Why Appraisers Are Becoming An Endangered Species (and How to Prevent Their Extinction)Mon February 08, 2016
The African lion was recently added to the U.S. Fish and Wildlife Service’s endangered species list because its population has fallen by more than 40 percent in the last 20 years. According to the Appraisal Institute, as of June 30, 2015, there were only 78,500 active real estate appraisers in the U.S.—3 percent fewer than in 2014 and a 20 percent decrease from 2007. If that rate of decline continues, appraisers will be joining the African lion on the endangered species list very soon.
Of course, this isn’t groundbreaking news. Many observers have, from time to time, voiced concern over this issue, but in recent years it has taken a backseat to more immediate concerns—like the Dodd-Frank Act, the Qualified Mortgage Rule, and the TILA-RESPA Integrated Disclosure (TRID) Rule.
Now that some of those challenges are (or at least almost) behind us, maybe 2016 is the year that our industry will begin to seriously address this growing problem.
Why the Appraiser Population Is Shrinking
The biggest challenge, of course, is the aging out of the appraiser population: 62 percent of appraisers are 51 or older. So we can certainly expect the appraiser population to decline even more in the next five to ten years due to retirements.
Add to that Millennials aren’t jumping in to fill the void. And why would they? The Bureau of Labor Statistics reported that the median annual salary of a real estate appraiser was $52,570 in 2014. Meanwhile, some of the fastest growing occupations, like physician assistants and nurse practitioners, earn more than $95,000 a year.
Increasing licensing requirements have also made it more difficult to become a certified residential appraiser. The Appraiser Qualification Board now requires a Bachelor’s degree or higher and 2,500 hours of appraisal experience that must be completed in no less than 24 months. Yet becoming an apprentice and racking up those hours is difficult because many would-be apprentices are unable to find a mentor or supervisory appraiser to take them on. One reason for that is lenders, investors and government-sponsored entities (GSEs) have restricted the use of appraiser trainees. Another is appraisers lack the economic incentive to share their already compressed fees with apprentices and to train appraisers who will become their future competition.
In addition, the job itself has a lot of pressures. First, there’s the ever-constant pressure to “hit” the right number, which, depending on the industry’s risk appetite, could be higher or lower than the appraiser’s experience suggests. Then there’s increased pressure for quick turn times—today lenders and appraisal management companies (AMCs) expect appraisals to be completed and delivered in seven days or less. Appraisers are also constantly being second-guessed by everyone from underwriters to investors to appraisal management software. Questions asked may surround the actual comparable sales
selected by the appraiser: Why were they selected? Should they have been selected? The adjustments applied to each comparable sale may also be questioned and challenged. Appraisers may also be asked to consider additional comparable sales presented by lenders or AMCs (and possibly incorporate them into the appraisal report or provide commentary to discredit their use).
New regulations have added more financial pressures. Under TRID, appraisal fees need to be fully disclosed on the Loan Estimate. However, constraints around zero tolerance and changed circumstances will impact not only lenders who need to properly disclose and re-disclose fees, but also appraisers who will need to predict the scope of their assignments sight unseen.
So how can we attract the next generation of appraisers to prevent extinction?
How AMCs Can Help Solve the Problem and Add More Value
Perhaps I’m a bit biased (or naïve), but I believe appraisal management companies (AMCs) have the potential to help play a bigger role in solving many of the issues behind the shrinking appraisal population. Now, I know many appraisers believe that AMCs are the problem, and not the solution, because they feel AMCs have taken all of the profits out of the business. Considering 80 percent of appraisals orders come through AMCs and the new vendor management requirements make AMCs even more essential, perhaps its time to put this argument to rest and accept the fact that lenders need AMCs and AMCs need appraisers.
One way to help improve the future of the appraisal industry is by creating enough revenue for individual appraisers and AMCs. This is easier said than done, of course, because lenders ultimately set the going rate for appraisals and, historically, have been reluctant to pass along significantly higher costs to borrowers. The new TRID rules have at least initially bumped up the fees being estimated for appraisals because lenders want to leave a “cushion” in this zero-tolerance area, so they don’t have to re-disclose if there’s a change of circumstances. Over time, however, there will be pressure to have more precise estimates—and the potential that AMCs and appraisers will be forced to “eat the differences.”
Our company offers a few different pricing models to support our clients, as well as our network of appraisers. For example, we recently deployed a model with one of our new bank clients that defines reasonable, customary fees within different zones within their lending footprint and based on the complexity of the assignment. That fee gets paid in its full to the appraiser, while our main fee is invoiced to the bank as a separate AMC administrative fee. This collaborative fee model allows our appraisers to receive more compensation than they normally would working for an AMC and it allows our client to vet and pay only one vendor—our AMC (and not each and every appraiser they use).
In addition, it would be beneficial to all parties if AMCs could join forces with lenders to recruit and train the next generation of appraisers. Some lenders, like Quicken, are making inroads in recruiting their loan officers and internal appraisers straight from college and doing thorough training. In fact, Quicken has become a leader in the origination space because they not only make the effort to build and train a younger, more tech savvy team, but they also compensate their staff well and foster a fun environment.
Similarly, perhaps lenders could alleviate some of the pressure by allowing the use of more apprentices. Maybe we could consider establishing an industry training fund. Or consider recruiting underemployed realtors, many of whom would probably be very good at the job given their background.
And finally, AMCs and tech providers need to develop and push-out new technology to make the current appraiser workforce more efficient, and make their opinions more bulletproof. For example, the same technology that investors use to question “comp” selection could be put in the hands of appraisers so that they could anticipate and resolve any concerns before submitting their reports. Also, mobile technology could improve efficiency and prevent human input errors further up in the supply chain.
While it may take some time and money, investing in recruiting, training, continuing education, and fair compensation will hopefully attract a new generation and help take appraisers off the endangered species list.
Shawn Murphy is Executive Vice President of ValuAmerica, a subsidiary of Clayton Holdings LLC. He can be reached at firstname.lastname@example.org.