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Expensive Appraisal vs. Modest Loan Amount

Published On 06-12-2013 , 4:55 PM

I heard it in my many years as a bank review appraiser who bid and engaged appraisers and I hear it now from banks that I assist with consulting services. The loan amount is low, often below $250,000, and the appraisal fee is high. The loan officer blows a gasket and the borrower threatens to walk to another bank. Fingers are pointing and voices are rising. What options does a bank have in such situations?

 

Before we explore solutions, it is important for all parties to understand what might bring about such a situation. Appraisal fees are made up of two components: the appraiser’s best estimate of the time involved and his expectation of appropriate hourly compensation for his time and expertise. High appraisal fees are, thus, not the product of greedy or opportunistic appraisers, but the end product of a mathematical calculation.

 

With the appraiser’s hourly compensation being a static figure, the wild card that impacts appraisal fees is the amount of time that the appraiser projects for a given assignment. Most times the appraiser is pretty accurate in that estimate. Sometimes there are issues or problems that extend the time involved and impair the appraiser’s income from an assignment. Other times the appraiser overcompensates for risks or unknowns that do not materialize. The bidding process is far from an exact science.

 

The issues that will influence an appraiser to quote a higher fee could be any one of the following, all of which stem from an expectation of more work and more time:

 

·       The appraiser has not valued that property type recently and will have to research the market more thoroughly than for property types recently appraised with data already in file

·       The property is outside the appraiser’s regular market area and extra work is involved to research that market

·       The property type is particularly complex (despite the low loan amount). Examples may be a convenience store, a bed and breakfast, a fraternity house, a restaurant, or a property with specialty improvements (such as an office warehouse with a pool to train divers or an office building with an elaborate kitchen for a cooking school)

·       The appraiser is too busy to take on the assignment, due to an already full workload, but is nervous about not bidding at all in case the bank stops bidding him as a result

 

These issues are all valid. They are facts that the appraiser cannot change. Nor can the loan officer or the borrower change those facts, as much as they might wish for that power. Going back to my initial question: what options does a bank have in such situations?

 

·       If the bank has trained personnel on staff – either licensed appraisers or specially trained non-appraisers – the appropriate personnel can perform an evaluation. This presupposes that the loan qualifies for one of the evaluation exemptions outlined in the Interagency Appraisal and Evaluation Guidelines.

·       If an evaluation is not an option, perhaps the loan can be taken with the abundance of caution exemption. Of course, this requires a strong borrower who is not overleveraged.

·       If neither an evaluation nor abundance of caution is a viable alternative, the bank could shop around for an appraiser who bids a much lower fee. Extreme care must be taken if this course is pursued, however, as there are some appraisers who do not understand, or willingly forget, their own limitations. A low appraisal fee paid for a lousy appraisal may cost the bank a second appraisal fee, extending the loan closing period and even further jeopardizing its relationship with the borrower.

·       The final option is to recognize that appraisal fees have nothing to do with loan amounts. Any effort to correlate the two will prove fruitless. With this understanding, when evaluations and abundance of caution are not options, the bank is best served to engage the appraiser that is most competent for the assignment, regardless of the fee involved. If the client is a particularly good one, it may behoove the bank to eat the fee.

 



 




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