The ugly truth about appraisal fees

I had a bad experience with an AMC recently and I want to share it. This is not because I’m wanting to rant or be negative, but only to highlight some of the ugliness that happens behind closed doors when it comes to appraisal fees during loans. This is especially worth knowing about for any home owners and real estate agents for the sake of their clients. Any thoughts? I’d love to hear your take. 

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The Issue: I was asked to appraise something challenging, so I quoted a fee that was higher than a standard fee in Sacramento but still reasonable for the job because the house was funky. Anyway, I was comfortable with the fee and it was accepted by the AMC (Appraisal Management Company) that the lender hired to manage the appraisal ordering process. But then things got interesting because through the course of the transaction someone showed me an email from the loan officer where I learned the AMC was actually charging the buyer $345 higher than the fee I quoted. What the? That seemed excessive, but the real clincher for me was the email showed a chain of conversation with the AMC where they said I was the one who quoted the much higher fee. Not only was the AMC gouging the buyer in my opinion, but there was a blatant lie that I was the one dictating this fee that was 43% higher than the one I quoted.

Look, I’m not a complainer and I am a total optimist, but this is not okay on so many levels.

Why this matters:

1) Anger & The Real Fee: Let’s remember the appraisal fee charged to the buyer might be far different from what the appraiser actually gets. Thus before becoming angry at the appraiser for charging so much, try to find out what the appraiser is being paid (and what a market rate is for your area too). Is the appraiser actually getting that rush fee your buyer paid too? Keep in mind many AMCs tell appraisers not to discuss fees, so unfortunately it’s not likely you’re going to get an answer from the appraiser (maybe ask the loan officer to dig around). To complicate matters, it’s common for AMCs to tell appraisers NOT to attach an invoice to the appraisal report, so it’s not easy for anyone to find out how much the appraiser made from the fee the buyer paid unless there are disclosure rules from the state.

2) Appraisal Quality: In many cases AMCs are scraping so much off the top that the appraiser really isn’t making a reasonable market fee. It’s easy to gloss over this as insignificant, but it matters because over time if appraisers do not earn market rate fees it is going to weed out more experienced appraisers from doing loan work. Could this impact quality? I think so. By the way, if you didn’t know, an Appraisal Management Company is NOT used during a private valuation such as a divorce, pre-listing appraisal, estate planning, litigation, hard money loan, bankruptcy, etc… By the way, let me make it clear that not all AMCs are bad either.

3) Longer Turn-Times: At times it’s difficult for an AMC to find an appraiser because a property is so unique or it’s in a rural area. This can be frustrating for everyone else in the real estate transaction because it hands-down makes an escrow longer. Yet sometimes the problem isn’t the lack of an available appraiser, but rather the AMC broadcasting an absurdly low fee to countless appraisers for weeks. If the AMC would have simply started the process with a market rate fee and a realistic turn-time, maybe the order would actually be finished by now.

4) Lack of Transparency: California does not require disclosure on the HUD-1 of the fee paid to the appraiser vs the fee paid to the AMC. Since these fees are not separated, there isn’t any transparency as to what the appraiser and AMC are getting. I would think some buyers would be shocked to learn the appraiser didn’t get the full fee in the first place – not to mention a $345 AMC fee. Why would we not disclose these fees? Can’t we do better at being transparent?

I hope this was helpful or interesting. Any thoughts?

New Video: I made a video called “The market isn’t doing the same thing in every neighborhood.” It’s a quick look at three neighborhoods. Watch below (or here).

Questions: What stands out to you most about what I mentioned above? Anything else to add? Did I miss something? What is the best way to avoid working with bad AMCs?

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5 things to consider about higher appraisal fees and longer turn-times

Appraisal fees have been going up and turn-times have been getting longer. Why is this happening? Why is it taking longer to get appraisals done? Is there really a shortage of appraisers? Let’s consider a few points below to help think through some of the bigger pieces to this conversation. I hope this will help you better explain the issue to your clients also. Any thoughts? I’d love to hear your take.

