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National Mortgage Professional
Jun 27, 2005

Are you getting ripped off by appraisal fees?Charlie Elliott Jr., MAI, SRAappraisal industry, price adjustments, property factors Today, in the lending community, there is more competition than there was in the past. Loans have drifted from the specialty product arena to that of a commodity, given governmental efforts to standardize loans for the benefit of the borrower. This has given consumers the ability to compare prices and be more discriminating as to which lender is offering the best value. In addition to all of this, there is also pressure from the government and lending competitors to hold down costs. In evaluating the cost of a loan, there are many fees that involve various types of service-providing vendors. These often involve PMI insurance, flood maps, credit reports, legal services and appraisals. While there is pressure on all vendors to reduce prices, it seems that there is more pressure on appraisers than there is on some of the other disciplines. Perhaps I feel this way because the appraisal industry is my industry, so I am more aware of the pressures. Logic tells me that, to some degree, this may be true; however, appraisals, by their very nature, seem to vary in cost more than, say, credit reports or flood maps. For this reason, I acknowledge that appraisals are fair game for question, although I am convinced that critics will become more accepting of the wide range of appraisal fees if they better understand why appraisal prices vary. In preparation for writing this column, I conducted an informal survey of appraisal costs around the country. Not surprisingly, there was a wide range. The complete single-family residential appraisal, or the FNMA 1004, ranged in price in the survey from a low of $300 to a high of $650, and the limited single-family residential appraisal ranged in price from $225 to $395. A quick thumbnail comparison provides us with a price range for the complete appraisal, amounting to approximately 117 percent of the base price, and a price range for the limited appraisal, amounting to approximately 76 percent of its base. Without getting into heavy statistics and for the sake of simplicity, let's say that the range of appraisal prices varies by approximately 100 percent from that of the lowest or base price. Stated another way, there will be those who claim that some appraisers charge twice as much for their appraisals than others. On its surface, this information would seem to support the cries of some that consumers are being ripped off by opportunistic appraisers. While I'm sure there are some situations where some appraisers gouge customers, I beg to differ with this general premise and offer the following explanation. In addition to the legislative laws we follow, there is another law in this country that has helped make us the strongest nation on earth: the law of supply and demand. Throughout history, numerous socialist and communist countries have attempted to overcome this law by imposing their own fairer pricing system, which usually consists of bureaucrats applying "one size fits all" pricing to all of its products and citizens. Attempting to employ the basic economic theory I learned as a college student, I seem to recall that when an economy is operating efficiently, prices automatically adjust to reflect the appropriate price given a level of supply and demand for a product. It not only works for consumer products, but also for services such as appraisals. So, how is it that certain appraisals can logically cost much more than others? •Appraisal type: Complete appraisals with interior inspections cost significantly more than limited drive-bys. They take more time and, therefore, carry higher labor cost. •Property location: Fees for appraising properties in remote areas or in areas where the cost of living is relatively high will be more than it would in other areas. It has been my casual observation that appraisals almost anywhere in the state of California cost more than appraisals in other states due to the high cost of living there, among other things. •Property type: Appraisals of large, unique, super high-quality properties are more labor-intensive than smaller cookie-cutter properties; therefore, the appraisal fee is higher. An example of this would be a 10,000-sq.-ft., post-and-beam mountain estate or a Hollywood mansion. •Demand: Recent statistics reflect just under 100,000 state-certified real estate appraisers in the United States, many of whom are inactive. This figure sounds like a huge number, but when compared to the more than one million real estate agents in this country, it's a paltry sum. During slack periods, this number is adequate for supplying fast service to the mortgage industry; during peak times, appraisers raise prices when pressured to offer quicker-than-market turnaround time. This is supply and demand at work. These explanations reflect only a small number of reasons why appraisal fees can vary. However, in my opinion, they weigh most heavily in the determination of appraisal fees. Lately, I have heard a lot about the bundling of services and flat fees for closing services. At first blush, this may sound like a fair and just way to deliver services, but I beg to differ with this assertion. It is just the opposite, and I will attempt to prove my point by asking one question. In our survey, we concluded that a complete appraisal could cost between $300 and $650. An average of these two numbers is $475. Would it be fair and just to charge the little old lady $475 for her appraisal of a 1,000-sq.-ft. flat in an urban area of town while charging the Hollywood movie star the same price for the Hollywood mansion, when her true cost was about $300 and the movie star's cost was $650? I think not. While, admittedly, some of these facts and theories are general and will not always be as easy to evaluate as our example, the basis is solid nonetheless. I invite you to consider the points emphasized in this column when you are quoted an additional $100 on an appraisal than the one you ordered from the same appraiser the week before. While mortgage loans may have become the equivalent of a commodity, the appraisal is still very much of a customized and specialty product. Charlie Elliott Jr., MAI, SRA is president of ELLIOTT & Company Appraisers, a national real estate company. He can be reached by phone at (800) 854-5889, via e-mail at [email protected] or through the company's Web site at
Jun 27, 2005
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