When Customary Fees Become Unreasonable

[SpartanAG]

While I agree with you regarding "free market", several of your comments/observations appear to contradict one another within your post.

To me it's not so much an inconsistency on your part but rather an example of the complexities of the real world of appraisers and their fees (and probably the world of "free market" itself).

Appraisals aren't complex, appraisers are.

Which part(s) of my post is contradictory? I'm asking out of curiosity. I'm human, so it is possible I worded something poorly.

 

[SpartanAG]

Another thing I'm really ticked off at AMC's about is how many (I would dare say a large majority, but that's personal speculation) require/want 48 hr TAT after inspections.

Just as appraisers choose their fees, they choose their turn times. Again, it is a matter of supply and demand. AMC's ask for 48 TAT's because they know they can get it from enough of the suppliers (appraisers) to meet their demand. Appraisers aren't forced to accept 48 hour turn times; they choose to accept them. If a floor is set for fee/TAT, then the appraiser will have fewer choices regarding how they want to run their business. Some appraisers may be able to thrive at the lower end of the fee range, and I applaud them for that. I don't want the choice to charge and accept lower fees taken from them. That may be the only way they can compete in their market area. Get government out of the way and let those who can succeed, do so. Not everyone can be successful at everything. People need to be allowed to fail.

 

[Meandering]

For the majority of residential appraisers, it is not a "business", but rather is self employment.

All of the necessary duties and responsibilities of being a "business" is removed from the appraiser under the AMC model.
There is no advertising for residential appraisers to get more business, there is only "qualifying" to be on a panel.
There is no determination of the geographic area you wish to service; your geographic service area is limited by the AMC, unless of course you are on the panel of a few that regularly send you work for properties 300 miles away, it still was not an area you chose to service, but rather is one the AMC decided you could service.
You can not create your owns software to sell your products. Your software options are limited to those acceptable to the AMC and are integrated with Fannie Mae.
You can not decide that you won't work past 5pm any weekday and take weekends off. Your expected TAT is computed against a 12-14 hour day including drive time, due diligent interviews, data accumulation and every other aspect of the report that requires you to go out of the office for something need for substantiation in your report.
If your locals decide appraisal services are a tax, you can not just charge your fee plus tax, as a pass through expense to the locals, as every other business does. You have to either eat the tax, or hope the increased fee you bid to cover the tax will be accepted by the client who will compare it to others who will eat the tax at the expense of profit. No other business includes the cost of tax in their gross fee, without annotating it as such, the price is $X plus tax, or the price is $X including the tax.

No, with AMC work it is not a business, it is self employment. Trying to call it a business, just doesn't make it so.

.

 

[ucbruin]

No one is more aware of what I need to charge to keep my business running more than me. I determine my own worth; therefore, I set my own fees.

I am not concerned with the thousands or tens of thousands of appraisers that don’t understand their own worth. Or perhaps they do, which is why they accept fee’s that are detrimental to their business.

How would any of us know "they accept fee's that are detrimental to their business."?

Setting a floor (minimum) will create less demand for appraisal services while also creating more supply. Demand will decrease due to the increased costs. If the floor is set at $600 for the appraiser portion of the fee, the AMC still needs to get their piece, so the final fee to the borrower will be $850 to $1,000.

1. Why will appraisal demand decrease because fees go up?
2. Assuming AMCs are currently getting $200 per appraisal why would a $600 min fee to appraisers cost the borrower $1,000?

The supply of appraisal services will increase because of the lessening demand due to the higher cost of appraisal services. Supply will also increase due to the increased price of appraisal services. Appraisers who have been inactive will begin appraising again, and new appraisers will begin to enter the profession because the floor makes the profession appear economically feasible. This combination of forces will create an additional surplus of appraisal services.

I can't figure out what this means.

In the end, a price floor hurts appraisers (and society) more than it helps. It may help the appraisers that choose to accept “low” fees, but it only helps those appraisers by hurting everyone else, including other appraisers. Price floors cause deadweight loss.

“A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. The deadweight welfare loss is the loss of consumer and producer surplus. In other words, any time a regulation is put into place that moves the market away from equilibrium, beneficial transactions that would have occurred can no longer take place.” (http://economics.fundamentalfinance.com/micro_price-floor.php).

Isn't this part of "free market" too? Creative destruction.

In the case of AMC’s, since the new floor is generally above the old ceiling; the new floor will also become the new ceiling. This is not mutually beneficial.

Instead of looking at the minimum as pulling up the fees for "appraisers that choose to accept "low" fees", why not look at it as preventing fees from declining?

Instead of heaping more rules and regulations on appraisers, I encourage you to focus your time and energy on getting government out of the way. Help remove barriers such as AMC’s and burdensome regulations. Allow appraisers to succeed or fail on their own by letting them make their own choices when it comes to how much they charge for their services and how they run their business.

