Sandra has been an appraiser for the past 15 years, and primarily services the Boston metropolitan area. She decided to enter this field of work when she made a career change after gaining custody of her 2 grandsons. Over the years Sandra has worked through fluctuations in her market, and has seen the changes that have come as a result. Recently, the shortage of inventory in the Boston market has led to an increase in sale prices as bidding wars have driven prices up over the appraised value. In her spare time Sandra enjoys painting and writing, but has remained busy with work in her market. According to Sandra, the key to success as an appraiser is patience. The educational requirements of becoming an appraiser and trainee experience needed is a long process, and patience is essential.
Boston, Massachusetts Market
Sales prices reached new heights in January 2017 for the Boston metropolitan area as demand continues to outweigh supply. The average price for a single-family home increased 7% statewide to $342,500 compared to January of last year, as inventory remained low (The Warren Group). According to The Wall Street Journal, the median sales price for the Boston Market rose from $685,000 in 2015 to $791,000, while rent in the neighborhoods surrounding Fenway Park increased 2.5%. Though inventory is being added to the market, there is a shortage of affordable housing for middle and low income buyers. According to Boston Agent Magazine 80% of the new construction being added to the market is housing, but primarily in the form of luxury apartments and condos. This paired with bidding wars has driven prices up and out of reach for many low-income buyers.
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One of the biggest topics in the industry is customary and reasonable appraiser fees. The theory is that the appraiser should be paid a customary and reasonable fee for their specific market area, which may vary. With this, I agree 100%. Appraisers should be paid a fair fee for their work based on the specific market area conditions, and doing so will greatly benefit the industry. This, however,is a concept that is far greater in theory than in reality. I believe that this regulation is somewhat of an unattainable ideal as there seems to be nothing that would allow this on a day to day basis from a practical standpoint.
- It was never meant for the appraiser to be paid a customary and reasonable fee.
The term “customary and reasonable fee” is widely used in legislation, medical, insurance, title, etc. – almost all consumer facing industries have some form of customary and reasonable fee language. This is intended to prevent the borrower or service provider from getting ripped off. So, if an appraisal is typically $450 dollars in Rockville, Maryland a lender can’t charge the borrower $1,500 without. Thus the fee must be customary and reasonable, within a normal justifiable range. Let’s say $350 – $600 would be reasonable for the area based on what the lender has previously charged for loans, this has nothing to do with the appraiser. If you listen to a talk that GlobalDMS had during its Global Tech Summit, one of the senators in attendance even admitted to just “throwing it [the language] in there”(The video is no longer available their site, however).
- Lenders do compete on fee.
Have you ever been on bankrate.com or any other appraisal industry-based site? You will see that all of these have the appraisal fee as one of the options and line items for the quote (side note: I, personally, don’t like the idea because a lot of other fees aren’t included; however, they’re there and need to be dealt with). Also, remember that the appraisal fee is the only thing that is paid upfront. Everything else is paid at closing. The appraisal is basically an application fee to see if the borrower actually qualifies for the loan. The appraisal is a big piece of the pie that’s more costly in comparison to the credit and flood, and lenders absorb the cost and pass it on at closing. This is why AVMs are appealing or zillow.com is appealing – even though it’s not accurate, it doesn’t cost an exorbitant amount to get an idea of what the value of the property is. That is particularly important for a mortgage office that’s trying to convince a borrower to go with them as opposed to a competitor. The reality is that a borrower is going to talk to multiple lenders hence the appraisal fee is a factor and the lower, the better. This is why a lot of national lenders have a flat fee either nationally or by state, it makes it easier not only for loan officers to quote fees but also for everyone to streamline the entire appraisal process so that there’s not a lot of back and forth.
- A fee plus model won’t work.
Some appraisal management companies say they operate on a fee plus model, and let the appraisers charge whatever they want. The reality is that they do not and cannot, regardless of what you,they, or anyone else might think. How much is the appraiser making? Less than what the appraisal management company is charging, and that’s pretty straight forward. Now, I do admit there are some better models out there. I like our model, in which we allow a vendor to set any fee that they want and then we set a minimum profit per file that you must be eligible for. We don’t assign the file based on fee alone but rather competency and accuracy with a fee set at a minimum. The fee plus model would mean that the appraiser sets their fee at a price, let’s say $350, and the AMC would add onto it with their fee, let’s say $100, as the additional amount of money. This on a one off basis sounds great. All the same, when you really think about rolling out a national platform with some consistency in pricing it doesn’t make much sense for any lender or AMC to agree to this. That would mean almost every appraisal having a different fee and, on top of that, assigning the appraisal and getting the price before charging the borrower’s credit card which might cause huge business process issue. Furthermore, it would be nearly impossible to sell to a borrower. A loan officer isn’t going to be able to sell “We don’t know what the appraisal fee is yet, but we will find out soon enough!” Anyone who has been in commission sales knows that will not work, especially when another company can easily say “It’s going to be this exact amount as we don’t do fee increases,”(our model).
- There’s always a loophole.
Lets be honest here, there are plenty of loopholes in any legislation, and the appraisal legislation has many. Most appraisal management companies use the old “If you agree it’s a customary and reasonable fee…” but this is a cheap shot at the appraiser as it isn’t really anything other than some added text. Some companies have improved by allowing the appraisers to set their fee, sometimes on top of displaying the average fee set by a vendor. Despite this, as long as it’s left up to a few pieces of paper stored at your local government office, it’s not going to be respected 100%.
“Customary and reasonable fees” are really a way of the industry saying that they’re being fair, when in reality the appraisers are dealing with hell trying to fight for a fee. The simple solution to this issue is to remove the “customary and reasonable fee” completely and have the state AMC legislation set the appraisal fee for the state, not the county. The fee would then be a mutual agreement upon an appraisal management fee with the board (which should consist of appraisers and AMC owners, perhaps a few lenders and builders, but no realtors). This way, it’s really simple – the appraiser gets paid what is reasonable for the state, the appraisal management company has a built-in profit, and the lender and builder have agreed that it’s reasonable as well. This ensures that at least everyone is heard, which is something that the appraisers have not had in a very long time (possibly ever). It would also eliminate any loopholes besides those of staff appraisers or mutually agreed upon volume discounts. The title industry has successfully adopted this concept for set title charges, so why not apply the same within the appraisal industry? The appraisal industry would then have a model that would be sustainable for appraisers and appraisal management companies, which are here to stay.