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“Reasonable and Customary Fees”
The controversy over what constitutes reasonable and customary fees is a hotly contested issue facing appraisers and those consumers who use their services today.
With varied special interests performing their own research into what constitutes ‘reasonable and customary’ as specified in the 2010 Dodd - Frank Financial Reform Legislation, the issue has become obfuscated.
While fees continue to be forced upon appraisers that are less than ‘predominant’ fees were in 1986 we fail to achieve the ‘reasonable’ part of the bill’s requirement.
The ‘customary’ portion is skewed by recent years extreme-low fees offered by appraisal management companies (AMCs). The same non-appraisal firms that forced below market rates in the market place during the financial collapse of 2008-2009 want those below-market rates considered in determining what is customary and reasonable now!
Never has the phrase “You get what you pay for” been more applicable.
The past three years have proven that unreasonably low fees result in seriously substandard quality (unreliable) appraisal reports. That is exactly why asset management companies handling lenders foreclosure portfolios (REOs) still feel the need to obtain broker price opinions (BPOs)...which are also being prepared by unlicensed, untrained people due to extreme low fees.
The question remains; “What exactly are customary and reasonable fees?”
I personally feel the federal government’s General Pay Scale (GS ratings) provide one of the best guides into what are both reasonable and customary. The research has already been done. Refer to chart below.
Additionally, the Veterans Administration (VA) has long understood the need for professional fees, and has established their own guidelines for single family to four unit residential income property work.
I have over twenty-four years full time appraisal experience, with six years prior licensed real estate sales experience. Coupled with six additional years financial institution experience this qualified me at the GS-12 through GS-14 levels by various Federal Agencies. When I was originally hired as a Senior Appraiser by the Treasury Department (IRS), it was at the GS-13 level. Annual pay rate with location premium (California) was $91,141. The workload was a blend of primarily commercial and residential use property analyses. It is a good starting point when considering appraiser qualifications, experience and ‘reasonable’ fees.
While most firms today do not permit trainee-only inspections and draft report writing, I include them in the grid based upon the skill sets most have after one year training in a fee appraisal shop.
Each of the GS pay grades below reflects the 27.% location premium attributable to the Los Angeles area of California due to it’s higher cost of living. It is calculated at the base shown below, times 127.16%.
All step increases to step 3 represent one year experience at that grade. Steps above 3 are assumed to require two years to achieve merit increases, and are not shown in this chart. These would equate more to owner operators with many years experience as a rule.
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Equivalent General Scale Pay Grades for Appraisers
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27.16%
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10.50%
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20%
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50/week
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Typical
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Fee Per
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Location
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Benefits
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Office
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Hourly
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Appraisal
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Appraisal
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Grade
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Step
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Base
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Premium
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Premium
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Overhead
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Equiv.
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(Hours)
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Avg.
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GS-7
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1
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$33,979
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$43,208
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$47,745
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$57,293
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$28.65
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12
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See Note
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2
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$35,112
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$44,648
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$49,337
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$59,204
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$29.60
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12
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See Note
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3
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$36,245
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$46,089
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$50,929
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$61,114
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$30.56
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12
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See Note
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GS-9
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1
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$41,563
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$52,852
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$58,401
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$70,081
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$35.04
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12
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$420
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2
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$42,948
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$54,613
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$60,347
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$72,416
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$36.21
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12
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$434
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3
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$44,333
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$56,374
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$62,293
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$74,752
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$37.38
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12
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$449
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GS-11
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1
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$50,287
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$63,945
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$70,659
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$84,791
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$42.40
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12
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$509
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2
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$51,963
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$66,076
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$73,014
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$87,617
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$43.81
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15
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$657
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3
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$53,639
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$68,207
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$75,369
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$90,443
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$45.22
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15
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$678
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GS-12
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1
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$60,274
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$76,644
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$84,692
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$101,630
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$50.82
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20
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$1,016
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2
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$62,283
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$79,199
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$87,515
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$105,018
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$52.51
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20
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$1,050
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3
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$64,292
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$81,754
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$90,338
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$108,405
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$54.20
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20
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$1,084
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GS-13
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1
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$71,674
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$91,141
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$100,710
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$120,853
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$60.43
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30
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$1,813
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2
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$74,063
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$94,179
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$104,067
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$124,881
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$62.44
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40
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$2,498
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3
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$76,452
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$97,216
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$107,424
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$128,909
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$64.45
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50
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$3,223
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GS-14
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1
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$84,697
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$107,701
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$119,009
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$142,811
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$71.41
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60
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$4,284
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2
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$87,520
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$111,290
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$122,976
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$147,571
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$73.79
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70
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$5,165
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3
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$90,343
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$114,880
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$126,943
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$152,331
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$76.17
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80
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$6,093
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GS-15
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1
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$99,628
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$126,687
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$139,989
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$167,987
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$83.99
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80
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$6,719
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2
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$102,949
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$130,910
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$144,655
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$173,587
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$86.79
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80
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$6,943
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3
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$106,270
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$135,133
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$149,322
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$179,186
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$89.59
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80
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$7,167
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NOTE: The above chart reflects the 2011 Los Angeles County area multiplier of 27.16. Some areas are higher (San Francisco is 35.15% higher), and some are lower (San Diego at 24.19%). Most of the U. S. is at 14.16%. Specific local area multipliers may be found at:
http://www.fedjobs.com/pay/pay.html
The GS-7 represents a trainee license requiring the additional direct supervision, including property and comparable sales inspection, by a State Certified appraiser. Two to Four additional hours at the Certified level.
