Matrix Blog

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about how the compensation formula is, in all reality, based on speed. Thats why the post is a day late – he had to get a flurry of assignments out the door yesterday.

Disclosure: John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, when its not raining, one of the smartest guys I know. …Jonathan Miller

Imagine hospital interns getting paid a percentage of the fee for every patient they sawor associates in major law firms paid 40% of their gross billings. Take it a step further, your mail deliverer getting a cut of the postage for every house he delivers toengineers getting paid based on how quickly they can churn out new plans and designs.

The “fee split” compensation system has become the standard for commercial appraisers. Under this system, professional staff appraisers are paid a percentage of their gross billings, usually on a sliding scale.the higher the gross billings, the higher the compensation. So there is a built-in incentive to do it fastoften very fast. As a result, there are junior appraisers able to churn out appraisal reports who earn in the six figures; the irony is that the professional who is thorough, cautious and methodical in his research and analysis will put out a much better appraisal, and serve his clients interests far better, but earn only a fraction of what the appraiser that churns out reports earns.

According to [Salary.com](http://www.salary.com), the median salary plus bonus of the commercial real estate appraiser is $76,237, nationally. Though they call this a “salary” to my knowledge, the only appraisers (excluding trainees) paid on a salary basis work for financial institutions or accounting firms.

Salesman, of course, get paid on a commission basis, and partners and principals of professional practices will benefit from both their professional and entrepreneurial skills in running their practices. But I can think of no other “profession” in which junior or mid-level staff are paid essentially on a commission basis.

In other professions associates are paid based on their experience and knowledge, often with a merit bonus at year end. In the appraisal business, a 3-year associate could earn well in excess of the 20-year professional.

What’s wrong with this picture?

[More importantly, where’s my slice? -ed]

Tags: Soapbox Blog, Appraisal Pressure, Appraisal Process, Appraisal Fees, Commercial Grade

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Here is an appraisal-related post on our other blog Matrix: [Bank Mergers Increases Need For Moral Flexibility](http://matrix.millersamuel.com/?p=488) that discusses issue of bank mergers and how the lack of competition influences an increase in crime. The post relates this to the current state of the appraisal profession and its flawed structure.

Tags: Appraisal Management Companies, Soapbox Blog, Appraisal Pressure, Appraisal Process, Mortgage Fraud, Appraisal Fees

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John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who provides unique insight to appraisal issues of the day. Here is his weekly post called Solid Masonry. Jonathan Miller

“Ameriquest Mortgage Co.’s recent $325 million lawsuit settlement with 49 state governments suggests all isn’t well in [the] home-loan industry.” But if you read between the lines, it may also not be well for the venders who service these lenders.

As indicated in the recent article [Cleaning Up Subprime Mortgages [Boston Herald]](http://business.bostonherald.com/realestateNews/view.bg?articleid=125620&format=text) it becomes all too clear just how far some members of the lending industry might have to go to make things right. And the sad truth is Ameriquest isn’t alone. While Ameriquest denies any wrongdoing, the settlement attempts to correct numerous issues concerning the application, processing and settlement of mortgages.

For one thing Ameriquest has agreed loan officers must also provide good-faith estimates of closing costs in a timely manner – and can’t “disparage, discredit or otherwise encourage (borrowers) to disregard” these figures.” In short, Ameriquest will have to adhere to the estimates they provide. It’s well known throughout the lending industry that some banks and mortgage brokers understate the good-faith estimates when borrowers are applying for loans. The technique steers borrowers away from honest lenders who are unwilling to play the “bait and switch game”. Some individuals claim these fraudulent estimates represented less than half the funds needed to close the loan. In addition, lowball estimates can be used to make higher lending rates look more attractive.

To be sure, this deceptive practice is a major issue for both consumers and honest lenders. But wait, national lenders smell a marketing opportunity, especially in light of a slowdown in mortgage applications during the past several months. In Kenneth R. Harney’s [A Good-Faith Effort To Clean Up Estimates [Washington Post]](http://www.washingtonpost.com/wp-dyn/content/article/2006/01/27/AR2006012700706.html) he spells out how SunTrust and LendingTree have recently announced programs where they too (without any allegations of wrongdoing) will guarantee good faith estimates, in an attempt to lure more borrowers.

