Appraisal Industry & Practice
As more appraisers look toward private, non-lending work, there's a side of running an appraisal business that doesn't get nearly enough attention.
There's been plenty of discussion in the appraisal profession about moving into private, non-lending work, particularly as appraisers continue to express frustration with appraisal management companies (AMCs) and the fees they're willing to pay. Much of the lending business has become a competition over who can complete an assignment the fastest and for the lowest fee, and it's understandable why appraisers would want to find other sources of work.
The usual advice is to develop private clients, where appraisers can establish their own fees and have more control over their businesses. I agree with the direction, but I think there's a considerable disconnect between being a good appraiser and knowing how to run a successful appraisal business.
In traditional lending work, the appraiser generally receives an order with a fee already attached. They can accept it, decline it, or sometimes negotiate, but they aren't usually responsible for finding the client, explaining why their services are worth the fee, or collecting payment directly. That changes considerably with private work, where the appraiser has to handle those responsibilities personally.
I think this is where some appraisers run into trouble. They may be perfectly capable of completing the appraisal, but they've spent years operating in a system where someone else largely controlled the business relationship. Moving into private work requires skills they may never have needed to develop.
And frankly, dealing directly with the public isn't always as straightforward as some appraisers might expect.
I was reminded of that recently when a homeowner called about an appraisal for a condominium he was considering selling. He was driving when he called and seemed primarily interested in getting a price. He described the property as a basic condo that was only a few years old, apparently assuming that made the appraisal fairly straightforward.
I was trying to explain the differences between a restricted appraisal report and a more comprehensive appraisal report so he could decide which service made sense for his situation. We offer different options because not every client needs the same level of reporting, and the fees reflect the work involved. If someone is working within a budget, I want to see whether there's an appropriate service that meets their needs.
As I went through the options, thinking I was providing a higher level of service by giving him choices, he became increasingly impatient.
Looking back, I suspect he thought he was making a quick phone call and would get a straightforward answer about what an appraisal would cost. He probably had no idea there were different reporting options or why I'd need to ask questions before quoting a fee. From my perspective, I was trying to help him make an informed decision, but I could see that the conversation wasn't going the way either of us expected.
The fact that he considered the property simple didn't tell me much about the work involved. Even a relatively new condominium can present valuation issues that aren't obvious to the owner, and I wasn't comfortable recommending a service without first understanding what he needed.
I've found that being thorough isn't particularly helpful if the person on the other end of the phone is becoming more confused or impatient with every explanation. It's something I've had to learn through experience, because the way appraisers discuss scope of work and reporting requirements with one another doesn't always translate well to a conversation with a homeowner.
Knowing What Your Work Is Worth
One of the more difficult parts of operating an appraisal business is deciding what to charge for your services. In lending work, appraisers often spend their time deciding whether an offered fee is worth accepting. In private work, you're responsible for establishing that fee yourself, and it needs to make sense for the work involved and the business you're operating.
Several years ago, I was hired to complete two separate date-of-death appraisals for heirs of an estate. We'd discussed the assignments, agreed on the fees, and scheduled both inspections. The day before the appointments, the client contacted me to cancel because they'd found another appraiser willing to do the work for half the price.
My fees were consistent with what other established appraisal firms in the area, whose experience and quality of work I respected, were charging for similar assignments. That doesn't mean there aren't appraisers willing to charge substantially less, but when the difference is that significant, I think it's reasonable to ask what you're actually getting for the money.
Two appraisers can inspect the same property and deliver reports that look similar to someone unfamiliar with valuation. The difference may be in the research, the selection of comparable sales, or how well the conclusions hold up when questioned. Those distinctions matter when an appraisal is being used to settle an estate or resolve a divorce.
A relatively straightforward property with numerous similar sales may not present much difficulty for a competent appraiser. An unusual property, a retrospective estate valuation, or an assignment that may be challenged in litigation can require considerably more judgment and analysis. The ability to complete routine assignments doesn't necessarily mean an appraiser has developed the same expertise in more complicated work.
Another appraiser once described this with an analogy that stuck with me. Clients believe they're ordering a steak, but one appraiser may be providing a steak while another is serving a hot dog. Both arrive in a takeout box, and the customer may not realize the difference until much later.
I thought that was a pretty good description. Much of what determines the quality of an appraisal takes place behind the scenes, and someone unfamiliar with valuation may have little basis for understanding why one appraiser charges more than another.