If you are currently able to dictate your fees, I can't see how a minimum fee would adversely impact you.

I've said it many times in the past, while I WANT/WISH/WOULD LOVE/etc. to see my fees increase by a few hundred dollars, I do accept the "free market" system. But a realistic minimum fee would not be a bad thing.

 

[bnmappraisal]

For the majority of residential appraisers, it is not a "business", but rather is self employment.

All of the necessary duties and responsibilities of being a "business" is removed from the appraiser under the AMC model.
There is no advertising for residential appraisers to get more business, there is only "qualifying" to be on a panel.
There is no determination of the geographic area you wish to service; your geographic service area is limited by the AMC, unless of course you are on the panel of a few that regularly send you work for properties 300 miles away, it still was not an area you chose to service, but rather is one the AMC decided you could service.
You can not create your owns software to sell your products. Your software options are limited to those acceptable to the AMC and are integrated with Fannie Mae.
You can not decide that you won't work past 5pm any weekday and take weekends off. Your expected TAT is computed against a 12-14 hour day including drive time, due diligent interviews, data accumulation and every other aspect of the report that requires you to go out of the office for something need for substantiation in your report.
If your locals decide appraisal services are a tax, you can not just charge your fee plus tax, as a pass through expense to the locals, as every other business does. You have to either eat the tax, or hope the increased fee you bid to cover the tax will be accepted by the client who will compare it to others who will eat the tax at the expense of profit. No other business includes the cost of tax in their gross fee, without annotating it as such, the price is $X plus tax, or the price is $X including the tax.

No, with AMC work it is not a business, it is self employment. Trying to call it a business, just doesn't make it so.

.

Sadly, I believe this is too damn true for MANY urban/suburban Res appraisers around the country.

 

[bnmappraisal]

Just as appraisers choose their fees, they choose their turn times. Again, it is a matter of supply and demand. AMC's ask for 48 TAT's because they know they can get it from enough of the suppliers (appraisers) to meet their demand. Appraisers aren't forced to accept 48 hour turn times; they choose to accept them. If a floor is set for fee/TAT, then the appraiser will have fewer choices regarding how they want to run their business. Some appraisers may be able to thrive at the lower end of the fee range, and I applaud them for that. I don't want the choice to charge and accept lower fees taken from them. That may be the only way they can compete in their market area. Get government out of the way and let those who can succeed, do so. Not everyone can be successful at everything. People need to be allowed to fail.

My bolds - I agree with all of this Spartan.

Yes, we can choose to accept or decline assignments, but at the end of the day, it is a business decision by the owner of the company (and for many of us Res appraisers, we're typically one man/woman shops) So we must make that decision ourselves whether to accept work to eat, pay bills, etc or not. Different parts of the country, different circumstances, different (fill in the blank) help us make that decision. Res appraiser's are getting beat up by the AMC system, IMO, and have been for the past 10 yrs or so. As I stated, I'm on the fence one way or the other. At least with CG's you have other options...well, maybe I should say, MORE options. As a CG, you could choose to ONLY do commercial. I know there are Comm AMC's out there, but I also know that commercial offers more options (my old supervisor is a CG & MAI).

 

[SpartanAG]

”How would any of us know “they accept fee’s that are detrimental to their business?”

Most appraisers aren’t very good business people, so they wouldn’t know. But I want them to have the freedom to make that choice. That is how the free market works.

“1. Why will appraisal demand decrease because fees go up?”

Basic economic principles dictate that as prices (appraisal fees) go up, demand will decrease.

2. “Assuming AMC’s are currently getting $200 per appraisal why would a $600 min fee to appraisers cost the borrower $1,000?”

Like your $200 per appraisal assumption, I used a percentage range assumption. It also stands to reason that if the appraiser is to be paid more, the AMC will also want an increase; hence my percentage projection vs. a flat fee projection.

“I can’t figure out what this means.”

Basic economic principles dictate that when prices are artificially set above market, more suppliers will enter the market and demand will decrease resulting in an oversupply. The link in the original post explains these economic principles better than I can.

“Isn’t this part of “free market” too? Creative destruction.”

No. A free market doesn’t have price floors and ceilings. A price floor is the antithesis of a free market.

Creative destruction is defined as: A process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

We aren’t destroying anything creating anything new by introducing a price floor; just adding more government regulation.

“Instead of looking at the minimum as pulling up the fees for “appraisers that choose to accept “low” fees, why not look at it as preventing fees from declining?”

What if the new price floor forces a decrease in fees for some appraisers? What if some appraisers want to charge below the price floor to be more competitive? Taking choice away from appraisers won’t turn out well in the end.

“If you are currently able to dictate your fees, I can’t see how a minimum fee would adversely impact you.”

