Category Archives: Fannie CU Blog
by Tim Andersen, MAI
Editor’s Note: Author Tim Andersen, MAI shows you how to protect yourself from your state board and have as happy a New Year as possible. His advice? Beware of consent decrees.
The letter arrives. You know, the letter from the state appraisal commission. You are not expecting it since you always do your best to complete your appraisals credibly and properly. Yet, despite your best efforts, here it is anyway. It’s in your hand. You have to open it and your stomach turns. This literally may be the future of your appraisal career, condensed to what amounts to a form letter- black ink on (cheap) white paper: cold and bloodless. Here’s how to handle it in your best interests.
You read it and fact-check. Yes, you did that appraisal on that date. Yes, you came up with such-and-such a dollar value. Yes, you have appraisal license number thus-and-so. But other than these details, what you read cannot possibly apply to you. It can’t apply to you since the letter, in its dry legalese, details your “…lack of due diligence in finding appropriate comparables to the subject property…”; your “…failure to reconcile the value indication via the Cost Approach with that of the Sales Comparison approach, thereby forming a value opinion that lacked credibility…”; and/or your “…failure to develop, and then summarize within the report, your conclusion of the subject property’s highest and best use…”.
This litany of infractions goes on for numerous pages, listing violations in the Uniform Standards of Professional Appraisal Practice (USPAP) Standards Rules, Ethics Rule and the Scope of Work Rule. It calls out violations of state statutes and state administrative codes and on and on. What’s worse is that the letter makes it sound as if you are already GUILTY of all of these charges. What? It’s innocent until proven guilty, right? With state appraisal boards, it’s often the other way around.
Toward the end of this horrible letter the attorney/author who seemingly holds your fate in his/her hands, generously offers what may be your professional salvation. Behold, an offer for a consent decree. Yes, salvation is near! You read it through. It is relatively short (a whole lot shorter than the document you just read containing your bill of indictment). It basically says that while the state is convinced you are already guilty of dozens of heinous appraisal infractions, if you will just sign the consent decree, all but two of them will be dropped, and you will be required to take a 15-hour USPAP class, pay a $750 fine, and be put under state supervision for six-months.
Life is looking better. You know you can take the 15-hour USPAP class online for less than $300 and you can probably complete it in less than seven hours. The $750 fine is just two appraisals. And you already know the state is too short-handed and underfunded to look over your shoulder for six months. An administrative law attorney and a USPAP consultant will cost a lot more than the total of the state’s fees. It will take you just two minutes to sign the decree, cut a check from your business account and get online to sign up for the USPAP class. This is just too simple! Woohoo!
If such a quick solution feels a little too simple and a little too painless, that’s because it may be. You open the letter back up, pull out the full package of doom from the state and read it carefully this time (which, due to your panic, you did not do earlier). You read it again and then again. Now you understand why at first it seemed so simple, so painless, and why the state wants you to sign the consent decree- now!
Now you realize that as soon as you sign that consent decree you are admitting your guilt to whatever charges the state included in the decree. You consent to whatever administrative penalties the state chooses to impose. Since your state appraisal board is a public entity, the consent decree, in its glorious entirety, with your signature on it, will soon become public record that any yahoo with Google® can find in less time than it takes to write a check.
If you sign that consent decree, not only have you admitted you are guilty of those specific violations, and accepted the administrative penalties associated with the admission of your guilt, you have also put every Errors and Omissions (E&O) provider in the world on notice that you are an insurance liability risk. And E&O providers don’t want to cash your check if they think there is any chance they will have to pay all the money back, and then some, defending you.
Bad for Business
In addition to what you just told your E&O provider, you have also just notified every potential client on the planet that, when performing an appraisal, you chose not to exercise due diligence in forming a value opinion (at least in this case). If you think that makes clients skittish, you’re right. Books of business composed of skittish clients tend to be rather thin.
When you sign that consent decree, you also have just notified every attorney in the jurisdictions in which you work that you are an ineffectual expert witness. Why? Because you just admitted to all of them, your failure to appraise per the rules and regulations governing you. This is not something you want coming out in a trial or deposition, so you’ll have to admit it up-front to your clients. Given that, some will choose not to use you.