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5 things to consider about higher fees and longer turn-times:

1) Appraiser “Speculators”: Did you know there are actually 45% less licensed appraisers in California today compared to 10 years ago? This sounds alarming, but is it a shortage? The number of appraisers climbed exponentially before 2007 because the market was good and it was fairly easy to become an appraiser in California at the time. This hefty increase was more about the market though rather than there actually being a need for more appraisers (key point). In fact, many of the appraisers who entered the field were more like speculators hoping for easy money –  but then the economy unraveled. We can’t therefore look at 20,000 appraisers as being a normal or healthy number of appraisers in California.

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2) Rate of Decline Slowing: According to a phone conversation with the Bureau of Real Estate (BREA) last week, in 2009 the state was losing about 190 licensed appraisers each month, and that number is now 34 per month. It’s great news the decline has slowed, but it’s also going to be a big problem if we don’t see the decline stop at some point. The good news is last week BREA actually announced new rules that essentially make it easier to become an appraiser trainee. Now let’s hope lenders/AMCs will encourage trainees to be used in reports (this needs to happen). Of course one factor worth mentioning is we don’t really know how many of the nearly 11,000 appraisers are actually actively working. For reference, the average age of an appraiser in California is nearly 52 years old (73% male and 27% female).

3) Shortage: When talking with BREA on the phone, they said there is NOT an appraiser shortage. Their sense is there are enough appraisers to handle current appraisal volume, though they said certain markets definitely have a shortage (such as rural northern California), while other markets are still saturated with appraisers (they said Orange County and even Sacramento). This reminds us what Jonathan Miller says, that there is NOT an appraiser shortage, but a shortage of appraisers willing to work for low fees.

4) Not Getting All the Money: A loan officer I spoke with was frustrated that his Borrowers were paying $550 for conventional appraisals and $750 for jumbo appraisals – and still experiencing longer turn-times. When he told me the Appraisal Management Company (AMC) he uses though, that’s where the problem comes in. This AMC regularly pays appraisers $350, which means they’re pocketing 40% of the fee the Borrower thinks is going to the appraiser. A few days ago on Facebook there was an appraiser who had an offer from an AMC to appraise a property for $850, but the AMC was charging the Borrower $1,385. Let’s remember appraisers are supposed to be paid “customary and reasonable” fees under Dodd-Frank, but a reasonable fee is what the appraiser gets – NOT what the Borrower pays.

5) Markets Change: The market has been experiencing a correction after years of low-ball fees from AMCs. Maybe some of it is due to there being less appraisers, and we’ll feel that out over time, but before sounding the appraiser shortage alarm, we have to respect the reality that fee markets don’t remain the same forever. For instance, a local architect friend has been so busy lately that he’s been quoting much longer turn-times and “blow off” fees that clients wouldn’t possibly accept (but they are accepting them). We see a similar market change with contractors as they are incredibly busy right now and not taking the little jobs since the big jobs pay more. Keep in mind appraisers are juggling appraisals for purchases, refinances, and private situations. When things get busy, appraisers understandably gravitate toward clients who pay better. This means low-paying AMC clients get dropped and anything that is not a “piece of cake” valuation might struggle to be accepted unless the fee is reasonable. As a consequence this also means AMCs may have to shop for many extra days or weeks to find an appraiser to take on the assignment. It’s not easy to digest this, but we have to respect the way markets move and then change our expectations too. Otherwise we are left feeling entitled to the way things have been when the market is simply different now.

I hope this was helpful.

Recent Woodworking: By the way, from time to time I like to share some things I’ve built so you know I have a life outside of appraising. Yes, I’ve built a few skateboards recently with my oldest son. It’s like re-living the 80s for me.

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Questions: Which points stand out to you the most? What else would you add? Did I miss something?

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Behind the scenes of how appraisals are ordered

How are appraisals ordered? How much time are appraisers actually given to finish the report? What is it like on the appraisers’ side of things? Let’s take a look at what happen before, during, and after an appraisal is ordered for a loan. Knowing how things work can foster informed conversations and help everyone plan for an effective escrow too. I hope this helps.

how appraisals are ordered - by sacramento appraisal blog - image purchased and used with permission from 123rf

My Interview on CBS: By the way, last week I was interviewed by CBS to talk about housing trends. Click here to see the video or scroll to the bottom of this post.

