Are Appraisal Fees Rip Offs?

By Charlie Elliott, Jr., MAI, SRA

Today in the lending community there is more competition than there was in the past. Loans have drifted over from the area of that of a specialty product to more of a commodity given governmental efforts to standardize loans for the benefit of the borrower. This has given the consumer the ability to compare prices and be more discriminating as to which lender is offering the best value. In addition to all of this, there is also pressure from the government and from lending competitors to hold down costs. 

In looking at the cost of a loan, there are many, involving various types of service providing vendors. These often involve PMI insurance, flood maps, credit reports, legal services and appraisals, among other services. While there is pressure on all vendors to reduce prices, it seems that there is more pressure on appraisers than there is on some of the other disciplines. Perhaps, that is because the appraisal industry is my industry, and I am more aware of the pressures due to my position. My logic tells me that, to some degree, this may be true; however, appraisals, by their very nature, seem to vary in cost more than, say, credit reports or flood maps. For this reason, I acknowledge that appraisals are fair game for question, although I am convinced that critics will become more accepting of the wide range of appraisal fees given a better understanding as to why prices do vary.

In preparation for writing this column, I did an informal survey of appraisal costs around the country. Not surprisingly, there was a wide range of prices listed. The complete single-family residential appraisal, or the FNMA 1004, ranged in price in the survey from a low of $300 to a high of $650, and the limited single-family residential appraisal ranged in price from $225 to $395. A quick thumbnail comparison provides us with a range of prices for the complete appraisal amounting to about 117% of the base price and a range in price for the limited appraisal amounting to about 76% of its base. Without getting into heavy statistics and for sake of simplicity, let’s say that the range of appraisal prices vary by approximately 100% from that of the lowest or base price. Said another way, there will be those that claim that some appraisers charge twice as much for their appraisals than do others. On its surface, this information would seem to support the cries, of some, that people are being ripped off by opportunistic appraisers. While admittedly there are undoubtedly situations where some appraisers gouge customers, I beg to differ with this general premise and offer the following explanation.

In addition to the legislative laws to which we subscribe, we also subscribe to another law here in this country that has helped serve to make us the strongest nation on earth; it is called the law of supply and demand. Throughout history, numerous and various socialistic and communistic countries have attempted to overcome this law by imposing their own fairer pricing system which usually consists of bureaucrats, applying one size fits all pricing on all of its products and citizens.

Attempting to employ details of the basic economic theory, which I learned as a college student, I seem to recall that when an economy is operating efficiently, prices automatically adjust to reflect the appropriate price given a level of supply and demand for a product. It not only works for consumer products but also for services such as appraisals. Listed below, I will attempt to explain why prices of certain appraisals can logically cost much more others.

• Appraisal Type: Complete appraisals with interior inspections cost significantly more than limited drive bys. They take more time and therefore carry higher labor cost. 

• Property Location: Fees for appraising properties in remote areas or in areas where the cost of living is relatively high will be more than it would in other areas. It has been my casual observation that appraisals most anywhere in the state of California cost more than appraisals in other states due to the high cost of living there, among other things.

• Property Type: The appraisals of large, unique, super-high-quality properties are more labor-intensive tasks than that of smaller cookie-cutter properties, therefore they cost more to appraise. An example of this would be a 10,000-square-foot post-and-beam mountain estate or a Hollywood mansion.

• Demand: Recent statistics reflect just under 100,000 state certified real estate appraisers in the United States, many of which are inactive. This sounds like a huge number but when compared to the more than one million Realtors in this country it’s a paltry sum. During slack periods this number is adequate to supply fast service to the mortgage industry; during peak times, appraisers raise prices when pressured to offer quicker-than-market turnaround time. This is supply and demand at work.

The explanations above reflect only a small number of reasons why appraisal fees can vary, however, in my opinion; they weigh most heavily in the determination of appraisal fees.

Lately, I have heard much about bundling of services and flat fees for closing services. At first blush, this may sound like a fair and just way to deliver services but I beg to differ with this assertion. It is just the opposite, and I will attempt to prove my point by asking one question. In our survey we concluded that a complete appraisal could cost between $300 and $650. An average of these two numbers is $475. Would it be fair and just to charge the little old lady buying the 1,000 square flat in an urban area of town $475 for her appraisal while charging the Hollywood movie star the same price for the Hollywood mansion, when her true cost was about $300 and the movie stars cost was $650? I think not.