When that letter comes in, don’t panic. First, before you respond to the state, call your E&O provider and get their advice. That’s why you pay for E&O insurance. Many providers have free claims lines. If you are not covered, for whatever reason, you need to contact an administrative law attorney before you respond to the state. An A/L attorney is experienced representing respondents in front of professional boards. Have your administrative law attorney respond to the state. The state appraisal board has a stable of attorneys representing it; you should have one too. Then take your attorney’s advice. Then, if necessary to defend yourself, you might want to retain a USPAP expert to determine if you really violated USPAP, and if the charges against you are based on its proper understanding and interpretation. (For more, please read Tim’s article Dealing Effectively with Complaints: When the State Comes Calling at WorkingRE.com, Library, Volume 24.)
It’s possible that, when all is said and done, you may end up signing a consent decree anyway but you want to sign it as a last step, not as a first one. Make the state prove its contentions that you are guilty of USPAP and/or state statute violations. Many appraisers have fought and won. You can, too.
About the Author
Timothy C. Andersen, MAI has been in real estate and consulting since 1975. He is a commercial real estate appraiser, AQB-certified USPAP instructor, USPAP consultant, Special Magistrate for the Palm Beach County Value Adjustment Board, author, instructor and expert witness. As a USPAP consultant, he works nationwide as an expert with appraisers whom the state has charged with license law violations. He is an instructor with the Appraisal Institute and has worked all over the U.S. with various proprietary schools, as well as a community college. The University of St. Thomas in Minneapolis, MN recently awarded him a Master of Science degree in Real Estate Appraisal. Tim’s e-mail address is email@example.com.
by Isaac Peck, Associate Editor
Editor’s Note: Nearly two years have passed since Working RE first reported the story of John Dingeman, an appraiser who faced the difficult choice of either violating USPAP’s Confidentiality Section or suffering the wrath of JP Morgan Chase by refusing. Finally, this holiday season, there is some good news to share.
You may recall Dingeman’s story: Chase, one of the largest and most influential banks in the country, was not the original client on the appraisal in question. Despite the Uniform Standards of Professional Appraisal Practice’s (USPAP) confidentiality requirements, Chase demanded that Dingeman respond to its requests or else. Dingeman chose to stand his ground and follow USPAP. His decision cost him dearly. Finally, this holiday season, there is some good news to share.
In March 2012, Dingeman refused Chase’s initial request to discuss an appraisal with the bank because of the Confidentiality Section of USPAP. Immediately following his refusal, Dingeman was placed on Chase’s Ineligible Appraiser List. Chase then filed a complaint against Dingeman with the Arizona Board of Appraisal. The complaint was promptly dismissed and found to be without merit.
As Working RE reported, Chase responded by challenging the mainstream interpretation of USPAP, arguing that whenever a client sells a loan, the transfer constitutes authorization for the appraiser to discuss the confidential aspects of the appraisal with whoever purchases the loan. What happened next shocked many in the industry. After deciding to follow USPAP, Dingeman was not only placed on Chase’s blacklist, but also on the U.S. Department of Agriculture’s (USDA) national blacklist, since Chase underwrites USDA loans. This type of action can all but put an appraiser out of business.
The good news? After battling for over a year, Dingeman recently learned that he has been removed from Chase’s “Ineligible Appraiser List.” He’ll be the first to tell you that it didn’t happen without a fight.
OCC Contacts Chase
Shortly after being placed on Chase’s blacklist, Dingeman filed several complaints with the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC), only to have the OCC dismiss his complaint and the CFPB decline to take action against Chase.
Over a year after the OCC initially dismissed his complaint, Dingeman reports that the OCC sent him a letter, dated August 8, 2013, indicating that “based on OCC discussions with Chase, you are no longer on this [Ineligible Appraiser] list.” After calling around to both local and national appraisal management companies (AMCs), Dingeman confirmed he was removed from the list. He says he checked with several AMCs who update their appraiser lists regularly and they confirmed that on August 7, 2013 he was on Chase’s ineligible appraiser list and the next day, on August 8, he was not.
While Dingeman can’t be sure what prompted Chase’s reversal, the timeline suggests that a follow-up call from the OCC may have caused the bank to finally remove Dingeman from the blacklist. The disappointing reality for Dingeman is that it took the OCC over a year to take action.
