Over the last year I have written a few different articles pertaining to the lending environment and how big reforms in the appraisal industry have changed the game for investors (namely the HVCC regulations). Having shared my opinion from an investors perspective, I thought it would be beneficial to hear from an actual appraiser how these changes have affected their business and what they are seeing.
I was fortunate enough to find a seasoned appraiser who was willing to give us insight into how the industry has changed from the inside. In fact, this particular appraiser wanted to be candid with me to the level that he preferred his name be anonymous so as not to hurt any existing relationships he has with the appraisal management companies (AMC’s) he currently works with.
Here are the five questions and answers I thought would shed light on how the appraisal industry has changed from an appraisers perspective:
How has HVCC changed your job in a good way?
One of the great aspects of HVCC is lender/broker pressure on value is almost non-existent. You would hear many horror stories pre-HVCC about appraisers accepting work on conditions which would require them to get “creative” with the appraised value or risk losing a valuable client. Now appraisers should feel no pressure to “hit a number” but instead appraise the property for whatever the recent market comparables are supporting.
How has HVCC changed your job in a bad way?
The advent of the Appraisal Management Companies (AMC’s) started out being a good idea in theory. Having a middle man to order appraisals through without direct communication with the lender/client reduced pressure on the appraiser. But many AMC’s have taken advantage of their position. They charge the borrowers on average higher fees than pre-HVCC, while the appraiser is being compensated much less than ever before. Some AMC’s will take a cut of 50% or more of the appraisal fee. But the appraiser does all the work and has the burden of all the liability. The reduction of fees to the appraiser has changed the appraisal industry so much that veteran appraisers who have been in the industry for many years are reconsidering their career choices and moving out of the profession.
Many AMC’s assign orders to appraisers based on a broadcasted bidding system to all appraisers in their network, where the lowest bidder wins the chance at taking on the appraisal assignment. These low bidders may need to cut corners and spend less time with their analysis in order to do more volume to make up for the reduction in their appraisal fee. This leaves a lot of room for errors in an appraisal report. Even the AMC’s that don’t work with a bidding system usually will give a larger volume of work to the appraiser who typically charges less for an appraisal report. Obviously, this is a good thing for the AMC since that means more money in their pockets.
The average AMC fee for a non-complex appraisal is about $250 in my area, while I have heard nightmare stories or even some broadcast orders for $150. During pre-HVCC days the average appraisal fee (Customary and Reasonable or C&R) was anywhere from $350-$400 for a non-complex order. I can’t speak for my peers, but I know that many borrowers will now pay $500-$600 for an appraisal report. So this means that the borrower is paying more for an appraisal report than pre-HVCC days, the appraiser is being paid less, while the AMC (the newcomer) is making a huge profit. The only real winner here is the AMC. Some AMC’s will even state on their engagement letter that by accepting this assignment, you the appraiser accepts that the contract fee to the appraiser is Customary and Reasonable. By the appraiser agreeing to this, they are agreeing that the new typical fee for their work is essentially whatever the AMC is willing to pay for the report! There is definitely a regression in pay for an appraiser which is even less than it was in the 1980’s on average! What licensed professional will agree to this? That is why there is an exodus of good appraisers leaving the industry.
Every state is different, but for what I have seen in my state there are a lot less appraiser trainees coming into the field. While more licensed appraisers are choosing not to renew their license since HVCC has come into play.
Do you believe the quality of appraisals (in general) have become better or worse since HVCC?
As I have already stated during the previous question, the appraiser’s fee has gone down significantly while liability and overhead costs have risen. Many veteran appraisers are turning down appraisal orders and even exiting the industry, while the high volume appraisers or low fee appraisers are accepting these appraisal orders. Because of this quality has diminished.
AMC’s do typically have their own automated reviews or review teams (who are normally not licensed appraisers) reviewing reports to help eliminate common mistakes. But because of the recent addition of the UAD (Uniform Appraisal Dataset), and with the built in review masters on most major appraisal software, the need for the AMC’s reviewers are just not as relevant. It still comes down to careful analysis of the comparables, the market area, and the subject property which will culminate into a good appraisal report. This takes time. But because AMC’s want a quick turnaround time and the appraiser needs higher volume to make a decent living, adequate time to complete appraisal reports is just not there.
Do you believe HVCC has helped or hurt the housing recovery?
Obviously there are many factors concerning the housing recovery. But when it comes to the appraiser’s role in the process I think it can go both ways. Since veteran appraisers are leaving the industry, and because of the amount of errors on appraisal reports, it can significantly slow down the process or even kill deals. Since the inception of HVCC and with certain AMC’s automated reviews, an appraiser will receive “errors” that are not relevant to the appraisal. For example, certain AMC’s would want a 0 in certain fields that aren’t applicable instead of an N/A or just leaving it blank. Now that UAD has been implemented, the appraisal report fields are filled with 0’s. Having to make corrections on things like this obviously slows down the process and is not relevant to what we are trying to accomplish.
Knowing that appraisals are crucial to most real estate deals, what can an investor do increase their chances of getting a good appraisal?
There isn’t much an investor can do to get a good appraisal. It is really up to chance. It all depends on who your lender is. Almost all the big lending institutions use AMC’s and those that aren’t are slowly transitioning to them.
All AMC’s are not created equally. There are some AMC’s that have a better reputation with appraisers and treat them as professionals. The appraiser has to weed out the AMC’s they feel are taking advantage of them which are constantly cutting their fees and asking for faster turnaround times.
Good AMC’s do exist and they offer better fees which are closer to the C&R fees that appraisers are accustomed to. The better AMC’s will work with the appraiser on a case by case scenario when complexity increases. The good AMC’s will reward the appraiser who turns in clean and credible assignments that are thoroughly analyzed, instead of giving more work to the low fee appraisers who cut corners to turn in work quickly.
But for the investor, obtaining an appraisal from one of the better AMC’s that have a good appraiser panel is all the luck of the draw depending on where you obtain your lending from.
For investors who are into rehabbing. I would suggest looking at what is typical for the area. Are custom kitchen remodels with high end appliances and custom cabinetry typical for the market area? If not then doing so may turn your property into an over-improvement for the area. For example, let’s say a property that is in a housing development of only a few different models. Comparables are abundant. Most of the homes with model match floorplans are all selling for around $200k. The subject property has the same floorplan as the recently sold comparables but has an in-ground swimming pool with a custom rock formation and water slide. The investor spent $100k on this amenity. He feels since the comps are selling for $200k and he put in $100k then it should be worth $300k. But is this amenity typical for the neighborhood or an over-improvement? What an investor puts in may not always recoup dollar per dollar when he or she sells it. So keep that in mind and try not to get carried away from what is typical in your particular area.