The GS-9 level is normally equivalent to three to five years at the State licensed level, handling Noncomplex single family residential to four unit properties. Any land appraisals must be non complex. All must have a transaction value under $1,000,000 for federally regulated institutions. They may perform field reviews of other appraisers work, however since that in itself is a complex assignment, one has to question the wisdom and propriety of limited experience appraisers passing professional judgment as to the adequacy of more experienced appraisers work.
Clients frequently (usually) will assign reviews for property the appraiser cannot legally perform on his or her own. A non certified licensee is not the peer of a certified appraiser.
The GS-11 level presumes State Residential Certification. These appraisers are handling both non complex as well as complex one to four unit residential properties, and land. They are normally qualified to perform any review of one to four unit appraisals, as well as land with residential use as it’s highest and best use.
The GS-12 level includes the above GS-11 tasks, but may also include certified residential level appraisers being cross trained for larger residential-income; commercial and / or industrial appraisals.
The GS-13 through GS-15 level appraisers are almost exclusively multi discipline commercial / industrial appraisers with broad expertise for numerous property types. These include special use property; leasehold interests, land leases, project development, easements, fractional interests, going concerns, and or business valuations, professional level consultation, forensic value and expert witness related work.
Review appraisal fees MUST consider that detailed verification of all data reported is performed. Additionally, research as to whether the most appropriate data was selected for analysis in the appraisal being reviewed. Next confirmation as to the reasonableness and appropriateness of adjustments and reconciliation is performed. All of this takes as much, if not more work than the original appraisal when performed correctly. In the event an opinion of adequacy is determined a short form report usually suffices.
It is when a poor quality report or analysis is found that the workload more than doubles! To expect a meaningful review and analysis at less than, or even the same rate as the original appraisal is not reasonable.
Most lenders do not randomly select reports for review as they are supposed to do under FIRREA. They select the questionable reports first. These are the reports that they already have strong reason to believe may be inadequate.
Review fees for field review assignments should at a minimum never be less than the appraiser would charge for appraising the same property. Where reportable, significant errors are found, the fee should be much higher as the work to analyze, document, report and respond to rebuttals is far more time consuming. I suggest 150% of the review appraisers normal base fees. Otherwise the review should be in the form of a flat rate comparative appraisal.
TIME REQUIRED:
Most new appraisers boast about how fast they can ‘turn an appraisal’, with many claiming to perform two or even three per day.
It is simply not possible to perform a USPAP compliant real estate appraisal; including advance problem identification, scope determination, proper market study, meaningful neighborhood analysis, proper highest and best use analysis, and properly researched comparable sales with market supported adjustments in eight hours. It is also not possible to perform two or three in eight hours!
MOST properly performed, adequately researched USPAP compliant non complex single family residential appraisals SHOULD take at least 10 to 12 hours. When UAD is implemented by FNMA several hours more should be allowed if the results are to be meaningful.
When 1004MC was mandated most appraisers knew that meaningful data research AS CALLED FOR in the form would take from two to four more hours. No clients would pay for this or recognize more than 20 minutes to an hour additional work as being required. Fees were not increased and appraisers absorbed the costs of yet one more obligation. The end result is that 1004MC is now filled out by auto populated software that that DOES NOT accurately measure data in the specific neighborhood as called for by the form.
Unethical AMCs demand USPAP compliance in their hiring agreements and orders, however neither their fees nor allowed turn around times allow adequate time for completion of all of the tasks that would be required under a USPAP compliant appraisal.
Income property over four units, and commercial use property appraisals are generally more reasonably compensated. The clients for these products are also typically better informed and understand that the costs of saving either a few hundred dollars, or a few days can result in losses running into the millions of dollars.
The hour allowed or estimated in the grid above are for that levels most common tasks. Even the commercial or business appraisals may frequently exceed the 80 hours average noted.
Based on the above, and as ALREADY REQUIRED under USPAP, every appraisal should be separately considered from a competency and complexity standpoint. Each should only be priced after preliminary research into the nature of the property interests involved, and the property itself.
Alternative Measures:
As noted above, the Veterans Administration has already performed their own long term studies as to what constitutes a reasonable fee. It must also be pointed out that they have the interests of veteran-borrowers to consider as well. The fees are generally reasonable, though at the lower end of the range.
The allowable fee in California, Arizona and Nevada for a single family residence is $450 for an existing property, and $500 for a proposed property.
The existing SFR fee is ‘reasonable’. The fee for a ‘proposed property’ is not.
The existing and proposed property fee for a duplex is $600. The fee is generally adequate in non complex, conforming price ranges. The same fee is allowed for 3 to 4 units. That is unreasonable as it does not take into account any analyses applicable to tenants rights in possession on a per unit basis. It is especially unreasonable in rent controlled markets where each unit must be analyzed based upon the individual characteristics of tenants in occupancy, which may impact the ability to vacate the units and reach market rents, or even to obtain occupancy by the new owner.
NO FEE SHOULD BE LESS THAN THOSE ALLOWED BY THE VA.
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Additional Related Stories and Links Found on the Internet:
Please feel free to email me at Mike@MFford.com to submit any links you feel are worthy. I will include them in this site if relevant.
http://www.toledoblade.com/Real-Estate/2011/04/17/Appraisal-fees-still-unfair-despite-new-Federal-Reserve-regulations.html
The following pdf pages are from the State of California Employment Development Department web site. It offers additional insight as to current State Officials perceptions of “reasonable and customary” fees for real estate appraisers ranging from trainees to seasoned appraisers.
You may use the ‘hover icons’ or scroll bar to the right to navigate through this document.
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