Wanting Chase to confirm in writing that he was removed from the blacklist, Dingeman had his lawyer contact the bank and request a statement regarding his eligibility to perform appraisals for them. In its response to Dingeman, the bank denied all wrongdoing and said, “In the interest of avoiding further expense to the parties and to bring about closure to this matter, we can confirm that as of the date of this letter John Dingeman is not on the list of appraisers ineligible to receive Chase appraisal assignments.”
Chase’s Case, TAF and USPAP
In their responses to Dingeman’s complaints with the OCC and the CFPB, Chase insisted that the sale of the loan constitutes authorization for the appraiser to discuss with them the confidential portions of the appraisal report, even though they were not listed as the client originally. Chase argued that because they were assigned the loan, the report is no longer “confidential” to them.
In an earlier story, Working RE reported that Dingeman cited FAQ 69 of the 2012-2013 edition of USPAP which indicates that there is no provision for terminating appraiser-client confidentiality the way that Chase suggests. Through further research, Dingeman discovered that The Appraisal Foundation (TAF) had addressed this exact issue in a Brochure titled Appraisers, Appraisals & You, A Lender’s Guide to USPAP.
TAF’s interpretation in the Q&A below, taken from the Brochure, leaves little room for misunderstanding:
(Question) I have a copy of an appraisal performed for another client. I would like to ask the appraiser some questions about this appraisal. Does USPAP prohibit the appraiser from discussing the appraisal with me?
(Answer) Yes. USPAP prohibits the appraiser from communicating assignment results or confidential information (both, as defined in USPAP) to anyone other than the client and parties specifically authorized by the client (with the exception of those authorized by due process of law, state appraiser regulatory agencies, and a duly authorized professional peer review committee under certain conditions). Even if you were identified as an intended user in the original appraisal report, you are not part of the appraiser-client relationship. Therefore, authorization from the client would be needed if you wanted to discuss assignment results or confidential information with the appraiser.
Without an agreement between the appraiser and the original client allowing the release of the information pertaining to the assignment, the appraiser is prohibited from communicating assignment results which include the appraiser’s opinions, assumptions, conclusions, the value conclusion or any confidential information as defined in USPAP. The appraiser may confirm that he or she performed an appraisal on the subject property, unless he or she was contractually obligated with the original client not to make such a disclosure.
This statement by TAF, in a document specifically addressed to Lenders to explain the meaning and intent of USPAP, seems to directly contradict Chase’s interpretation of USPAP.
One of the lessons for Dingeman, and perhaps for appraisers everywhere, is that getting the attention of regulators is not easy or automatic. “I’m very fortunate to have been removed from the list, when many appraisers in the same situation have not been, but it requires hard work,” Dingeman says. It is bittersweet for Dingeman that the OCC, who originally dismissed his complaint with no explanation, was quite possibly the agency that prompted Chase to remove him from the list, after languishing on it for more than a year.
Placement on a blacklist can seriously damage an appraiser’s career, Dingeman says. “I’m still removed from certain AMC panels and it can be hard to get back on them. Certain AMCs have had to go back into their systems and pull a new query before they reinstate me. Even then, the market is slower, so they don’t need more appraisers on the panel right now.”
In the process, Dingeman says he has diversified his practice to include non-lender assignments, consulting, and appraisal instruction. “I have spent an enormous amount of time familiarizing myself with guidelines and regulations within the industry. All of which have afforded me the opportunity to serve my peers as Vice-President and now President of the Coalition of Arizona Appraisers and on the Government Affairs Committee for the National Association of Appraisers. My advice to any appraiser is to continue to learn, branch out into different disciplines, and be professional in your day-to-day business,” says Dingeman.
At the end of the day, Dingeman is grateful to be off the blacklist. He says removal from the list and the Arizona Board of Appraisal’s dismissal of Chase’s complaint against him are final vindication that the original appraisal in question was fully compliant with USPAP.