I most likely wouldn’t be affected by a minimum fee at first. But just because I may not be affected, does not mean I shouldn’t defend what I believe to be right. I think a minimum fee will cause more problems than it will solve, so I will defend my position.

I've said it many times in the past, while I WANT/WISH/WOULD LOVE/etc. to see my fees increase by a few hundred dollars, I do accept the "free market" system. But a realistic minimum fee would not be a bad thing.

If you want a fee increase, you are free to take steps to make that happen. I would just prefer that those steps not include the government setting a price floor.

 

[SpartanAG]

My bolds - I agree with all of this Spartan.

Yes, we can choose to accept or decline assignments, but at the end of the day, it is a business decision by the owner of the company (and for many of us Res appraisers, we're typically one man/woman shops) So we must make that decision ourselves whether to accept work to eat, pay bills, etc or not. Different parts of the country, different circumstances, different (fill in the blank) help us make that decision. Res appraiser's are getting beat up by the AMC system, IMO, and have been for the past 10 yrs or so. As I stated, I'm on the fence one way or the other. At least with CG's you have other options...well, maybe I should say, MORE options. As a CG, you could choose to ONLY do commercial. I know there are Comm AMC's out there, but I also know that commercial offers more options (my old supervisor is a CG & MAI).

I agree and understand the difficulties the AMC model has caused in our profession. That is why I encourage the OP to focus his time and energy on getting government and by extension the AMC's out of the way. Adding more regulation and oversight via a government mandated price floor is not the answer.

 

[sandpiperapp]

I think many of us speak from a position of relative comfort with respect to our individual situations
I wonder how the appraisers that, for whatever reason, are dependent on the AMC controlled ordering process. Do they feel they are competing on a level playing field? Do they feel that they control their own fees?

 

[hastalavista]

I think many of us speak from a position of relative comfort with respect to our individual situations

There certainly is an element of that, but I'd add this to the equation:
When HVCC became the norm, I effectively lost all of my existing mortgage clients and had to develop new relationships. I completed one AMC assignment during that period and decided not to work for that AMC ever again. My clients included WAMU, which at that time was sending my firm up to 100 appraisals a month. With HVCC and the market downturn, I went from a 15+/- person appraisal firm to a one-man show. It wasn't easy, and it was especially difficult finding non-AMC clients (to be clear, once HVCC came into existence, there was a bit of a lag-time between bank-clients using AMCs; so I had some time to adjust, but my mortgage-broker clients nearly disappeared over night).

My point isn't to trumpet my own ability at building a non-AMC client base. My point is to put forth the notion that those of us (or many of us) who do not have an AMC client base understand the difficulties of developing a non-AMC client base, and can appreciate the dynamic that exists with the AMCs. We are not sermonizing from the top of the mount. Many of us have been there. Many of us (myself included) may be one-day away from being back there.

I've consistently advised appraisers who find themselves in the AMC rut to do the following:
1. Take the assignments if you have to so you can feed yourself/your family. This is the responsible thing to do.
2. Make a decision if you can provide appraisal services that meet the requirements at a lower-fee/faster turn-time that may set the competition in your market. Some do that (a few brag about it here on the forum. It can be done; it is not my cup of tea).
3. If you decide that a high-volume/quick turn-time/lower-fee is not a business model you want to pursue, then make a concerted effort to migrate to those clients who pay more and set more reasonable turn-times. The expectation should be that such clients are willing to pay for a higher-quality product. These clients may be limited.
4. If you cannot make the migration to a better quality client, and you decide that volume/turn-time for fee isn't a sustainable model, then it is time to make a personal decision about the viability of the appraisal profession for your specific circumstance. It may no longer be viable. Or...
5. Tough it out for as long as you can under the premise that the significant problem is an over-supply of appraisers; if you can stay in the game long enough, that imbalance will correct itself (indeed, this is what most of us did after 2008 through 2011).

And, BTW, if I ever find myself in the position that my current quality-client base disappears and I'm faced with competing in the AMC trenches, I can promise you that I'm going to follow my own advice.

I've posted enough times why I don't think the idea of a "minimum fee" solves any of the core issues. I don't even think it addresses an imbalance, since the imbalance (from my perspective) is one of supply.
But the argument isn't an us vs. them (I have the non-AMC business, you don't, so TS). The argument is about solving the core issue. Does a minimum fee solve the issue? I don't think so (others may think it does, that's fine). If it doesn't solve the core issue, then what does it do? IMO, it artificially and unnecessarily raises the costs of borrowing which is ultimately paid by the consumer so that I (an appraiser) can survive in an over-supplied appraiser market. I cannot support that even if I'm a primary beneficiary.

So, my empathy (which is very real) of the plight of many appraisers and some specific forumites who I've come to know through this forum is sincere. The situation sucks.
My disagreement is with the proposed solution.