So what does all this have to do with venders? Well if this trend catches on, either through legal settlements, revisions to the laws pertaining to lender requirements or from promotional programs aimed at increasing market share, it will force lenders to sharpen their pencils. And guess who they’ll turn to? The easiest and most cost effective option is to ask the outside venders to lower their fees, as it requires nothing of the lenders and only impacts the profitability of the venders themselves. Only as a last resort will the lenders consider reducing their internal fees or profit margins.

While increased efficiency and reduced costs are good for consumers, the race to the bottom, in terms of vender fees, could further compromise the quality of services provided. At a time when real estate deals are becoming more complex and technical and many real estate markets are in some sort of transition, this could prove unwise and lacking in good faith.

Tags: Soapbox Blog, John Mason, Appraisal Process, Mortgage Fraud, Redlining and Predatory Lending, Solid Masonry, Appraisal Fees

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This announcement got me thinking about the future of retail banking. Sort of half-serious, kinda.

[Wal-mart](http://www.walmart.com/) wants to go into the banking business supposedly for its [credit card operations [American Banker]](http://www.americanbanker.com/article.html?id=20060120LYSIACTO&from=home)

“The Federal Deposit Insurance Corp. has agreed to hold a public hearing on Wal-Mart Stores Inc.’s application to charter an industrial loan company in Utah.”

“Though Wal-Mart has repeatedly said it would use the bank only for debit and credit card processing, its application sparked 1,500 comment letters. The American Bankers Association and the Independent Community Bankers of America oppose it. Many community bankers worry the retail giant would use the charter to open retail branches in its stores.”

Their slogan “Always low prices. Always.” would seem to fit in well with the current attitude of the lending industry and appraisal fees.

Tags: Soapbox Blog, Appraisal Fees

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In yesterday’s American Banker, a column submitted by an executive and board member of ATM Corp. of America in Coraopolis, Pa., which provides settlement service technology to mortgage lenders called: [Appraisal Managers Can Take the Pressure Off](http://www.americanbanker.com/article_search.html?articlequeryid=463833550&hitnum=1) suggests that appraisal management companies can reduce inflated appraisals because they eliminate contact with the lender so they can be thought of as a buffer for appraisal pressure.

They claim that:

Appraisal management companies were introduced in the 1980s, in part to provide lenders with a way to secure unbiased appraisals.

While I don’t question their genuine conviction that they believe what they are saying, it is amazing how far off the mark they are.

Its been my experience that one of the problems with AMC’s in general is how detached upper management is from the appraisal process, understanding the problems and issues appraisers face every day.

Of course this article is targeted to a publication whose primary reader is their client base.

AMC’s are physically unable to perform true qualitative reviews for their reports. They can measure turnaround times and perform “electronic” reviews, flagging reports for exceeding guidelines. But someone sitting in a cubicle in Maine, doesn’t know the market, block by block in Idaho like a local lender would.

It gets worse. The quality of the reports, which can’t be measured by AMC’s in qualitative ways, are submitted by appraisers who are generally at the lower end of the quality spectrum. Why? Because the AMC is the middleman and the lender still pays the same appraisal fee. They get a piece of the action. The good appraisers are generally unable to afford to work for AMC’s without cutting costs or taking shortcuts that directly impair the quality of their reports. Of course there are always exceptions.

Specifically in our market, you can’t believe the quality we see for reports completed in this manner. They are usually not worth the paper they are written on.

Articles like this in prominent publications are misleading, and because of the lack of a unified voice for the appraisal industry, no one challenges it. After a while, repetition leads to a false sense of truth and the appraiser ultimately loses.

Tags: Appraisal Management Companies, Soapbox Blog, Appraisal Pressure, Appraisal Process, Appraisal Fees

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The new appraisal forms mandated by Fannie Mae effective November 1 will likely cause an [increase in appraisal fees [MCall]](http://www.mcall.com/business/realestate/all-appraisalsnov20,0,5473370,print.story?coll=all-businessrealestate-hed) because they will take longer to fill out and place much more liability on the appraiser for expertise he or she generally doesn’t have.