Julie Friess, SRA is an Arizona appraiser and USPAP instructor who says that the 2014-2015 USPAP training materials place an added emphasis on the Confidentiality Section of USPAP. “There is a whole section in the new 2014-2015 USPAP instructor training class regarding the responsibility of confidentiality that appraisers have to their clients. In the very beginning of the new 2014-2015 USPAP, they redefine assignment results with the purpose of communicating that USPAP’s Confidentiality clause includes more than just the appraiser’s opinion of value. Instead of the focus being on the value, the focus is now also on the appraiser’s opinion and conclusions. An appraiser develops an entire analysis of a market and how comparable sales are related to the subject property and that analysis is also confidential and falls under the definition of assignment results. The class also reiterates that the Ethics Rule prohibits discussing the assignment results with anyone other than the parties outlined therein,” says Friess.
While the added clarification is certainly a positive, Friess isn’t sure it is necessary. “I think it should have been very clear before the new changes to USPAP, there are so many USPAP FAQs and Lender’s Guides that have already clarified this point. It’s also interesting that Chase has a clause in their engagement letters that says the appraiser is not to discuss the assignment results with anyone but them. So they expect exclusivity and to have all of their information kept confidential, but they want people to bend the rules for them.”
As far as what lenders intend to do to address this issue, Friess says that some potential solutions are being considered. “I’ve been in meetings where it was proposed for lenders to have it in their engagement letters that if the loan is sold, the purchaser would automatically become the new client, but I don’t think anyone has adopted this practice yet. A potential problem with this is that it might put the appraiser on the hook to have to answer questions to a ‘client’ many, many years down the road.”
Union Busts Chase
Dingeman’s case attracted attention from many appraisers and appraiser organizations alike. The American Guild of Appraisers (AGA) took a special interest because Dingeman is a member of the Guild. The AGA is registered under the Office and Professional Employees International Union (OPEIU), which is chartered under the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). The AFL-CIO is the largest and most powerful union in the United States, with over 12 million members.
When Dingeman was first placed on Chase’s blacklist in 2012, the AGA leveraged its position as a member of the OPEIU/AFL-CIO, to engage representatives who were responsible for managing the union’s relationship with Chase. At the time, Chase had Union Privilege Status with the AFL-CIO, making it a preferred vendor, allowing members to enjoy preferred deals on Chase credit cards, mortgage services, car loans, and other banking services, and driving significant business to the lender.
Peter Vidi, President of AGA, says he was actively involved in pressing for a resolution of Dingeman’s case. He says that after the AGA took up the issue with the Union Privilege representatives, a dialogue about Chase’s treatment of Dingeman began. The fact that Chase was blacklisting a union member, and not being forthcoming about it, gave the Union Privilege representatives good cause to request an explanation from Chase, according to Vidi. Vidi says that the Union representatives were displeased with the way Chase was handling the situation.
Shortly after, Chase’s Union Privilege status with the AFL-CIO was revoked. While Vidi notes that there were a variety of factors that came into play regarding the union’s decision to revoke Chase’s Union Privilege status, the bank’s treatment of Dingeman was certainly “another nail in the coffin.” The monetary benefit to Chase as a preferred vendor to the union is difficult to estimate but Vidi says he’s certain that if Chase had a choice, it would rather not lose the business of such a powerful organization.
Vidi says this is an example of the benefits that an appraiser union can bring. “This is a clear demonstration of the actions that our group takes on behalf of our union members. That’s the way a union works, if one of the members is mistreated, the union goes to bat for them,” says Vidi.
by George R. Mann, CRE, FRICS, MAI
Editor’s Note: You may be interested to hear what (at least one) Appraisal Management Company (AMC) thinks about the effect of low-bid appraisal ordering on quality, the topic of last issue’s News Edition (Low Bid Appraisal Ordering and Its Effect on Quality). Appraiser George Mann posted the following comments to his blog. Given all that we hear about the overall low quality of appraisals, his response and rational for “low bid” ordering might surprise you.
December 9, 2013 – Post No. 34 – Some of you may have seen a recent article by Isaac Peck, Associate Editor of Working RE. His article was titled Low Bid Appraisal Ordering and Its Effect on Quality.
This is a well-written article and obviously presented some factual situations. However, as a review appraiser for almost 22 years, I feel obliged to present the other side of the coin. I have overseen the order and review of about 15,000 appraisal reports over the years. Whether I was an employee of a bank or acting as their Agent, I was/am essentially an AMC. We do the same thing whether we are employees or hired companies/contractors.
