Fees:  New Rules, New Data

Appraisers are used to toiling away in relative obscurity, but suddenly the national spotlight is shining on the industry, and in an area that normally is shrouded in comparative secrecy: Fees. More interestingly, people outside the profession are actually worried that appraisal fees may be too low, not too high.

The National Association of Realtors raised the issue to national prominence after AMCs rushed into the HVCC vacuum with low-fee appraisers who were willing to drive long distances to cover markets they normally didn't serve. After NAR related even a handful of anecdotal examples in national press briefings of out-of-town appraisers who didn't have access to the local MLS, or didn't know how to even find the subject community, appraisal fees were a hot topic for everyone. Deals were falling apart, or so the logic went. (See our editorial about appraisal fees, "Avoiding a Race to the Bottom," for more on this topic.)

It doesn't even matter if it's an accurate depiction, or if it's the real cause of lowered values (highly unlikely). It matters that NAR was able to influence the FHA to revise the fee landscape, by inserting language in a new Mortgage Letter (ML 09-28 (PDF), which took effect February 15th) mandating that appraisers be paid "reasonable and customary" fees on all FHA appraisals. It went even further and stated that those fees had to be based on what appraisers normally were paid on independent appraisals, before any cut by an AMC is taken off the top. In other words, AMCs needed to add their own fees on top of an appraiser's regular fees and report them as such, instead of grossing up their margins in both directions — taking a cut from the appraiser's portion while simultaneously pushing up the total fee paid by the borrower. Plus, AMCs are now barred from demanding that appraisers delete any reference to their actual fees in the report. So, a borrower who paid $450 for an AMC appraisal can now see that the real appraiser may have been paid only $250 for the actual work.

This was a major victory for appraisers nationwide. Yet, much like what happened when the HVCC first was announced and appraisers initially applauded it, it seems that the appraisal community took the new regulations to mean the exact opposite of what actually was the case. Many characterized the new rules as "FHA adopted the HVCC" and "FHA moved to an AMC model", when nothing could be further from the truth. FHA put a baseline down for appraisers to be paid fair, non-exploitative fees, while also adopting appraiser non-coercion language which avoided many of the HVCC's mistakes.

Instead of an AMC bonanza shrouded in secrecy from the borrower, the FHA created a system with fee transparency plus a firewall that still encouraged lenders to manage the process directly using third party systems such as Mercury. They even quoted our "double blind" language in the section related to using web portals instead of AMCs. There's no doubt that it was a win for appraisers in the battle to be treated fairly and openly in the transaction.

Enter the Appraisal Fee Reference, or AFR
Help has arrived in the form of our Appraisal Fee Reference™, also called the AFR™, which is a free monthly service of our Mercury Network “Industry Analytics” group. In it, we analyze fee data from hundreds of thousands of URAR-only, non-AMC transactions which used our Mercury Network technology backbone in the last year, and report the median appraisal fees in every county and district in the fifty United States, the District of Columbia, Puerto Rico, and Guam. (Download it for free here.)

The AFR excludes reports ordered by known AMCs, in order to determine the customary fees paid to independent fee appraisers when they are engaged directly, without middlemen. AFR transactions cover the preceding twelve months, up to the end of the month immediately prior to publication.

It’s actual observed data, not an industry survey of perceived fees. Each transaction is extensively validated and verified before inclusion.

The AFR is a lengthy report, generally over 60 pages, and is the compiled data behind the additional charts and comparative analyses reported here in these articles.

It is not a piece of “advocacy” analysis, as evidenced by the many counties in which the reported fees are painfully low. While we are unapologetic appraiser advocates, this is simply data, and the data is what the data is, plain and simple. The results are published every month and they will vary up and down as the market indicates. It is an objective analysis with consistent rules applied to massive amounts of data. (pq)

(Details of the methods and facts behind the AFR are in “Frequently Asked Questions” article on this site, and are also on the Mercury Network Analytics page at www.MercuryVMP.com/Analytics.)

Using the AFR as a Baseline For “Customary” Fees
While the AFR itself is merely an objective analysis of data, the use of the report by appraisers and clients will likely be highly subjective.

The key to the AFR is that it gives appraisers the facts needed to be certain of the bare minimum starting point for negotiating customary fees. Negotiations are subjective by nature.

As the FAQ points out, the AFR doesn’t purport to be “the customary fee” for a given area, nor does it claim to include add-ons such as extra forms, drive times, rush fees, or even add-ons for meeting FHA appraisal demands. We’ve filtered the transactions based on what we know in order to estimate the median fee in the target area for a “plain Jane” base URAR.

Individual fees for anything above a base URAR will generally be higher.

Base URAR Fees as a percenetage of transactions

A bar chart comparing the Base URAR as a percentage of transactions and the Base URAR as a percentage of revenue.

The base fee for a URAR (without extras for FHA, mileage charges, additional analysis, and so on) is shown here by percentage of transactions analyzed as well as percentage of revenue generated.  Note that the over-$500 segment was just 61% of the volume of the under-$200 segment, yet it generated 221% more total revenue for appraisers.  The national median is $350, and the national average is $351.

But in negotiating any fee, using the AFR is the best way to establish that the fee can’t possibly be less than the AFR’s estimate, since the AFR is the median fee for basic URARs. It’s the floor below which “customary” can’t logically go, let alone “reasonable,” in a fee negotiation.

It also ensures that the lender or AMC can’t claim they were unaware of the market, or that it’s simply “wrong,” unless they have better data. “No, that’s not customary” isn’t data; it’s merely an opinion. We encourage appraisers to forward the AFR link to any and all clients and AMCs. We also suggest that appraisers ask to see the data behind any attempts to dispute it.

The AFR of course cannot address what is “reasonable,” since real estate is by definition unique and so are the assignments that go with it. The particular nature of a specific assignment creates conditions which allow only the appraiser to make the determination of reasonableness of the fee, and that adds on top of the “customary” baseline.

It is, after all, an appraisal fee, which means an appraiser determines what it should be.

Use It Or Not
The AFR is just data. Some will agree with its results and some will not, and some will use it and some will not — though we believe any appraiser without it is at a disadvantage when involved in any fee negotiation.

Download your free copy of the Appraisal Fee Reference here.