When Fannie Mae redesigned the forms, the appraiser’s role took on the that of a home inspector which is a different discipline that appraisers are not trained for.

The problem is the new forms are written in such a way that they hold the appraiser responsible for the condition of the property, says Barbara Decker-Spence, an appraiser in Allentown, who has led seminars on the changes for area real estate agents, lenders and appraisers.

”I am an appraiser. I am not a home inspectorand there’s a big difference,” she explains. ”Appraisers value the economic interests [while] home inspectors look at: Does the electrical system work? Does the plumbing work? Does the mechanical system work and are there structural issues?”

If report preparation takes longer and additional liabilities are being placed on the appraiser’s shoulders, it would then follow that the cost of doing business is higher. Appraisers in many markets could be expected to pass along the cost to their clients.

Tags: Soapbox Blog, Appraisal Process, Home Inspection, Appraisal Forms, Appraisal Fees

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And I feel fine…

The new Fannie Mae forms start this Tuesday November 1. Its days like this I realize how fun it is to be an appraiser. The form is being changed for reasons I still can’t explain. In fact, nearly all the forms are being changed at the same time. Something about conforming to changes in USPAP, forcing more thorough reporting, catching flips, etc.

I am sure software vendors are thrilled, appraisers are annoyed and lenders are frustrated. I love change. I love new things. However, this could be a potential fiasco in the making.

What day does use of the form begin? I am getting all kinds of instructions on when to start using the forms from my clients. The required use of the new form should begin on November 1 based on (per my clients):

The effective date of the report? (I am going with this)
The order date of the report?
Anything you have inhouse from that point on?

Here’s a few issues to consider.

1. Fannie Mae does not buy all the paper that is sold to the secondary market. I understand that a number of these investors may not want appraisers to use the new forms. They are under no requirement to use them.

2. Appraisers will be using the re-sending appraisals on the new forms that have already been delivered on the old form.

3. I took this opportunity to launch an entirely new software application we developed with the new forms in it. Training for us will be doubly hard.

4. This has been a revenue opportunity from trade groups and individuals to sell books and promote seminars, which makes the whole conversion even more scary (when it really isn’t).

5. Judging by how hard it was for many lenders who optically scan incoming reports when they went digital, I suspect this won’t be much better.

6. We will be managing more forms now since Fannie Mae made sure that these new forms would not be appropriate for any other use by including a series of poorly worded, extensive liability pitching to the appraiser, limiting conditions. Rest assured, we have all been told its no big deal.

On the bright side, I suspect most appraisers will expect to be compensated for the additional work and frustration. The new forms require more information and add more liability, some of it unrealistic, in addition to the cost of new software upgrades.

At the end of the day, we will all survive and get the reports out the door, perhaps late and incorrectly, but we will figure it out as we go on our own.

Tags: Soapbox Blog, Appraisal Process, Appraisal Forms, Appraisal Fees

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Today I finally received payment on an appraisal delivered in March, almost six months to the day. The appraisal was prepared for (and contracted by) a major financial institution. There was no problem with the appraisal. It was well prepared (if I do say so myself!) and there were no questions or issues during the review.

We called no less than a dozen times to follow up on the payment status; first we were told that they’d “look into it.” Then we were told, “don’t worry, you’ll get paid” and “you know we’re good for it.” The reason for the delay, we learned, is that the loan hadn’t closed and the Bank’s policy is to pay for all third party costs at closing; they do not collect the appraisal fee from the borrower up front.

This policy is wrong on so many levels:

• The Bank should not expect their appraiser to subsidize their borrower for six months
• While I know that the Bank “is good for it”, our landlord and phone company still expect their payment on time.

Ironically, in this instance, the appraisal was a 2-week rush assignment, where we worked through two weekends to get completed on time.

Tags: Soapbox Blog, Appraisal Pressure, Appraisal Process, Appraisal Fees

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