Some facts based on what I have seen over the past two decades:
1. Around 90% of appraisal assignments are awarded to the low bidder.
2. The vast majority of assignments, whether awarded to the low bidder or not, are acceptable.
Therefore, awarding to the low bidder should not adversely affect the quality of appraisals over the long run.
All of the good appraisers out there need to realize that almost every assignment they have won is because they were the low bidder! I doubt they would say their work product was inferior for all of those assignments.
Let me provide some actual numbers from the past few months of awarding assignments in a specific market for a specific client. Amazingly, all of these appraisals have been reviewed and accepted without any significant revisions. All of them were awarded to the low bidders.
In October, we awarded 31 appraisals with fees totaling $77,600. If we had the philosophy that all low bids would result in poor quality appraisals and we went with the second lowest bids (who is to say all of them would result in better products?), the fees would have totaled $99,900! What kind of service would we be providing to our client (or employer) if we had them (or really the borrowers) pay $22,300 more for these appraisals that had no assurance of being any better than the low bid reports? That would be the kind of service that would drive you out of business (or fired, if an employee).
I once told an appraiser that we were concerned about engaging him because his fees were so much lower than others in the market. He retorted, quite strongly, as to what right I had to opine about how much money he thought his time was worth! Also, he said there are a lot of bad $5,000 (commercial) appraisal reports out there. You get what you pay for certainly doesn’t hold true in the appraisal arena.
While there is a lot of concern about AMCs saving $50 and getting a poor report that might be off by $50,000 on a house appraisal, this pales in comparison to the errors on the high end. We once had to lower a $500 million appraisal to $400 million. Just because the fee was $50,000 didn’t mean the report was good. How many erroneous residential appraisals are needed to get to this $100 million error for one assignment?
KC Conway, CRE, published a report a few years ago that showed that appraisals on average were in error by about 20% (my personal data over the years shows an average of 22%-23%, albeit my data isn’t a scientific study like Mr. Conway’s). These appraisals probably had fees ranging from around $5,000 to $50,000. There is no guaranty of quality as fees go higher.
One common question I have been asked over the years was why do we go with low bids? There is a logic to this. If we have grouped a set of appraisers that we know are equal in competency, then the major decision maker becomes fee (and time in some situations). As with the 31 appraisals I mentioned above. We know all of the appraisers in this market. We know which appraisers are say Level A or Level B (we don’t go down to the Level C or lower quality appraisers). So when we have them bid we know the competency is about equal and the likelihood of approving their reports is very high. Where is the logic in not going with the low bid?
There will always be those situations like Mr. Peck encountered. Every industry probably has something similar. But, what about the 60% or 70% or 80% or 90% of all appraisals that are done right and selected because they were the low bid. Not enough stories are written about those.
Postscript: Mann owned and operated his own AMC for five years (Collateral Evaluation Services), selling his interest this year. He currently runs the AMC operation for Situs.com. He handles mostly commercial work but orders residential appraisals occasionally and says he finds no difference in the results between commercial and residential. “Even if we ordered mostly residential appraisals say, for a bank’s mortgage company, we would all (commercial AMCs) operate the same way. First, derive a list of quality appraisers. Second, bid to them and the low bid would win 90%+ of the time. And 95%+ of the appraisals would be acceptable on first review. But I get to select only the good appraisers. That is 95 percent of the battle,” Mann says. “As I have told appraisers for a decade or more, you can fire your clients. I have had many tell me later that that was the best advice they ever got.”
About the Author
George Mann is a member of the Counselors of Real Estate (CRE). During his 27-year career, he has been a fee appraiser, assessor, and reviewer. Mr. Mann has overseen the review of 15,000+ commercial appraisals across the USA and in eight foreign countries. His weekly blog can be viewed here.
by Isaac Peck, Associate Editor
Editor’s Note: Are lower quality appraisals the new normal? Here is why low-bid appraisal ordering might be driving down quality and driving out the best appraisers from the profession.
Any appraiser who has worked with Appraisal Management Companies (AMCs) is likely familiar with the “order by email-blast” system that some AMCs rely on to fill orders.
The process goes like this: an AMC sends an email blast to all appraisers within a given area, detailing a particular property and offering a certain fee for the completion of the assignment within a prescribed time frame. Depending on the AMC, the email may or may not clearly include a scope of work and offer additional information about the property to help appraisers make an informed decision whether to accept. Appraisers receiving the email are then faced with a choice, accept the assignment as-is, and the fee being offered, or “counter” with a higher fee.
