Low certification standards have allowed a glut of inexperienced appraisers into the field, knocking the bottom out of the fee structure and leaving clients questioning the opinions they are buying.
Changes made by federal regulatory agencies to improve the quality of work in the appraisal industry may have had the opposite affect, by flooding the industry with appraisers and reducing the amount of work available for them.
The result has been a drastic drop in appraisal fees as the glut of appraisers chase the limited work that is still available. The competition has led to cut-rate fees that have chased some quality appraisers out of the industry and has some clients feeling they may not be getting the quality work they expect.
"Most appraisers are scrambling for work, and the appraisal fees have gotten so low that some companies are quoting unrealistically low fees to get business," says Ray Cirz, of New York-based Krauser, Welsh & Cirz Inc. and immediate past president of Valuation International Ltd., Minneapolis.
The changes in question began in 1989 with the introduction of appraisal certification and the ensuing approval of state licensing for the industry. Spawned by the savings & loan debacle of the 1980s, FIRREA, the Financial Institutions Reform Recovery and Enforcement Act, instituted tight restrictions on how financial institutions could handle their real estate loan portfolios. It also required more frequent appraisals of the properties, to gauge their value vs. the amounts loaned on them.
"When FIRREA went into effect some banks had to have their entire portfolio reappraised," says Dick Sorenson, director of appraisal services for First Chicago bank and president of the Appraisal Institute, both based in Chicago. "Not only annually but sometimes twice a year."
To ensure quality appraisal work, FIRREA also included a certification provision outlining minimum standards for the large number of appraisers entering the industry. The growing numbers were sparked not only by the federal requirement creating many opportunities for appraisers, but low interest rates had created a large market for the refinancing of home mortgages, all of which required new appraisals.
"Federal law mandated that the states implement the certification requirement and the states took that as a right to create a licensing law," says Merle Atkins, executive vice president and principal with Marshall & Stevens, a Los Angeles-based appraisal firm.
"I would agree that state licensing and certification brought about a proliferation of appraisers in the industry and it did have a downward impact on fees," says Frank Liantonio, national director of valuation for New York-based Cushman & Wakefield. In addition, the fact the Resolution Trust Corp. is basically out of business has also limited the amount of appraisal work, but a few years ago it was a major source.
"Licensing came into effect just as the market was going into a frenzy as far as appraisal work was concerned," says Sorenson.
But the volume of work didn't last. "The real estate markets came back and the regulatory agencies eased off the banks and the number of appraisals they required," explains Cirz.
The contracted appraisal workload also shrank as banks began to develop their own in-house appraisal divisions, a circumstance many appraisers saw as a potential conflict of interest by the banks. "On one side of the room is the loan officer trying to originate the loan and on the other side of the room is the guy who is going to come up with the value to support the loan," says Keith M. Kramer, president of Keith M. Kramer Associates Inc., Chesterfield, Mo. "Yes, I think there is a conflict of interest there."
Cirz also sees that potential. "Banks are not permitted to do their own audits, so how can they do appraisal work for themselves?" he asks.
Although certification guaranteed a certain level of experience and education for appraisers, many in the appraisal industry say the standards it set were far too low.
"These standards are unrealistically low," says Cirz. "The government is saying that as long as you pass this low standard everybody is equal. One appraiser is as good as the next in the eyes of the government."
"The test is not difficult to pass if you have been in the business a while, and as a result it has lessened the importance of the higher professional designations that require more experience and education," says Atkins. "The regulation also stated that financial institutions could not discriminate based upon designation or education, whereas prior to that we could limit our appraisers to those with MAI or other professional appraisal designations."
"I think most of the professional appraisers wish the bar had been set a little higher," adds Sorenson.
These problems occurred just as appraisal was beginning to gain some additional respect in the real estate industry.
"The appraisal industry was starting to be recognized as a profession and was making tremendous strides," says Cirz. "But after what has happened in the industry over the last five years it is no longer considered a profession. It is more of a vocation."
Rising interest rates have created part of the problem by drying up appraisal work at the single-family housing level and forcing inexperienced appraisers into the commercial field where, due to their inexperience, they lower the quality of that work. "This is squeezing a lot of appraisers that got into the business but are not yet established," says Kramer. "The only way they have of competing is by reducing fees and, of course, that further compounds the abilities of those doing good work to make a living."
"There are a lot of good people that have left the appraisal industry over the past 12 to 18 months because the fee level made it such an undesirable business for many practitioners," says Liantonio.
Cirz estimates that appraisal fees have dropped between 30% and 50% in the last five years. Things have gotten so desperate in some quarters that firms have resorted to sales as though they were selling shoes.
