Earthworm AMCs and Free Appraisals
Quit working for the earthworm AMCs
I love reading Jonathan Miller’s Housing Notes blog each week.
Here is one of his entries from last week. Below this I’ll add my own $0.02. Actually, it’s worth a nickel!
Let’s explore the concept of free appraisals.
The idea that “you get what you pay for” doesn’t seem to apply to real estate.
Appraisers have been under siege for the past decade and the industry is decimated. There are only a few good appraisers left in each market as lenders and the Appraisal Management Companies (AMCs) they use have pressed hard to convert a professional expertise to a commodity. The only catch is that the appraiser has to work for half the market rate and they (the AMC) keep the other half. In addition, we have Estimates that are now so ubiquitous most consumers just assume the results are right. Tom Horn of the Birmingham Appraisal Blog writes a good overview of the phenomenon of “free” home appraisals.
A byproduct of commoditizing appraisals since the financial crisis through AMCs has created a new army of form fillers that don’t do appraisals. As a result, they are not responsive to changing market conditions. I read articles like this all the time: Low appraisals threaten central Ohio home sales. All participants in these types of articles just can’t understand why all of a sudden there is a burst of inaccurate appraisals across the market. Doh!
- 90% of bank appraisals are now done by AMCs since the financial crisis versus the inverse before the financial crisis.
- AMC appraisers generally work for half the market rate without AMC involvement, reducing the quality of appraisers staying in the profession.
- AMCs and banks require unrealistic turn around times that incentivize these less qualified “experts” to cut corners.
It’s in everyone best interest to protect the neutrality of the appraiser which would increase industry competence. Unfortunately I think this appraisal battle has been lost and banks have won.
In many ways, Jonathan is spot on. His observations are especially true with the bottom feeding, third tier, earthworm located, broadcast emailing ‘opportunity’ AMC’s who place very little worth on the appraisers they attempt to entice to do assignments at rock bottom fees, often at extraordinarily fast turn times.
Those are the kind of skuzzy earthworm AMC’s I won’t work for.
At the other end of the spectrum are higher echelon AMC’s. The ones who, in many cases, are owned by appraisers. Those who have experienced appraisers on staff who do report reviews. These AMC’s understand the plight of independent fee appraisers. They work hard to maintain positive relationships. These kinds of AMC’s generally have what is called a ‘cost plus’ business model. That means they pay the appraiser a proper fee that is ‘normal’ in the particular area, and then obtain a service fee from the lender for the AMC’s services.
By ‘normal’ I don’t mean the knuckle dragging fees paid by the earthworm situated AMC’s who syphon off a portion of the borrowers “appraisal cost” payment for their own overhead and profit, leaving the appraiser with a lower percentage of the total paid by the borrower. ‘Normal’ to me means a fee at or very close to what I would charge a local or regional bank, or a private party. Read that again! I don’t discount private party assignments.
The ‘normal’ fee is not based on the misguided assumption that ‘normal’ is equal to what unsophisticated appraisers charge as they fight to the bottom of the fee range in their area. But some AMC’s feel justified in operating this way. Because the Federal Reserve Bank’s compliance dual standard in their final rule regulation enforcing the Dodd-Frank Customary and Reasonable fee provision. Their ‘appearance of compliance’ using one provision allowing appraiser-accepted AMC fees is 180 degrees out of sequence with the intent of the law.
So what are appraisers to do?
Quit working for the earthworm AMC’s. Quit accepting fees that are demeaning. Quit being pushed to produce the appraisal report ‘yesterday’ after receiving the assignment ‘today.’
But, and this is important, to rise to a higher level of income and stature, appraisers have to do better quality reports. And they have to quit being, as Jonathan says, form fillers. Increasing competency will earn appraisers more respect from the higher echelon AMC’s and their respective lender clients. That way, the appraiser, and not just the bank, wins.