NOTE: The info below is relevant only for how appraisals are ordered in the lending world. Private appraisals do not require use of an AMC.

Before the Appraisal Order:

  • Appraisers typically have to be on an approved list for an Appraisal Management Company (AMC) to be sent appraisal orders. Appraisers apply to be on such a list, submit a resume, a few work samples, etc… In case you don’t know what an AMC is, according to NAR, an Appraisal Management Company (AMC) works with lenders and appraisers to facilitate the ordering, tracking, quality control and delivery of appraisal reports.
  • The AMC puts together a list of what they expect from appraisers. Sometimes the list is just one paragraph, but other times it might literally be three pages long of what they expect on the inspection, or how the appraiser should handle certain situations if they arise. When the order is sent to the appraiser, this list is attached along with the order.

Image purchased at 123rf dot com and used with permission - 14688774_s - smallerThe Appraisal Order:

  • When an appraisal is needed, an AMC will order one from one of their approved appraisers. If there is not an available appraiser on their list, the AMC will try to find an appraiser to add to their list.
  • Some AMCs will send out a blast order to a large group of appraisers. Typically the fee is very low and the turn-time is very quick. The first appraiser to click on the order is the one who gets it.
  • Other AMCs or appraisal departments will send out an order to a specific appraiser, and give the appraiser anywhere from several to 24 hours to accept the order.
  • Appraisers are regularly given about 7 days to finish an appraisal, though some AMCs may require 3-5 days.
  • If the appraiser doesn’t like the fee or turn-time that is offered, the appraiser can negotiate for a different fee and deadline. Some AMCs listen to appraisers and approve higher fees as needed, whereas other AMCs are bottom feeders only searching for the cheapest and fastest service.
  • An appraisal is usually due no later than a specific time such as 12pm, 1pm, or by midnight of the given due date.
  • A rush fee might result for an appraisal that is due several days prior to the normal turn-time or even just one day.

appraisal value - image purchased by Sacramento Appraisal Blog from 123rt dot com 4During the Appraisal Order:

  • AMCs usually want the appraiser to call to set the inspection within the first 24 hours of accepting the order.
  • Once the inspection is set, the appraiser has to update the AMC’s online appraisal platform with the inspection time.
  • The appraiser is usually required to give status updates every 24 or 48 hours.
  • The ordering platform can actually track how well an appraiser communicates and whether deadlines are met, which can result in more or less work for the appraiser.
  • The appraisal might be due in 7 days, but if nobody can give the appraiser access until day 6, the appraiser is likely going to ask for several more days to complete the assignment.
  • If the property ends up being more complex, the appraiser may need additional time or even a fee increase.
  • The appraiser can access the purchase contract and other provided documents in the AMC’s online portal. Keep in mind the appraiser only has access to whatever documents are there though (usually the purchase contract, but rarely the pest report, TDS, or title report).
  • INVOICE: Many AMCs require the appraiser to NOT include the invoice with the appraisal. There can be a big difference between what the Borrower is paying for the appraisal and what the appraiser is actually getting (this point was added thanks to an appraiser who emailed me).

After the Appraisal Order:

  • The appraiser is thanked profusely and lauded with praise by everyone involved in the transaction (kidding).
  • An AMC’s review department will look over the appraisal and ask the appraiser for any clarification or additional comps if needed. Appraisers typically are asked to complete revisions in 1-2 days.
  • If deemed necessary, the lender may hire a second appraiser to do a second appraisal when a house is complex, the value is suspicious, or the house has been flipped recently.
  • Most lenders have a rebuttal process, and the appraiser will typically be given 2 days to look at any new information or data that is submitted for the appraiser to consider.
  • Appraisers are usually given a 2-3 day turn-time for a re-inspection.
  • Appraisers are often paid between 30-60 days of doing the appraisal. It depends on the client.

