Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he faults fee spreads to the commoditization of appraisals and emphasizes he is not tipping his hat on his car preference. …Jonathan Miller
This being the dog days of summer I was carefully mulling over in my mind my next Fee Simplistic blog when my plans were altered by fellow Commercial Grade blogger John Cicero’s commentary about spreads in appraisal fees commensurate with the scope of work involved. As a retired bank appraiser who was responsible for not only hiring but, more importantly, understanding the collateral and scoping the assignment before retaining an appraiser my curiosity got the best of me and I inquired as to how a 300% spread in fees could occur. Was it possible that the various appraisers misunderstood the assignment, was the lender giving each appraiser the same report requirements or was I or John missing something? I found out that the winning “bid” or fee (for those who are indeed professionals) was awarded to an appraiser -now get this-who did it twice before over a 2 year period and hence the spread. As John would lament losing the assignment because of the ridiculous spread in fees my take on this (not that I do not agree with him) is that the lending side should be the designated culprit.
Why so? My previous role with the bank on the credit side would have caused me to inquire as to why 2 appraisals over 2 years by the same appraiser did not assuage the lending side. Was the problem with the borrower, the terms offered or with the appraisal itself? Looking at this from the credit side of appraising I would have been interested in the history as to why this borrower was still hunting for a loan. I most particularly would have been interested in the history of the 2 values by the same appraiser: did he get it right the first time, the second time and is it likely he will get right this time or was the problem in the borrower’s credit history or the terms of the loan?
Finally, I would have been also been interested in talking to the appraiser about how he saw the appraisal issues, assuming there were some, over the 2 year period. We know that falling cap rates would have produced a higher value (all other things being equal) but what was the appraiser’s thinking? Was this going to be a fast turn around because he appraised it twice before or were there new factors that had arisen in the market that he was not paying attention to because he knew the building and the resultant value range from his two previous assignments and was only interested in a quick turn around and his fee?
Unfortunately, the appraisal world today has become too commoditized where FIRREA and USPAP have fostered a lowest common denominator mentality. “Get it done, get it done fast, and get it done as cheap as possible” is the credo that has been created by the so-called “authorities”. I have always liked to think that professional fees whether for appraisers, dentists, physicians or accountants should be based on the value they bring for their service. Would you entrust your health or your tax return to a doctor or accountant who will do it for the lowest fee or are you willing to pay somewhat more for better or more competent service? Certainly, the shareholders of XYZ lending institution deserve the same consideration or has securitization of collateralized mortgages removed this concern? Of course someone will say, “what’s the difference if you drive a Honda Civic or a BMW-they’ll both get you to where you want to go”. Yes they will just as a store front drop -in-clinic will take care of your pain until it comes back again
Semper Fee Simplistic
Tags: Soapbox Blog, Martin Tessler, Appraisal Fees, Fee Simplistic
As I approach my 25th year working in as a RE appraiser, I’m convinced the 300% spread is due to the fees establishing low end. Recently I’ve been focusing on just how the low end is even possible and in addition to the points you have raised, I’ve come up with my observations: 1. many low fee appraisers fail to know their actual operating costs and resulting margins. So they are flying blindly and hook on to the lowest common denominator – the fees charges by their closest competitors. 2. many fail to place enough value on the cost of obtaining and maintaining in good standing (in addition to a minimum of 45 hours of continuing education, subscriptions, memberships, E&O insurance, admin. expenses, transportaion costs, etc.) their individual licenses. As the licensing standards ramp up nationally in January 2008, this may changes some attitudes. 3. many appraisers wrongfully think they are in the volume business and match that myth with low, volume pricing. Hence, rocking the boat that has been smoothly and steadily listing in calm waters for years, is something they dare not do – it could effect the perceived volume!. 4. Many low fee appraisers are unwilling or are incapable of preforming regular marketing and client development staregies. A top tier example of just how it should be done is Miller Samuel. For most, it seems to be much easier to sit by the fax machine or field emails and wait for orders to come in. 5. As you point out banks essentially consider appraisal services to be a commodity with fast, cheap, and oh by the way, reliable service to be the order of the day. It is my opinion, most but not all banks, make poor clients for many reasons and more appraisers should understand this. But the leading issue is that bank’s zeal for efficiency and cost containment simply do not mesh with the real issue though…at the end of the day appraisers still must exceed minimum professional standards and provide credible assignment results, irrespective of the fee, low or high. Unfortunately, an underlying problem is that many appraisers are unwilling to stand up for what they must do – exceed minimum professional standards and provide credible assignment results – which typically requires a higher level of effort and fee. This is not to say appraisers by and large are doing a poor job. Simply put, they do not appear to be getting enough time and fee for thier professional efforts. Over time, I am confident this paradigm of what many simply consider to be “low cost = low wisdow” will change as the focus increasingly shifts to promoting the public trust (in the profession and individual appraiser) and appraiser’s unwavering charge to the exceed minimum professional standards and provide credible assignment results. And some rethinking followed by a reorganization of many bank appraisal procurement models will surely change as well. Like any commodity prized for it’s fast and cheap qualities, things eventually catch up. In terms of appraisals, the value of the professional service, with the real opportunities it provides clients at the core, will ultimatley be the order of the day.
Thanks Jose – “low cost = low wisdow” is absolutely the order of the day.