When it comes to fees and the issue of transparency, all appraisal management company (AMC) operating models are not equal. While there are variations, AMC’s generally operate under one of two business models – Cost-Plus or Fluctuating.
For purposes of this blog, we will be referring to non-complex residential assignments.
Transparency signifies openness, communication, and accountability; something that is easy to notice or understand. As it relates to AMC’s and fees, transparency is operating in a way where others can see exactly what fees are being paid to the appraiser and what portion of the total fee is being retained by the AMC.
The model most preferred by appraisers and clients is the Cost-Plus model. This particular model sets the management fee that an AMC earns per order at a predetermined and agreed upon fee and the client establishes a standard customary and reasonable appraiser fee for the markets in which they operate. The predetermined AMC management fee is added to the appraiser’s fee to arrive at the total appraisal fee. The management fee does not fluctuate and it 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 AMC for seeking the cheapest appraiser fee. The cost plus model encourages the AMC to select the most qualified appraiser, not the cheapest.
Using the Fluctuating Fee model, the AMC quotes a flat fee to the client (the quoted fee). The goal under this model is for the AMC to find as many appraisers as possible to accept appraisal assignments at a fee that enables the AMC to retain the highest possible fee which is the difference between the appraiser’s fee and the quoted fee. As such, the AMC’s fee fluctuates from order to order and the fee being paid to appraisers fluctuate as well.
There are reputational and operational risks associated with the fluctuating fee model. This model may involve robo-bidding in search of the lowest appraiser fee. Robo-bidding is described as the practice of email blasts to all appraisers within a geographic area as defined by the AMC, not necessarily the client, requesting the appraiser’s best fee, or requesting that appraisers accept the assignment at the AMC’s target fee, and the first to accept is awarded the assignment. This practice may not take into consideration the geographical competencies of the appraisers receiving the bid opportunity. Quality and performance issues can be significant when AMC’s are solely focused on the lowest bidder. Banks, credit unions and other lending institutions may also discover their preapproved panel of appraisers is not being utilized at all or to the extent they prefer it be. This model is driven by finding the lowest cost appraisal in order to increase the fee the AMC will retain. Often it is not apparent to the lender how much compensation the appraiser is receiving, and therein rests the issue of transparency.
Additionally, the fluctuating fee model is one of the most frequent complaints appraisers voice about working with AMC’s and some would argue this model encourages participants to turn a blind eye to reasonable and customary fees.
Whether you are currently partnered with an AMC or looking for the right AMC 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 AMC’s. The common goal for all parties involved is a quality report at a reasonable and fully disclosed fee, delivered in a timely and reasonable time frame.
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.