Fee Versus Value

[Charles Witt]

I am posing a question I have pondered. Hopefully there are some USPAP instructors out there.
It is a violation of USPAP to have fees based on value. However, a client emailed me with the following: Under $500,000 value. fee is $350; $500-749,000 value. fee is $385; over $749,000, fee is $400. They have asked their appraisers to agree with this fee schedule.
However, I feel if I agree with it, then I am in violation of USPAP's Management Section of the Ethics Rule which basically says that I can not accept an assignment and have a fee based on the amount of value opinion. I could have a fee schedule based on size of home, square footage, distance from office, etc.
However, some have told me that is OK to agree with it. No USPAP violation since I did not propose it. I feel otherwise.
What are your thoughts?

 

[Pamela Crowley (Florida)]

Fee based on the value???

No way! You're right and they are wrong.

 

[Barbara Decker-Spence]

We usually base tiered price structure on house size, which in our market usually accomplishes what we need to - the larger the house, the more expensive, and the more difficult it is to appraiser (at least once we exceed the typical price range)

 

[TC]

I remember telling one of my best clients that I needed to charge more because of the size of the dwelling and that it would take me more time just to inspect. She replied, "So you'll charge less for a 800sf Condo?"

TC

 

[Robert Anderson]

The following is from an Appraisal Foundation Q & A:

34. Appraisal fee is contingent on the appraised value

Question: A potential client has asked me to complete a form indicating what my appraisal fees would be for different assignments. The form asks me to indicate my appraisal fees according to appraised value, e.g., to list the fee for assignments with appraised values between $100,000 and $299,000, $300,000 to $499,000, etc. Is it a violation of USPAP to quote fees in this manner?

Response: Yes, this is in violation of USPAP. Completing and submitting such a form to a potential client establishes a compensation arrangement for assignments that is contingent on the amount of the value opinion. This is prohibited by the Management section of the ETHICS RULE, which states, in part:

It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:

1. the reporting of a predetermined result (e.g., opinion of value);

2. a direction in assignment results that favors the cause of the client;

3. the amount of a value opinion;

4. the attainment of a stipulated result; or

5. the occurrence of a subsequent event directly related to the appraiser's opinions and specific to the assignment's purpose.

---

The following are from Landsafe, which has (or at the time had) a different view on this issue:

From Sid Miller, LandSafe Legal & Compliance

LandSafe is addressing an issue of complexity of the appraisal that may be related to any number of criteria. Such complexities could include any combination of some or all of the following items: size of the improvement; acreage; site and view; uniqueness of the property; ability to find comps; unusual market area; and similar factors which make the appraising of the property more complex. Since many of those factors are unknown by the lender at the time the appraisal is ordered and are not included in the loan application form or other documents received at loan application, we have had to depend on some other indicators of the complexity of the property appraisal and it is the estimated sales price.

LandSafe's contention is that we utilize the "estimated" sales price, as determined by the seller/agent or, the case of a refinance, by the borrower as a basis for assessing the complexity of the assignment. The appraiser's fee is determined on the basis of that initial measure of 'complexity' and the fee is then fixed regardless of the 'value' that might subsequently be determined by the professional appraiser.

From Greg Dennis, EVP, Collateral Valuations

There is a nuance here that is profound. We establish our fees based on the "estimated sales price" not the appraised value. We set fees based on customer assessment of the value. The appraiser and the ultimate appraised value has not impacted on our fees. The reason we use estimated sales price is that the sales price typically indicates complexity... 0 to $500k are relatively straight forward properties.... Over $1,000,000 are a quote because they could be straight forward CA properties of complex properties in Columbia SC with a guest house....

--

I used to have a value-based fee structure until Grey Meyers alerted me to the USPAP concerns. My fee structure is no longer value-based.

 

[Terrel L. Shields]

base it on the assessor's assessed value if you want to do it that way. I contend complexity and location are more dramatic impacts upon the difficulty of the assignment than size or amenities...definately for price.

The easiest poultry farms I do are the $2,000,000 ones. They are new, no depreciation, costs are recent. The tough ones are the older style houses that are obsolete but still making good income, and selling for $200,000 or less. Now that's tough.

 

[moh malekpour]

I have a set of minimum fees for different type of assignments. At the bottom of my fee schedule, I explaine that these fees are for typical tract homes in a reasonble distance 30-40 miles from my office. My fees would higher depending on the complexity of properties, ocean front properties, too large properties and long distance places. Fee based on value is contingency and violation of USPAP and usually doesn't make sense either. There are some high value properties that are easier to do than low value properties.

 

[Lee Lansford]

My GUESS is that the fee is based upon the "price estimate" provided BY the CLIENT to the appraiser and not contingent upon the opinion of value developed and communicated by the appraiser.

Example: The client provides the appraiser with an assignment with a "estimated market value of $1,000,001".
The client's fee schedule states that all such assignments with estimates PROVIDED BY THE CLIENT in excess of $1 million has an appraisal fee of $350.
The appraiser receives the fee of $350 though the opinion of market value is $900,000.
In the above, there is no violation of the USPAP.

 

[Charles Witt]

Lee: Banks no longer provide estimates of value with a refinace order. Or if they do, they are not following guidelines.

 

[George Hatch]

On the one hand, I sincerely doubt that appraisals are getting pumped in order to reach a threshold on a fee schedule. Most appraisers who are pumping values seem to be quite happy to do so for their standard fee.

On the other hand there is an Advisory Opinion from the ASB on this. Although an AO is not part of USPAP as such, the principles and concepts that the AO is based on are in USPAP. My personal opinion is that an appraiser would really have to have a good reason for swimming against this mainstream. That's why I don't do a value-based fee schedule.