The problem is that oftentimes experienced appraisers feel that the fee offered is neither fair nor reasonable (but might be customary!). These experienced appraisers often counter the AMC’s initial offer and submit a higher bid to complete the assignment. In some cases, the AMC accepts but all too often, the order is accepted by another appraiser “at terms offered.”
The question raised by many seasoned appraisers familiar with this type of ordering system is what kind of quality does such a “low-bid” appraisal ordering system produce? The AMCs who utilize these systems insist their entire panel is vetted so that any appraiser they work with will do a good job. Some appraisers are not so sure. James Johnson (not his real name, he fears reprisal from AMCs and banks), an appraiser in New York with 25 years’ experience, provides a unique perspective on the issue and tells a story that may resonate with many appraisers.
At Terms Offered
Johnson is a residential appraiser who also does appraisal review work for various AMC clients. Recently, he was underbid on an appraisal assignment to the tune of $50. The order came in the form of an email blast solicitation for a multifamily appraisal assignment. After assessing the complexity of the assignment and the required turn-around time, Johnson countered the bid with a fee $50 higher than what was offered. “Based on what I saw, I calculated how much time I would need to do it properly and I decided that the fee offered would not cover the work involved,” says Johnson.
Not long after he learned that the order had been accepted by another local appraiser at the terms offered, a scenario that Johnson says he experiences on a regular basis. Three weeks later, another email blast was sent out to review the same appraisal in question. This time, Johnson won the bid and was given the opportunity to review the work of the appraiser who accepted the earlier order for the lower fee. This is where things get interesting.
Upon reviewing the appraisal, Johnson says he was shocked and angry at the low quality of work that was delivered. “The report was rife with inaccuracies, mistakes and questionable logic. I was steamed when I saw the quality of work done by one of the appraisers who keeps underbidding me. The comparable square footages, age, and lot sizes were all incorrect. One comparable that the Realtor had listed as a ‘handyman special’ was reported as being in good condition. All comparable photos were cut and pasted from the MLS. Garages were missed on two comparables. Finished basements and property locations were not adjusted for. The Subject contained two units, each with two bedrooms and one bath, but the rental comparables used in the appraisal included an unadjusted two-family unit with four bedrooms and two baths, and a one bed, one bath apartment,” says Johnson.
In addition to shoddy analysis on the adjustments and next to no research on comparables, Johnson says that all of the comments appeared to be canned. “Neighborhood comments were even worse than the comp selection and adjustments. Basically, it looked as though all of the comments were canned and nothing was original or specific to the subject. The 1004MC showed an absorption rate for months seven to12 at 22.50/month, months four to six at 44.67/month and current to three months at 53.67/month, but the appraiser stated repeatedly that the local market is slow, local market activity is stable and the data/activity is considered to be ‘too small to be considered statistically reliable.’ Everything was checked as stable. There was no reconciliation or explanation as to how the appraiser arrived at his final estimate of value,” says Johnson.
How it Happens
Johnson was so upset about the poor quality of work on the appraisal, and the appraisal ordering system that rewards such behavior, that he called the AMC. He says he wanted to find out why the AMC would give orders to an appraiser who produced such poor work when experienced, diligent appraisers are willing to do the same assignment for only a slightly higher fee. “I was told by the representative who works on the solicitation panel that she never would have given that appraiser the job over me. She stated that his rating is terrible whereas mine is excellent, and had this involved scrutiny by a human, anyone on their team would have chosen me over the other appraiser. The problem is that the solicitations are sent out offering a very low fee and it is only when nobody accepts the fee offered that humans get involved,” says Johnson.
The bottom line, according to Johnson, is that for this AMC at least, if a more experienced, diligent appraiser says that he or she needs a few more dollars, or asks for a few more hours on the due date/time, it is considered a “bid” and it is looked at only if no one else accepts the assignment “at terms.” “The result is that even though this appraiser has a terrible rating, and there are others like him I am sure, the AMC leaves him in the system and he can just accept the assignments at ridiculously low fees and continue to steal assignments from me and other appraisers who price the work to do the job correctly,” says Johnson. “Then the AMC uses that depressed fee to calculate what they consider to be Customary and Reasonable for the assignment type in my area.” The AMC representative went on to say that the same system is used for appraisal reviews and all of their products, according to Johnson.
