Working For AMCs - Can It Be Profitable?

On many Internet forums, it’s common to see appraisers posting about . . .

• AMCs forcing appraisers to take lower fees
• Brokers pressuring appraisers to “make values”
• Lenders side-stepping appraisals by using AVM providers
• Underwriters demanding appraisers "conform" or lose future work

That’s the way my earlier blog “ It's All Going To Work Out - AMC and AVM Debate “ started out. Today, my Guest Blogger Ken Verrett, Acorn Appraisal Associates, has some new insights on doing business with AMCs (Appraisal Management Companies)

Acorn Appraisal Associates is a 20 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. Our market includes the greater Houston SMSA, including Harris, Montgomery, Fort Bend, Brazoria and Waller Counties, TX

Bryan Kent Shelman - Colorado Realty Reports said to Ken:

“In my opinion, doing appraisal business on the internet/phone/fax is still just like negotiating with a small fruit cart vendor in a village market 1000's of years ago. It's still subject to the basic economic principals of supply and demand. It still depends on how hungry you are and how bad the vendor needs to sell his apples. It will not do much good just to curse the guy on the other side of the cart. When he can pay $230 for an apple at the next cart and you're selling them for $350? I don't care how good your apples are.” Kent, another way of thinking of the demand and supply is to think of your last visit to the grocery store. Want a can of beans? You can pay a buck twenty five for Delmonte brand green beans or buy the generic can for ninety five cents. Same green beans, just packaged differently, maybe with a couple of extra spices in the Delmonte, maybe not. Rels and others [AMCs] of their ilk are astute volume purchasers in the appraisal market. Their clients are astute lenders. They don't need an appraisal to make their loan decision, it's just one safety check from their lending risk check list. But they do need the appraisal to sell the loan in the secondary market. Generic is their product of choice because it's all that is required to qualify the loan for sale. It would be mine too if I where in their position. Now from my business perspective, there are several advantages to working with clients like Rels. We serve a large metropolitan market. Ten thousand square miles. Doing the field work for one appraisal can easily take an average of 3 hours including drive time, with the drive time to and back being a major part of that.

Today we were group interviewing an appraiser to join our firm. He has worked for several local companies since moving from Pittsburg a few years ago. I asked him to estimate the average time it took to do the field work in our market.

He estimated that same 3 hours. I asked our guys to estimate the average time it takes them. They agreed on 1 to 1.5 hours. The difference was they are usually doing three on the same trip to a given area, and the interviewee was doing one at at time. The volume represented by Rels and others allows us to achieve that efficiency. And profitability. And the efficiencies don't stop with shared field work. The volume also allows us as a business to achieve similar efficiencies in our administrative area. Our net margins are better because of that volume. This might come as a surprise, but we actually pay a significantly higher split percentage on the lower fee earned on the Rels business. That may sound crazy, but it isn't so. The appraiser's net dollars on the lower priced Rels work is actually equal to the net dollars on a full fee assignment. The company takes the lesser split and still makes a profit.

And since the appraiser is earning an equal fee, I don't have to worry about them being tempted to shy away from the Rels jobs, or to cut quality or service because the fee is the same. I can and do demand our high standards to be applied to all clients and all assignments. Classical Economics texts speak of Adam Smith's Factors of Production; land, labor, and capital as defined in The Wealth of Nations. Great book. Even today.

In an appraisal business the labor is supplied by the appraiser. Capital is supplied by the business. The labor factor is limited in the efficiencies it can achieve. Shared drive time to field work is one of those efficiencies. But it's still the training and experience and skill of the individual appraiser applied to the appraisal problem that produces the product. The Labor factor shouldn't be rushed, and the Labor factor can't cut corners and still achieve quality. It doesn't matter what the gross fee is on an assignment. The appraiser must still contribute the same amount of effort to complete the assignment. So the appraiser should expect to earn the same income for the same high quality product he must produce. Capital on the other hand always has greater potential to produce efficiencies. If organized properly, an appraisal firm should have lower average fixed costs as volume increases. Variable costs are also subject to economies of scale. A properly organized and managed appraisal firm should have increased net margins if the mix of clients is managed so that each client and each product and each order contributes at least a positive margin over variable costs, and as volume increases average fixed costs decline and net margins increase. In our appraisal business, the appraiser is the artisan, the professional, the labor factor of production. He provides the labor and should be highly paid for bringing his skill and experience to produce a quality product. The business owner is the capital factor. He does not provide the artisan's labor and must earn his income by properly and efficiently managing the assets of the business. Clients like Rels help achieve the higher volumes that produce lower average fixed and variable costs and higher profit margins. Ken Verrett Acorn Appraisal Associates Houston, TX kverrett@oak-acorn.com

Appraisal , Real Estate , Appraiser