Do Appraisal Management Companies
Add Value To The Process?
By Charlie Elliott, MAI, SRA

There has recently been much controversy concerning appraisal management companies (AMCs) and their contribution to the appraisal process. This concern has stemmed from a number of different camps but some of the loudest howling seems to be coming from individual appraisers who do work for the management companies.

The typical complaint for an appraiser is management companies charge hefty fees, perhaps $400 per appraisal, and farm it out to the local appraiser for say $150, pocketing the difference. The management companies typical response is that they are in the business of providing services to the client and they not only deserve a profit but that they have substantial expenses including rent, payroll, utilities, taxes etc. They further point out that someone has to enter the order, find an appraiser, monitor the process, receive the appraisal, review the appraisal, supervise any necessary changes, ship the appraisal, bill the client, collect the fee, pay the appraiser and incur any bad debts associated with such services.

There is also the question as to whether the transaction is arms length. Who owns the appraisal management company? Is it the bank that is making the loan or is it an independent company earning its keep in the marketplace? Is the law of supply and demand governing the transaction? In cases where the bank owns the AMC, is it appropriate for the bank to set the appraisal fee to the borrower? Should this be considered self-dealing?

Is the amount of the appraisal fee charged the borrower any different than any other closing fee? Does the borrower not have the ability to go to a bank which charges less for appraisals, origination fees, surveys, credit reports, etc.?

Is it not true that all appraisal companies, even small mom-and-pop shops, are AMCs when the company hires nonowners to do appraisals?

These are some of the questions coming before Congress in the near future. Some have already been addressed at the state level. In Pennsylvania, an appraisal management bill (SB 206) was recently referred to the Senate Appropriations Committee, avoiding a vote of the full Senate. It was designed to require AMCs to register as appraisers and be governed under state appraisal board regulations. There have been assertions that the main proponent of the bill is the Pennsylvania Appraisal Board, if this is so the board would be an advocate of the appraisers, which it is charged with regulating.

This whole mess seems to stem from the question as to who is suppose to ultimately pay for the overhead and administration of the appraisal process. If it cost the lender $100 per appraisal to implement the process, who should pay for this service? Some appraisers apparently think that they are being forced to pay it in the form of lower fees. The client sometimes thinks he is paying it when charged an appraisal fee larger than that which the appraiser charges. The lender often thinks he pays it because his costs are greater than the spread between the appraisal fee charged the client and that paid the appraiser. Some management companies even think they pay it when they are forced to offer appraisal services at a loss after paying the appraiser a higher fee for a remotely located property and incurring the administrative overhead involved.

In an attempt to get to the bottom of this “can of worms” we must first ask ourselves what is the true cost of the appraisal? In a perfect world it would be what the appraiser billed for his or her services or at least something close to that. Unfortunately, we do not live in a perfect world. Properties are not perfect, comparables sales are not perfect, lenders are not perfect and appraisers are not perfect. For some reason, it seems that the process of ordering and receiving a properly prepared appraisal in a timely manner consumes a lot of resources. Since it is not the purpose of this article to get into the actual dollars involved lets just say that the true cost of the appraisal includes the overhead for administering it, which can be a substantial part of the overall cost.

The next question is who should pay for the appraisal. Getting back to one of the terms from college economics, “there is no free lunch.” Just as in the case of a home purchase, the buyer pays for all of the costs. It does not matter that the seller or the lender agrees to pay for commissions or closing costs, in the end the buyer pays the freight, either now or in the future. Therefore, it is the buyer’s responsibility to pay for the entire cost of the appraisal, including any overhead associated with its production.

Next, how does the appraiser get paid? Is it reasonable for the management company to keep 75% of the appraisal fee for management services? Probably not; however the appraisers compensation will not be determined as a percentage of the fee paid by the client or the lender for that matter. The appraiser should and will be paid based upon supply and demand for his or her services. Neither large management companies nor lenders can dictate the fee for appraisals. They can offer, suggest, ask etc. In the end the some appraiser must agree to the fee. Once the fee is negotiated that becomes where supply meets demand. When we shop in a grocery store do we refuse to buy a product based upon what the owner paid for the product or how much money he is making? We buy the product based upon its value to us and whether it is competitively priced. The last time I checked we still live in America where we enjoy a free market and where supply and demand determines price.

Finally, after stirring through all of this confusion it is time to call for the answer to the question: do appraisal management companies add value to the transaction? While undoubtedly, not all management companies make the same contribution to the process someone has to manage the appraisal process. This could be the lender or a management company chosen by the lender to include, perhaps, a wholly or partially owned subsidiary of the lender. It could also be the appraisal shop employing fee appraisers. In either case there is a substantial amount of work required to deliver the properly prepared, on-time appraisal management companies have received deserved criticism in some cases by offering appraisers lower than market fees. Rather than refuse the work, some appraisers have resigned to accepting it and venting their frustrations by complaining. Perhaps AMCs would better serve their image by subscribing to a bit of political correctness as they serve an important function within our industry.

By whatever name they are called, as long as there are independent fee appraisers there will, out of necessity, be AMCs. It could be argued that their function is just as important as that of the appraiser and, yes, most do add value to the process.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.