Penny Wise, Pound Foolish
“The funny thing is that I would have done the assignment correctly for a mere $50 more. And their client wouldn’t have had to wait an extra four-five weeks. The assignment was for a purchase so I know time was an important factor. I was told that the in-house reviewers looked at the appraisal and ordered a field review because they had no confidence in the original appraisal. So they saved $50 and are now spending another $400 for a field review,” says Johnson.
The fact that many large AMCs use an appraisal ordering system that automatically selects appraisers based on their acceptance of a low fee and turn-time is disconcerting Johnson and many other appraisers. “I know that most appraisers take their profession seriously and have standards. They have ethics. But day in and day out I keep losing work to appraisers who undercut me and take assignments at impossibly low fees. I’ve seen appraisers accepting a complex 1004UAD with an REO addendum and laundry list of attachments for a total of $250 and a three-day turn-time! These are appraisers who just check a few boxes, add a few photos and call it a day, and they get work that I should be doing,” says Johnson.
Who Pays the Price
It is not just the “honest” appraisers who lose out with such a system. Richard Hagar, SRA reports that in situations where the appraisal is deficient, the AMC is required to turn the appraiser into the state board for disciplinary action. Additionally, the field review conducted by Johnson is not sufficient for the lender to lend on, so an additional appraisal must be ordered. “While the review appraisal might contain an opinion of value, the opinion is not in the correct format, nor has the review appraiser inspected the property. The AMC must order a new appraisal and inform the lender that it has ordered: a) an appraisal, b) a review and, c) a new appraisal- all of which MUST be submitted to the lender prior to making a lending decision,” says Hagar.
The end result is that the AMC, if it seeks to comply with federal regulations, will spend an additional $400 on a field review, plus another $400-$500 on an additional appraisal, all because it attempted to save $50 on the first order. The catch is that technically the AMC is not the one who pays the price associated with selecting the appraiser in the first place. “Who gets charged for the review and the new appraisal? It should be the bank but they usually figure a way to charge the borrower for the bad business practices of the AMC and lender,” says Hagar.
Good Appraisers Driven Out
Johnson believes his experience is indicative of a major problem in the industry. Namely, that blast-type order systems, that deliberately offer unreasonably low fees for appraisal assignments, result in good, experienced appraisers being driven out of the industry, as well as a systematic degradation of appraisal quality and appraisal fees.
Johnson offers two particular assignments that he recently lost bids on to reinforce his point. The first was a 2055 appraisal order for a property listed for $7 million with over 6,000 square feet of living space on three acres of land. The property was gated and included two guest houses, an in-ground pool, and a tennis court. Johnson bid $900 but according to the AMC’s ordering system, the order was accepted at terms offered of $225.
The second property was listed at $3.5 million with nearly 6,000 square feet of living space located on the waterfront. Johnson bid $475 but the order was accepted at $225. “These are very complex properties. The 2055 appraisal form might save some writing time but it should be the same amount of work as an appraisal on a 1004. You just can’t afford to do all the work that is needed to produce a credible report on the fee offered. You still have to do all the steps. If there are appraisers out there who want to produce a good product and don’t care what they get paid, God bless them, but they’re not going to last in this business,” says Johnson.
“In my area, I’m one of the few appraisers doing residential work who hasn’t come into the industry in the last three-four years. Everyone else has moved on to other things because they refuse to lower their standards and submit shoddy work, and it just doesn’t make sense to submit quality work for such low fees,” says Johnson.
Johnson says that the current system rewards unethical, inexperienced appraisers who accept low bids and it puts appraisers like him in a position where it can be hard to get work. “I would be fine if I was bidding against other appraisers who are doing what I am doing, instead of submitting these generic, non-specific appraisals. Most of the appraisals I review have nothing to do with the subject. Yes they have a floor-plan and pictures of the subject, but every single comparable photo is cut and pasted from the MLS. The market data is all generic, cut and pasted comments from 100 other appraisals,” says Johnson.
