traveling to those same small towns in six states, chatting with the grocer, the barber, the gas station attendant, picking up clues, signs along the way…so that when I walked into the bank president’s office I knew more about the commerce of the town than he thought I should, and because of that we could do business, help each other.

I do know that when I came late to the appraisal profession I took all the AI courses that were available in a five year span, all they offered really.

When I began those courses I was already trained to observe, to listen, to accumulate random facts and compose a picture…a hypothesis.

The AI courses built on that base and made me better at it. All appraisers taking the good courses in appraisal theory, learned those same skill and applied what they learned in the field to develop and hone those same skills.

It’s part of what sets appraisers apart, what makes them a professional, part of the skill set that brings value to business transactions. It’s part of what we are expected to provide, why we are paid.

I’ll bet you haven’t thought about that in weeks…maybe even months!

But it happens every day, even if you don’t consciously think about it. A typical sample of that in operation occurred with me the last couple of days.

The nation is in turmoil, many markets have been in recession for a couple of years. Houston hasn’t had that problem…not until recently. Houston is an oil town. It’s much less so than in years before, but still an oil town. West Texas Light at $150 last summer created a boom in the oil patch and in the oil service business. That same West Texas Light is now in the $40-50 range, and the oil services businesses are beginning to hurt.

Houston housing markets have been in balance for the last ten years…good solid value growth in the 3-5 percent range each year. But the clouds are building and it is not just what is being reported in the newspaper…that statistic that one in three Houston houses sold in January were distress sales. That’s certainly not good, but heck! It was 24 percent distress in January 2008.

I saw clouds building as I drove to an appointment recently. Established small strip centers one after the other, all with one or two suites vacant. Three closed bank branches…now vacant.

Yet big dirt is being moved…a 50 acre commercial site to the right in vacant land that I thought would stay vacant for another couple of years. To the left a 75-100,000 square foot shopping center with a large anchor…the anchor not yet announced. That’s another one I thought would be delayed another couple of years…but there it is…tilt wall already in place!

A highway overpass gave me bird’s eye views of two large businesses on either side. To the right was an equipment rental business with a yard full of equipment. To the left was an auction house with its yard also full of equipment. Good for the auction company…bad for the companies that could no longer afford that equipment. Bad for the equipment rental business…when the lot is full the equipment is not earning revenue.

Both those yard statuses mean the unemployment rate is going to tip up in a month or two…the yards are leading indicators.

Click here to continue reading . . .

Runt Rants - I'm Back

Well, well, well. I’ve awakened from a year long nap to find a changed world. Rip Van Runt. That’s me!

When I dozed off

• We seemed a lock to elect the first woman president of the USA 
• The HVCC was going to revolutionize the appraisal industry 
• The Snake Oil Salesman were still selling bottled pig slop as perfume 
• The debate was ongoing to let troubled financial institutions fail 
• WAMU was a healthy bank 
• The DOW was down to 10,000 and there was concern in the air

When I returned 

• We have a male President 
• We have our third female Secretary of State 
• We have Senator Biden as Vice President in charge of something called Stimulus 
• The Snake Oil Salesmen have gone underground  
• The US auto industry has become a ward of the state 
• The financial industry has become a ward of the state 
• WAMU disappeared, Wachovia disappeared 
• HVCC has been so watered down that the change will be hardly noticed 
• The DOW is nearing 6,000 
• The US and the world are in a recession 

Yep, the last year has been eventful, and I missed it all. I know how Mr. Van Winkle must have felt.

Appraisal Scoop has become a must read in the Real Estate Blogosphere, regularly in the top 15 of 500 sites, often in the top 10. That’s impressive, but not a surprise. Appraisal Scoop was created by the best appraiser/marketer I know. He had a history of creating environments for others to thrive in before. He’s done it again in Appraisal Scoop. For my Heartless Editor to allow me to participate again is truly a stroke of luck!

Our business, Acorn Appraisal Associates in Houston Texas has endured a rough year; two rough years in fact. No doubt yours has also. Profits have declined. Net Income was still positive, but not nearly the required, the targeted, return. Revenues have basically been flat.

September brought Hurricane Ike, the first to directly hit Houston in decades.  Our building's power was knocked out and was one of the last to be brought on line; three weeks it took!  We’ve been able to maintain our staff and minimize the income loss to them personally, but little profit for the company remained.

That happens in business. We’ve adapted. We’ve changed. We’ll change some more. I’ll try to address those changes, those experiences in the time to come.

That’s what the Heartless Editor charged me to do when he invited me here several years ago. I’ll try to confine myself to what I know, which is my business. Not yours, but mine. For each of us business owners are experts in our own business, and no one else’s.

I’m here to share my business experiences, the successes, the not so successes.  One appraisal business owner's view of the market, the changes, and how I view their affects on my business. Take from them anything that might help you in yours.

I’m glad to be back.

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 - Veterans Day and Dog Tags

I once did a Runt Rant on the subject of Dog Tags. A friend of mine lost a son to the Iraq War. He honored me with a gift of his son's commemorative dog tag. I vowed to wear it every national holiday that honored our veterans. I hoped other veterans would do the same. Maybe they will.

One evening as I removed the Dog Tags from my neck, I wondered why I was removing them. What else would hang around my neck the next day? Nothing? If so, why? It was then that I experienced a rare creative thought....I'm not very creative. I could wear the Dog Tags around my neck permanently, wherever I go, whatever I do.

A reminder: to me, possibly to others who I come in contact with. Mine are now a fixture. The Geezer wears dog tags. Occasionally someone will notice them and comment. It sparks conversations, leaves a thought behind that might not have been there before. A reminder that we have what we have, we enjoy what we enjoy, because others have sacrificed to ensure that we can.

  This week is Veterans Day week. It's to remind us of our service men and women, past and present. The gift they give us. The one we often take for granted. Freedom. This week I'm wearing my dog tags outside my shirt. Sparking more conversations, more thoughts that might not have been there before.

Thanks guys and gals for protecting what I have, what we all enjoy!

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 23 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Runt Rants - Energy Crisis is Similar to the Appraisal Crisis

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Watching the dramatic rise in the price of oil the last few weeks, the resulting rise in the price of gasoline at the pump, and the actions of our elected representatives and those seeking election is both entertaining and instructive.

• Entertaining to watch folks complain about the result but not identify or agree on causes. 
• Instructive because there are parallels to what the Appraisal Profession has experienced in the last few decades.

Neither the Democrats nor the Republicans have anything close to a policy to address the energy problem Both have had ample time and ample opportunities to do so. They certainly can’t agree on the causes. One side wants to increase the search for new oil reserves. The other worries about the environmental impact of that alternative and prefer to regulate increased mileage standards. Both want to find alternative fuels, alternative energy sources, but neither are willing to describe the costs to voters of taking bold action. There is even a lively debate about the amount of usable oil reserves left in Earth, and that debate centers around the term Peak Oil.

Peak Oil is not about running out of oil. It is about the crossing of demand and supply curves and what results when that happens.  It is about lead times to develop alternatives.  It is about the implications of such crossings of the curves as it relates to a critical commodity.

Energy Costs and Our Business

It’s not a just an interesting political problem.  It’s an appraisal business problem.  Today in Acorn I am dealing with the implications of $4.00 gasoline.  We give a mileage allowance.  Should the allowance be increased to compensate the staff?  Should Acorn encourage the demand curve change by granting increased mileage allowance for those with fuel efficient autos? Whence does the cash to achieve that arise? 

Click here to continue reading . . .