Three Important Considerations:

  1. Backed-up AMC Communication: Appraisers are often blamed for a slow escrow, but in reality an appraiser might hit all deadlines that were given without being tardy. The problem is that a loan officer might submit an order to the appraisal department, but the appraiser might not actually see the order for a few days if the ordering department is backed up. Moreover, if the appraiser is dealing with a complex issue and reaches out to the AMC for conversation or direction, but it takes the AMC four days to respond to the appraiser, it can certainly delay things. The same thing happens when appraisers request documents that should be easy to get, but they end up taking many days.
  2. Remembering the Past: I remember working in an appraisal office in 2002 and at the peak of the busy season we had a 4-week turn-time, and we would do 2 or 3-week “rushes”. The turn-time was simply longer because that was the market at the time. It seems right now we are locked into a much faster turn, which is nice, but when the market gets hot, that may need to change.
  3. Picky Appraisers: When appraisers are overloaded with work, many appraisers might say NO to appraising a complex property. This means an AMC might have to reach out to many appraisers before finding someone willing to take on the assignment (hint: pay the appraiser for the additional complexity as money tends to talk). For instance, a 7-day turn time in the beginning of the year was actually not enough time for many appraisers because they were backed-up with so many other appraisals. Thus when both an easy order and a very challenging order would come into the appraiser’s pipeline, the obvious choice was to take the easier route because the hourly rate would be far better than how much more time it would take to complete the complex appraisal (that makes sense, right?).

My Interview on CBS:

Questions: Any thoughts, stories, or points to share? Agents, does anything surprise you here? Appraisers, did I miss anything? I’d love to hear your take.

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Why do appraisers take so long to finish the report?

You had an appraiser come out to your property last week and the appraisal is still not complete. It’s been 10 days!! What is going on? Here are some reasons why the appraisal might be taking so long.

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  1. Liability: Appraisers have to support the value in the appraisal report and be liable for that value, so appraisers should take their time to finish a job right (within a reasonable time frame of course).
  2. Juggling Work: Keep in mind appraisers are likely juggling many different appraisals at any given moment. This means all files in an appraiser’s briefcase are probably not being worked on every single day. If an appraiser only had your house to appraise, it would be easier to finish the appraisal sooner.
  3. Complex Assignment: If your property is complex, it may take longer to finish the appraisal since there is simply less data available for comparison. Most of my lender clients want appraisals back in 7 calendar days, which is usually very doable. However, when a property is out-of-the-ordinary for some reason, it’s nice to have more time. Sometimes upon inspection the appraiser will find out the property is much more challenging, so that can warrant a need to renegotiate the due date. I find most private party clients for divorce or “Date of Death” do not operate on the same time table as lenders since it is much more common to have easily 2-3 times as long to complete assignments.
  4. Extra Days with the AMC: Appraisals for lenders are often ordered by AMCs (Appraisal Management Companies). The appraiser might have completed the appraisal in a timely manner, but it could have sat in the hands of an AMC’s processor for an extra day or two on the front end and then an additional day or two on the back end as the appraisal goes through the AMCs quality control before the report is actually sent to the loan officer.
  5. Client Timeline: If the appraisal was ordered from the lender, find out what the actual timeline was that the lender gave the appraiser. After all, the lender may have given the appraiser 14 days. If a client gives an appraiser a long leash, the appraiser is likely going to enjoy the luxury of more time.
  6. Busy Schedule: If an appraiser is incredibly busy, that may unfortunately push back deadlines. That’s never ideal, but it happens in every industry.
  7. Lack of Professionalism: There are of course examples where an appraiser simply mishandles time or an appraisal, which can cost a client money. There is no excuse for that.

Advice for hiring a real estate appraiser:

  • Ask the appraiser when the report can be in your hands (before you hire the appraiser). Be sure you are on the same page about deadlines.
  • Let the appraiser know when you specifically need the report.
  • Have realistic expectations about time.
  • Get something in writing about when the report will be completed. The appraiser likely has an order form that you can fill out (get a copy of the order). Or you can always talk via email back and forth and use that conversation as your agreement.
  • If you need something right away, you might want to offer to pay a “rush” fee.
  • Be leery of “fast and cheap” appraisal marketing. If you have a delicate situation and you do have the luxury of time on your side, find an appraiser who will take more than 24 hours to appraise your property.
  • Sometimes clients might say something like, “I know the report will be in my hands next week, but can I just get the value now?” The value ultimately comes at the end after all research has been completed.

I hope this was helpful.

Question: Do you have any stories to share or any questions? Let me know.

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