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 www.appraisalsanywhere.com.
