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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.
“Low Bid” Appraisal Ordering and Its Effect on Quality
by Isaac Peck, Associate Editor
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.
(story continues below)
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.
We’re always listening: Send your story submission/idea to the Editor: firstname.lastname@example.org.
I haven’t had too much activity in the past year so I had forgotten about AMC appraisers. Remind me, when and which loans are mandated to go through their system? I will look for someone to responds.-
by Kris Lightman
Thank you for this excellent article. I am a real estate broker that has gotten caught in the crosshairs of this practice. It is expensive for my clients and time consuming every time I have to do a rebuttal on a botched appraisal. All agents and lenders need to know who these AMC’s are so we can boycott them. Only then will they stop this practice.-
by Pick a name
This is a sleezy business with sleazy people. I will be out of it in less than two years. If I had my life to do over again I would have never gotten into the appraisal business. The morgtage brokers, banks, real estate agents and even appraisals have no ethics and in many if not most instances just plain corrupt. There should be a special place in hell for all of them.-
by Country Gal
Quality of the report sound like everything I review these days, and one AMC does the OA report and assigned it to the lowest bidder, then another AMC hires the reviewer appraiser, as each of the OA AMC’s bid for the lowest fee too, they pass it on to getting the lowest bid for the appraiser too. Then the “S” hits the fan when the report has to be reviewed, too often after the loan was already made. Yea folks that’s what reviewers are seeing every day.-