Can Appraisal Co-ops Save the Day?

As the market naturally erodes due to fewer real estate transactions, and as the HVCC pushes the remaining transactions in ever-increasing numbers to appraisal management companies (AMCs), many appraisers are kicking around the notion of creating a member-owned AMC, or "co-op". It’s no surprise, since creating a co-op taps into all of the "David-versus-Goliath" emotion needed to keep a topic moving along on Internet forums and forwarded e-mail threads.

The basic idea seems to generally be the same no matter where or when it comes up: Appraisers will band together, create a company, assign orders across all members, collectively and cooperatively review and manage the reports done by other members, keep the full fee, and — in a few cases — refuse to work for other AMCs, in effect going on strike and forcing lenders to use the co-op instead.

It sounds great in theory, but most if not all of the discussions I’ve seen have completely ignored a few critical areas, any one of which is capable of sinking any such venture. These aren’t the only three areas of concern, of course, but these are the ones that seem to be truly overlooked and therefore unlikely to be dealt with in a successful fashion.

First, there’s a major component that most appraisers tend to overlook even in their own businesses: Advertising and selling. There seems to be the perception that the Better Mousetrap Fairy will float in on butterfly wings and sprinkle pixie dust on lenders, making them instantly aware of the coop and imbue them with the unshakable belief that it’s better than other AMCs (or managing their own fee panel), and the lenders will magically beat a path to the co-op’s door.

But unfortunately, there isn’t a Better Mousetrap Fairy. To generate the revenue required by a large collective of appraisers, there has to be a concerted, well-funded advertising and marketing program, backed by a team of experienced and dedicated salespeople and sales managers, who all like to get paid. And paid well.

For anything but the smallest city-wide co-op, the cost to do that runs into the millions. Advertising, trade shows, e-mail and website media, and PR alone will soak up seven digits in a hurry. Throw in payroll, benefits, and travel budget for salespeople, and you’ve added millions more very quickly. Can a co-op handle that financially, up front? The marketing, advertising, and sales staff costs precede the influx of orders and revenue. It’s not a pay-as-you-go system. It’s a pay-now-or-go-home system.

Second, there’s the issue of managing the workflow for a company the size that a co-op would have to be. Technology can be bought relatively off-the-shelf and then implemented for a few hundred thousand dollars, but the technology isn’t the issue. Technology simply helps enforce a workflow design.

But what design? Will a high-volume appraiser accept a round-robin assignment system in a co-op where he or she is an owner, and yet where orders go to everyone in sequence, regardless of speed, quality, fee, or other criteria? Will a USPAP instructor who pays to join and have a say in the co-op be willing to have negative reviews of his or her work performed by less-experienced appraisers? What sort of disincentives will a collective create in the assignment system where some appraisers — also owners — will inevitably break rules, drop the ball, or otherwise cause production problems?

All the technology in the world can only be used to implement the workflow and processes that humans design. But even in small appraisal shops, these very workflow issues often derail partners and staff.

The third and final issue is the killer one in my opinion: Management. In an appraiser co-op where profit is not the metric by which everything is measured, and where there’s not an arm’s length relationship between vendors (appraisers) and ownership (the same appraisers), how does a management team move forward without spinning into endless debate with the members? (pq)

These three hurdles are tough enough to clear in a venture where funding is available, workflow is obvious, and management has an unambiguous mandate to lead and implement a plan. They’re virtually impossible in a collective with no source of up-front marketing and advertising funds, distinct disagreement on how to handle even core workflow, and a decision-by-committee cultural predisposition.

That’s unfortunate, of course, and I really hope I’m wrong. As we’ve said several times before, there are natural niches for all sorts of entities — traditional AMCs, vendor management platforms such as our Mercury Network, and appraiser co-ops too. Co-ops would certainly spice up the market, which is always good. If the pixie dust comes in 55-gallon drums, we might get to see it happen.