"Recently there was a firm running a two-for-one sale," says Kramer. "They sent a letter to the banks saying they would appraise any two office/warehouse buildings for the price of one. So an assignment that might have brought $4,000 or $5,000 in fees is now going for about $2,000."
Licensing also led to problems in other areas. Each appraiser must be licensed in each state he works, creating a nightmare bureaucracy for firms working in numerous states or across the country, says Atkins. Temporary licenses can be obtained, he says, but to do so can take weeks or months in some states due to the licensing offices being understaffed or the infrequent meetings of the license approval board.
Furthermore, the states have continuing education requirements and some states do not recognize the programs of others, meaning appraisers are having to frequently travel state to state taking exams and attending classes to maintain their licensing. "It has certainly increased our cost of operation," says Atkins.
Dwindling fees and rising costs is not a healthy environment for any business, particularly one as crowded as the appraisal industry, and the natural result is a consolidation.
"In any industry there are efficiencies of scale at a certain level and I think we are seeing a shakeout to try and find that level in an environment that is difficult to read due to the many changes," says Kramer. "Somewhere out of this firms of an appropriate size will shake, out."
"In the late 1980s the appraisal firms staffed up for a tremendous amount of bank-owned real estate evaluation work," says Steve Witten, president of Connecticut Bank Owned Properties, Branford, Conn. "Obviously those staffs are too large now and what you have now is a shaking out. And those that survive will be true quality professionals."
Many appraisers see specialization, in both the area of the country and property type, as the key to remaining viable in the industry.
"There is a clear trend toward specialization," says Liantonio. "Office buildings, hotels, motels, resort properties are all areas of specialization. It helps to have a staff that works in that property type every day."
Since value can vary widely from market to market, geography is also important. "I do appraisals all across the country," says Kramer. "Recently I have done four appraisals in Austin, Texas. That is probably more than most appraisal companies based in Austin have done there. But for the quality of the appraisal it is important to know the market well."
But experience may not be the main criteria any longer. Some appraisers say fees and not quality have been driving the appraisal industry of late.
Last summer, the Appraisal Standards Board of the Appraisal Foundation, the federal agency regulating the industry, made changes in the Uniform Standards of Professional Appraisal Practices creating summary and restricted reports, which are shorter, less specific accounts as opposed to the longer, full-narrative appraisal reports.
"The change was in response to the banking industry looking for something less than a full report, so they could save money on appraisals," says Kramer.
In fact summary reports can cost as little as one-half the amount of a full narrative appraisal, while the even less-specific restricted reports run about half the cost of a summary report.
"I have heard a lot of comments from our membership that many banks are engaging appraisers solely on the basis of fee," says Sorenson.
"The emphasis has been shifted to fee rather than quality," adds Cirz. Today, appraisal firms are avoiding some of the problem altogether by changing the type of services they provide to avoid some of the appraisal regulations.
"Now we are all doing what is called consulting and due diligence reviews," says Atkins. "We provide services that give a client a piece of an appraisal re, port, but we don't give a value opinion on the property."
Atkins cites this example: Last summer his company consulted on a project and provided the client with an inspection and comments on the improvements to the property, an opinion on the state of the cash flows and an opinion on the demographic situation in the area, but did not give a value opinion.
"Basically I ask the client what questions they have about the property and we will see if we can provide a service to answer those questions," says Atkins, who says this is a fast-growing area of his firm's business.
But when it comes to obtaining financing a full appraisal will still be required, and the same problems of cost vs. quality will still apply.
Kramer says he sees the administrative value of the summary and restricted reports as follow-ups to full narrative reports done within the previous year or so, but he does not understand the drastic reduction in the fee charged.
"The summary report is supposed to contain the same depth of work in the appraisal while summarizing the information in the actual report given to the client," he says. "Theoretically, wouldn't you have to charge the same fee because you are doing the same amount of background work? You are just writing a 25-page report as opposed to a 125-page report.
"All of the background data for a summary or restricted report is supposed to be kept in the file," he adds. "But in many cases they don't have the information to backup their findings because they did not do the work."
"They are supposed to have sufficient information in the file to support whatever they are putting in the report," says Atkins. "So the field investigations should be almost identical regardless of whether it is a self-contained report or a restricted report." He says the confusion stems from the broad interpretation of how to apply the new regulations.
Others are also skeptical.
"I am highly suspicious of the quality of work that is being prepared by appraisers because of the changes the Appraisal Standards Board has made," says Cirz. "The fees are so low, I am afraid what they are doing is not doing their job."
"I think this change has been the single most detrimental happening to our industry and the quality of work," says Kramer. Despite this, he says the regulation does not need to be changed, but rather the industry has to be better policed to assure that the required work is done and that abuses are not permitted.
"I think we are just starting to learn to live with the existing regulations, adds Atkins. "I would hate to change them now."