Changing Times Increase Benefits
of Appraisal Outsourcing
By Charlie Elliott, Jr., MAI, SRA

When I was growing up in the 1950s and ‘60s and even when I was building my career in real estate appraisal in the 1970s and ‘80s, people wondered if the world would be much different when the years started with “2” instead of “1.” Now we’re over halfway through the year of 2004 and the world certainly indeed has changed.

Computers small enough to sit on our laps are able to do more than earlier monster-sized computers that were big enough to fill up a large room. Professional athletes earn eight-figure salaries on a regular basis. TV cable systems can get over 200 channels. Globalization has become a buzzword.

Here are some other modern buzzwords: regulatory compliance, cost containment, operating efficiency and specialization. Players in all corners of the mortgage industry have been hearing and using these words more and more.

My profession has certainly changed in the last 30-some years. I remember when the conventional mortgage market was predominantly local, and the institutions that controlled it were predominantly small. There seemed to be a “good-old-boy” network involving the bank, the savings and loan, the credit union and the appraisers. Not only did they interact in business, but they also often interacted in the community through civic, church or social affairs.

This might still be going on, but I can guarantee you that it’s happening on a much smaller scale. I would estimate today that 80% of all mortgage loans are funded by financial institutions from central office locations far from where the real estate collateral sits. The 1980s saw two major factors that led to this change. First the savings-and-loan scandal wiped most of the S&Ls, which were once so prominent, off the face of the earth. Perhaps even more important to this chance is the merger-mania that started over 20 years ago and is still quite prevalent today.

This has resulted in a drastic change for real estate appraisers. While the appraiser and the collateral property that needs to be appraised, the financial institution and, more importantly, the person ordering the appraisal usually are not. Therefore, appraisers tend to be dealing with a voice or perhaps e-mail, rather than someone on a face-to-face basis.

Also, people ordering appraisals of faraway property are usually not familiar with the appraisers in the area where the property is being offered for collateral.

This has led to the emergence of appraisal management companies and the outsourcing of appraisals.

Last fall, there was a government action, which added even more to the change we are talking about. On October 27, 2003, the Comptroller of the Currency and four other major federal bank regulators issued a directive to financial institutions, reminding their directors of the importance of appraisal independence. This directive stated that property owners and loan sales people are not allowed to select appraisers. Furthermore, it let the directors know that they would be held personally responsible if the regulation was violated. Therefore, it has become even more of an advantage for a financial institution to use an appraisal outsourcing company because such action insulates the institution from any questions of impropriety concerning appraiser selection and influence.

While locating and selecting appraisers in other parts of the country take time, it can also be difficult for someone in a different area to be sure of an appraiser’s qualification. Making sure appraisers have the proper education, certification, experience and liability insurance is another service provided by a good national appraisal company. These companies often know from experience how dependable an individual appraiser is. Those who fail to show proper work habits have usually already been weeded out.

Financial institutions that outsource appraisal-management services are able to reduce staff overhead due to administrative and monitoring responsibilities taken over by the appraisal company. When outsourcing is utilized, costs can be identified and transferred to the borrower as part of the true cost of acquiring the appraisal. Since the costs are not part of the appraisal fee, however, financial institutions that currently maintain appraisal-management departments cannot pass this cost along to the borrower. And even if some costs must be absorbed by the company that outsources, at least that company knows what those costs are.

Convenience is a major advantage of outsourcing. When only one number needs to be called or one number needs to be faxed or one Web-order platform needs to be utilized to get appraisal service in a broad geographical area, management is free to do what it was meant to do, sell and issue loans. Most appraisal companies now offer free online tracking, which helps all parties to keep up on the progress made on an appraisal. This can save some communication time with the borrowers.

I believe that outsourcing of the appraisals is good for the organizational harmony of such an institution. It could save a lot of “finger-pointing” when a loan fails to close because the appraised value did not come in as high as anticipated. When the appraisal has been outsourced, it is more of a distant issue.

Most of these and other benefits seem to work for smaller financial institutions as well as larger ones. Therefore, I believe that the trend to outsource appraisals will probably continue.

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.