Johnson believes that AMCs are fully aware of the problem. “I’ve talked to several AMC employees on the phone and they tell me they have frequent meetings discussing this very issue. It is brought up time and again yet nothing gets done about it,” says Johnson.
“I’ve been trying to hold the line. If we establish a customary and reasonable fee, and then some AMCs offers us $25 less, that is still within a reasonable range. But that slowly becomes the customary and reasonable fee, so the AMCs lower their bid even further. The end result is that the appraisers who are willing to cut corners are the ones who get the lion’s share of the work,” says Johnson. “If they allow the substandard appraisers to continue to underbid the ethical and competent appraisers for an extended period of time, the diligent appraisers will need to decide between working for minimum wage or starving. With the age of the average appraiser rising to over 50, many are making a third choice: leave the business.”
About the Author
Isaac Peck is the Associate Editor of Working RE Magazine and Marketing Coordinator at OREP.org, a leading provider of E&O Insurance for appraisers, inspectors, and other real estate professionals in 49 states. He received his Bachelors in Business Management at San Diego State University. He can be contacted at Isaac@orep.org or (888) 347-5273.
You already know that, as an appraiser, you and your business are carrying a lot of liability. What you may not know is just how easy it can be to reduce both your personal and business risks by making a few easy changes to how you do business.
Don’t Extend Credit to a Company You Don’t Know
Think of it this way: each and every time you accept a non-COD appraisal report, you’re extending credit to your client. And, if you’re accepting a report from a client that you haven’t worked with before, the risk that you’re taking by accepting that order is enormous. You don’t know how easy that company is going to be to work with, and you don’t know how soon they will pay you.
You can never be absolutely sure about whether or not the client is going to pay you for the work you’ve done (even the ones that you’re currently working with!). Clients are at risk of a buyout, a merger, or cash flow issues at any time, and it’s important for you to remember that their risks translate into risks for your business as well.
Think of your business like you would think of a lender. A lender would never loan out money to a borrower without first checking the borrower’s current credit history, would they? So, why do you?
Actually “Know” Your Clients
Knowing your clients’ past and current payment structures allows you to lower the risk of you getting stiffed on a report that you’ve already completed. Take ES Appraisal, for example. Appraisers completed appraisals for ES Appraisal for years without a problem. Suddenly (or so it seemed), ES Appraisal filed for bankruptcy and thousands of appraisers were stiffed for millions of dollars of fees.
The reality is that red flags were popping up about ES Appraisal for months. ES Appraisal was getting slower and slower with their payments to appraisers. It’s one thing if a company forgot to pay an appraiser for one report, and it is another thing entirely if they’re making a habit of being more than 60 days late paying all the appraisers on their panel.
There were posts scattered across Facebook, Twitter, LinkedIn, and forums, once every few weeks, about an appraisers not getting paid. But, posting in these places is hard to follow, doesn’t provide you with concrete information, and, because of the nature of social media, unless you’re online right when another appraiser posts, you’re not even guaranteed to see that information.
If appraisers had pooled their collective knowledge of ES Appraisal into one central credit-reporting type system, we all could have recognized ES Appraisal as an at-risk client, stopped accepting orders from ES Appraisal. It could saved appraisers millions of dollars in unpaid fees.
Get the Right Type of Knowledge
It’s no longer enough to simply read comments in Facebook groups, get opinions from an open-ended forum, or ask another appraiser’s opinion. You need hard facts about how your client is performing now and how they have been performing over time. Getting that information can significantly decrease your business’s risk, and it can save you a lot of worry.
Appraisal Advisor aims to provide appraisers with that kind of data through a system that works very much like a credit agency. Only licensed-verified Independent Fee Appraisers can write reviews about their clients. By providing 3 different types of reviews for you to complete about your clients, you can enter objective information about clients such as how long it takes them to pay in days (calculated by our systems using the date the appraisal was invoiced and the date the appraisal was paid), exactly how much that client is paying other appraisers in your coverage area, and how easy or difficult they are to work with.
We combine your reviews with the those of other appraisers so that you can see statistically valid, objective information about clients that you currently do business with and clients that you’re thinking about working with.
Our goal is to provide appraisers with a credit report substitute so that you can minimize your personal AND your professional liability.
Register today. We’re free through the end of 2013 (at least!) and require no billing information.