When it comes to fees and the issue of transparency, all appraisal management company operating models are not equal. While there are variations, appraisal management companies generally operate under one of two business models – Fluctuating and Cost-Plus.
For purposes of this blog, we will be referring to non-complex residential assignments.
Transparency signifies openness, communication, and accountability. This is something that is easy to notice or understand. Transparency is operating in a way where others can see what actions are being performed.
The Fluctuating Fee Model – Under this model, the appraisal management company quotes a flat fee to the client (the quoted fee). The goal under this model is for the appraisal management company to find as many appraisers as possible to agree to conduct appraisals at a fee that will enable the appraisal management company to retain the highest possible fee, which is the difference between the appraiser’s fee and the quoted fee. As such, the appraisal management company’s fee fluctuates and at the end of the day, appraisal management companies operating under this model expect their net fee income to allow them to remain a viable business entity.
There are reputational and operational risks associated with the fluctuating fee model. This model may involve auto assign in search of the lowest appraiser fee. Auto assign is described as the practice of email blasts to all appraisers within a geographic area defined by the appraisal management company requesting the appraiser’s best fee, or requesting that appraisers accept the assignment at the appraisal management company’s target fee. This practice may or may not take into consideration the geographical competencies of the appraisers receiving the bid opportunity. Quality and performance issues can be significant when appraisal management companies troll for the lowest bidder. Banks, credit unions and other lending institutions may also discover that their preapproved panel of appraisers is not being utilized. This model is driven by finding the lowest cost appraisal in order to increase the fee the appraisal management company will retain. Often it is not apparent to the lender how much compensation the appraiser is receiving, and therein lies the issue of transparency.
The Cost-Plus Model – This particular model sets the fee that an appraisal management company earns per order at a predetermined and agreed upon fee. The client establishes a standard customary and reasonable appraiser fee for the markets in which they operate and the predetermined appraisal management company fee is added to the appraiser’s fee to arrive at the total appraisal fee. The fee does not vary and has no bearing on the fee that is paid to the appraiser.
Under a cost-plus model, it is not necessary to send typical residential orders out for bid. This model does not reward the appraisal management company for selecting the cheapest appraisal fee. The cost plus model encourages the appraisal management company to select the most qualified appraiser, not the cheapest.
Whether you are currently partnered with an appraisal management company or looking for the right appraisal management services partner, we encourage you to understand the business model of your partner or prospective partner. The issue of fee transparency is just one of many operating differences that exist between appraisal management companies.
Valuation Management Group operates under the Cost-Plus business model. We are a national, full service appraisal management company that manages the appraisal process for community banks, mortgage bankers and credit unions. We take the appraisal process from ordinary to extraordinary. We offer the full array of commercial and residential appraisal products and services.