From the Movie Armageddon – actor Steve Buscemi says, as they are sitting in the Space Shuttle on the launch pad:

You know we’re sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn’t it?

The commercial appraisal industry has evolved from a group of professionals providing critical input for underwriting or other decision making to a pure commodity. In retaining the services of an appraiser, the basic theme is “the low fee takes it.”

These buyers of appraisal services either cannot distinguish a good report from bad, or simply don’t care. Therefore, most lenders – notice that I didn’t say all – will make their selection based on that person that is willing to sell his services for cheapest fee.

Can you imagine selecting your cardiologist or divorce lawyer using the same criteria?

With the advent of on-line bidding systems, lenders can now solicit bids from a dozen or more firms, which inevitably places even more downward pressure on fees.

The irony is that the same groups that make an entirely fee-based decision are the ones lamenting the dreadful quality of appraisal reports that are the norm today.

HmmmI wonder if there’s any relationship there?

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One Response to “Fee For Service Armageddon: How Low Can You Go?”

  1. Martin Tessler says:

    It is going to be quite interesting in the next cycle when the holders of the CDO bonds are hit because of defaults (assuming defaults hit the middle & higher tranches and not just the lowest rated ones)for the Feds to comment on the quality of the underwriting. I think that the next looming real estate downturn is waiting to happen and I believe its going to arrive when the BLS starts publishing the new CPI which has been cleansed of its big generator of inflation-energy and food-by Greenspan and his cronies who want to keep inflation in check. Now they will no longer be able to do so with $3+ gas along with the impact its going to have on everything plus the runup in building material costs which is already going on. The effect is going to be adouble whammy to homebuilding and home buying-I see higher interest rates looming once the real CPI kicks in and the price increases in new housing is going to falter in sales because people will have to fill their SUV’s and cope with higher prices. You guys and certainly Jonathan should be planning a consulting practice that will counsel the bond insurers or SWAPS sellers on what is going to be the over-inflated portfolios and the best thing is that you don’t have to write an appraisal report to collect fees that will reward your time input compared to the low bid appraisal syndrome.