Understanding the Appraisal Fee

One question that is often ask by new clients is “why the appraisal fee is “so high” and why we are quoting anywhere from two week to two months to complete their appraisal.

It’s important to understand the laws governing the appraiser and the appraisal process. Those of us who lived through the real estate bust of the early 1990s remember it was, in large part, precipitated by the mass takeover by the Resolution Trust Corporation of Savings and Loans. The governmental imposed reforms that followed included the passage of the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) which called for state licensing all appraisers for assignments which include FDIC Insurance.

FIRREA brought in a much needed set of appraisal standards, called the Uniform Standards of Professional Practice (USPAP), to which state appraiser licensing bodies bind licensed appraisers. These standards codified the appraisal process, and while detailed and technical, an understanding of USPAP requirements would be enlightening to those who order appraisals on a regular basis.

When you order a commercial appraisal, you are essentially paying for the appraiser’s time and expertise. A typical commercial appraisal will take me anywhere from 20 to 60 hours. Additionally, a 10 unit apartment may talk only slightly less time that a 100 unit apartment. Thus, sale price and property value have little to do with the commercial appraisal fee.

The things that do affect the fee of commercial appraisal reports are:

      1. complexity of the assignment,
      2. availability of data,
      3. report format and
      4. required turn-around time.

1. Complexity of the assignment

Simply put, the more complex the assignment, the larger the scope of the investigation, the longer it will take and the higher the fee. Even small properties with a lot of issues to deal with, (complex leases, mixed-uses, deed restrictions, etc.) can often take as long as larger properties will less issued to deal with).

 

2. Availability of data

The scope of the assignment and data availability are intertwined. I appraise a lot of assisted living properties which have state licensing requirements. Thus, the most comparable data would come from the limited supply of similarly licensed facilities.

 

3. Report Format is Purpose Driven

There are essentially three formats available to the appraiser, the full-narrative, the summary narrative and the restricted report (in order of cost – highest to lowest). Many times the format is dictated by the use of the appraisal and not the user of appraisal services. While a summary format is generally acceptable for most lending scenarios, if the appraisal assignment is considered complex, it may likely require a full narrative analysis. USPAP Advisory Opinion 11 defines the level of detail that is contained in each of these formats.

The most economical of formats, the restricted report, sometimes referred to as a letter appraisal. However, as defined by USPAP, a restricted appraisal report can be relied upon only by the client (no third part use), thus, its use is very limited.  However, we are often called upon to complete a commercial appraisal for purposes where the restricted format is allowable.

Instances were a restricted report format could be used would be where an owner wants to determine the listing price or a buyer is trying to identify an acquisition price, or a company wants to make a sell/hold decision, or simply to determine one’s net worth.

4. Required Turn-Around

This is where the user of appraisals has the most influence on fee. We may receive calls asking for a summary appraisal of a property that is escrow with a closing date of say two weeks away. As stated earlier, the typical appraisal will take anywhere from 20 to 60 man hours, and in most cases the appraiser does not know the full scope of analysis required in the commercial appraisal until he actually sees the property.

On short-order appraisals this presents a huge risk factor for the appraiser in that the fee quote is typically issued prior to seeing the subject and what data is available. As a result, the appraiser will usually factor such risk into the fee quote with considerations such as potentially having to work weekends to complete the assignment on-time. Again, per USPAP, there are no shortcuts – the analysis has to be completed to USPAP standards regardless of fee and turnaround time.