My fees have increased over time as operating costs have risen, demand for our services has grown, and we've become more selective about the assignments we accept. There's also a limit to how many appraisals I can reasonably complete while maintaining the level of research and analysis I expect from my work. I can't simply make up for substantially lower fees by completing twice as many assignments, and I have no interest in building a business around that approach.
An appraiser with very little work might be willing to accept an assignment for considerably less than someone with an established client base. I understand the temptation, especially when business is slow. But if the fee doesn't adequately compensate them for the work involved and the cost of operating their practice, taking more assignments at that price isn't going to solve the problem.
I think it's perfectly reasonable for appraisal businesses to charge different fees based on their experience, operating costs, and the demand for their services. But consider a market where established firms are charging $800, $900, or even $1,000 for a particular type of assignment. If someone offers to complete comparable work for $350, how are they accounting for everything involved? There's still research to conduct, information to verify, market evidence to analyze, and a report to prepare that meets the applicable USPAP requirements. Are they willing to earn considerably less, or are they spending less time developing and supporting their conclusions? I can't answer that for any individual appraiser, and a low fee alone doesn't establish poor work. But it raises a fair question about what the client is paying for and whether the appraiser has really considered the cost of providing the service.
The Cost of Running the Business
For someone running a solo appraisal practice, time is essentially our inventory. There are only so many inspections I can schedule in a week while still completing the reports already underway. And the fees we charge have to cover more than the time spent inspecting a property and analyzing comparable sales. There's the driving, the cost of maintaining a licensed business, and the hours spent on phone calls and administrative work that don't directly produce a report.
I've had appointments cancel when they were scheduled between two other inspections, leaving me with an hour to kill half an hour from my office. There's not much I can do with that time. I've also driven 45 minutes to a property only to find that nobody was there to provide access, whether someone forgot the appointment or a tenant wasn't available. Sometimes that means making another trip, with considerably more time spent on the assignment than originally anticipated.
Those are real costs, which is why our engagement agreements include cancellation fees and other provisions for situations where appointments fall through or additional trips are required. If someone hires an attorney and the attorney begins working on the matter, there's generally an expectation that the time spent will be billed, even if the client later decides to go elsewhere. I don't see why the time involved in preparing and scheduling an appraisal assignment should be treated as though it has no value.
Recently, a prospective client called to discuss a residential appraisal. We spent some time talking about the property, the purpose of the assignment, my qualifications, and my familiarity with the local market. I explained how I'd approach the valuation, what the work would involve, and the fee. Before ending the conversation, I specifically asked whether they wanted to hire me, and they said yes.
I told them I'd prepare an engagement agreement, and we tentatively scheduled the inspection for the following Tuesday. I sent over the paperwork and made room on my calendar.
The next day, I received a message explaining that they'd hired another appraiser.
I found that pretty irritating. I'd asked point blank whether they wanted to move forward, and they'd agreed. Had they told me they were still shopping around, that would have been fine. Instead, I'd spent time preparing for an assignment that was apparently still up for grabs.
I expect to spend time answering questions, discussing assignments, and providing quotes without getting hired. That's part of running a business. But I draw a distinction between someone inquiring about a service and someone agreeing to engage me. Once a client says they're moving forward, I begin preparing the engagement agreement, setting up the order in our system, and making arrangements to complete the work. Until the agreement is executed, though, there's a limit to what I can reasonably expect from the client, which is something I have to account for when scheduling assignments.
I could have responded more pointedly, explaining that they'd wasted my time after explicitly agreeing to move forward. I might have felt justified in doing so, but it wouldn't have accomplished much. I responded professionally and went back to work, although I continued thinking about the interaction longer than I should have.
Some people will be considerate of your time and the commitments they make, while others won't give those things much thought. I can disagree with how someone handles an interaction, but spending the rest of the day irritated about it doesn't accomplish anything, either.
After more than twenty years of appraising real estate, I've become more selective about the assignments I accept and more comfortable recognizing when a client may not be a good fit. I also understand that not everyone is going to recognize the value of the services we provide, no matter how thoroughly we explain them. Sometimes the best outcome is simply that someone leaves the conversation better informed, even if they decide to hire somebody else.
That's what I think gets overlooked when appraisers are encouraged to move into private work. You have to understand what your services are worth, find clients who appreciate what you're providing, and accept that not every interaction is going to work out the way you'd like. Being a good appraiser certainly helps, but there's considerably more to running a successful appraisal business than knowing how to value real estate.