The Changing Appraisal Industry
By Drew Watson
Change can be interpreted as one of two things: a threat or an opportunity.
The appraisal industry has avoided change because the slow-moving agencies and regulatory bodies have protected the 1004 process. Our customers have had to adjust their business models and do things more efficiently while the appraisal industry has made only incremental changes to our own forms and processes, all while we continue telling our clients which of our products is most applicable to mitigate their risk. Lenders are loudly proclaiming that they don’t need appraisers to tell them their risk.
The result of the stagnant 1004 process is that our products have drifted further and further from what builds value for our core business. What if we – appraisers – decided to change on our own? What if we were the first industry to not simply survive a massive influx of technology, but actually thrive? What if we could even increase our hourly rates?
Many – if not most – in our industry have chosen to view two changes as threats: the increased use of technology and algorithms to determine values, and the proposed rule change to increase the de minimis loan amount for residential loans from $250,000 to $400,000. I, however, firmly believe these combine to create maybe the biggest opportunity we’ve ever seen.
Let me tell you why.
First, no algorithm contains the local knowledge that leads to the selection of exactly the right comps or adjusts accurately based on subjective information like condition. We still need human intelligence as an input for the equation.
But how do we fit the seemingly square peg of traditional appraisal methods into the round hole of lender demands for faster, cheaper valuations? That’s where the de minimis change comes in.
For years, appraisers have been shut out of performing valuations when the loan amount is $250,000 or less. Now, the fear is they will also lose the transactions up to $400,000. So what’s the answer? How can a residential appraiser survive an erosion of almost an additional 30% of residential valuations?
Simply put, appraisers must embrace technology so they can focus on operating at their own highest and best use. We must be open minded to reframing, or resetting, the understanding of our value proposition. It is time we claimed our competitive advantages in terms of the alternative valuation products that are inevitably going to gain market share. If we do, not only will we not lose an additional 30% of residential valuations, we can reclaim the lion’s share of the ones we thought were already lost.
In another recent piece, I addressed the fallacies appraisers tell themselves that stand in the way of viewing change as an opportunity. Without rehashing all of them, here are two truths: it is not necessary for the appraiser to personally visit every property; it is not necessary for the appraiser to spend hours generating a residential appraisal. What is necessary is for the appraiser to apply his or her expertise to ensure the valuation is accurate and explain it in a way the end user can understand.
Not every residential property fits this model. Many will still require a more exhaustive analysis. But a narrower scope of work will be adequate for a significant percentage of valuations, and it’s those that we have to think about differently. And I don’t mean a little bit differently. I mean a paradigm shift in terms of how we think about the time spent producing appraisals and how we’re compensated for them.
For example, if I said I would pay you $75,000 a year for working on restricted appraisals for just 4 hours a day, 50 weeks a year, would you take that? That would give you half the day to spend on other, more complex projects. Now, what if I told you I’d pay you $25 for an appraisal. That doesn’t sound as good, does it? Well, it happens to be the exact same thing.
With our technology and a combination of big data and seamless processes, the average appraiser can easily generate 3 restricted appraisals per hour. A seasoned appraiser can do more, potentially 5-6 per hour. At $25 per report, that’s as much as $150 an hour. Compare that to how long you spend on a typical residential appraisal now – including travel time, measuring, analysis, everything – and see how that rate compares.
Change is inevitable. It’s been delayed as long as possible in our industry, but the pace of business and life in general is accelerating beyond the current appraisal model. The biggest challenge for a lender today is to answer their client more quickly. We can keep telling them why their way is wrong, or we can choose to be part of the solution by combining our expertise – or human intelligence – with newer, faster methods of applying and delivering it. That’s not a threat, it’s an amazing opportunity.