Colorado’s New AMC Appraisal Regulations Set to Positively Impact Commercial and Residential Real Estate Appraisal Industry
Appraisal Management Companies (AMC’s) were originally brought into the appraisal landscape in an effort to increase appraiser objectivity and decrease personal relationships between banks and appraisers. The intention was to reform the industry in a positive way. The outcome, however, as most lenders, appraisers, and borrowers would agree, has created higher fees for consumers, lower fees for appraisers and inefficiencies to the banking industry.
This could substantially change on July 1, 2013 as new regulation of AMC’s within Colorado goes into effect. The regulation, also known as House Bill 12-1110 Regulation of Appraisal Management Companies, may have substantial implications for borrowers, lenders, appraisers and consumers ordering commercial or residential appraisals.
Consider this very basic example for how an AMC currently works with regard to a small commercial real estate loan in Colorado (the same example would work for a residential property): A buyer finds a property they want to purchase in Denver. They find a bank or other type of lender to give them a loan. Before closing on the purchase and loan, the lender requires an appraisal. If the lender is subject to using an AMC to engage an appraiser, either legally or by way of choice, the lender will call a representative of an AMC to be the middle man to place the appraisal order. The AMC will call 1 to 10 appraisers to get a bid and turn time on the order. After receiving multiple bids, the AMC will take the lowest bid, regardless of the appraiser’s qualifications for the assignment, add in their finder’s fee and whatever additional spread they think they can get, and ask the bank if they would like to proceed.
By using the AMC, the buyer (borrower) end’s up paying a higher price for the appraisal. This is because the AMC, a middleman to the appraisal order that has no appraisal qualifications, no real estate knowledge, and is often an entry-level sales rep, requires compensation. The amount can range from very little, to quite substantial, depending on each project. It is not uncommon for an AMC to negotiate a $225 appraisal fee for a single-family home with an appraiser in Colorado and charge the borrower $475, not disclosing the fact that the appraiser only received $225. The AMC has made $250 in this example simply for picking up the phone and dialing. More than the appraiser who did the entirety of the work and has all the liability.
Within a commercial appraisal, a consumer may have no idea that they are paying a $3,000 commercial appraisal fee, and because the AMC was able to shop for a cheaper appraiser who may be unqualified and not produce good work, the AMC is taking $1,500 of the fee and the appraiser is only getting the other $1,500.
If there was a good, beneficial result of the AMC taking half the fee, there would be no problem. In reality, going through the AMC only creates time delays (every message must go through an AMC agent to/from the appraiser and bank so simple questions can take multiple days), poorer work product (the appraiser is squeezed on the fee and most likely will not spend as much time as they would have if properly paid), lower fees to the appraisers and higher fees to the consumers.
On top of this, to get the appraisal order, AMC’s require appraisers to sign contracts that indemnify all acts of negligence by the AMC (among other things) and leaves the appraiser highly exposed. As a result of the contract terms, appraisers can be more exposed than the actual lender, borrower, AMC, broker, investor, or any other party to the loan.
Among other regulations, the new bill is set to impose some modest modifications:
1. The Bill now requires AMC’s to be licensed. The licensing essentially requires a licensed appraiser to be the “controlling appraiser” of the AMC. It appears that the AMC will either fully or partly be subject to USPAP appraisal requirements, including maintaining a workfile for the appropriate period and ensuring that the appraisal is USPAP compliant.
2. AMC’s and the controlling appraiser will be held liable for finding appraisers that are appropriately qualified for the job.
3. AMC’s now can be penalized or lose licensure for requiring an appraiser to indemnify the AMC against all loss, liability, etc.
4. AMC’s can be penalized or lose licensure if they attempt the influence the reporting, development, or result of an appraisal.
5. AMC’s can be penalized or lose licensure if they prohibit appraisers from communicating with the client or intended users (unless they have a prior agreement).
6. AMC’s can be penalized or lose licensure if they fail to make payment to appraiser’s within 60 days.
7. AMC’s can be penalized or lose licensure if they violate the Colorado Consumer Protection Act.
8. AMC’s can be penalized or lose licensure for failing to disclose to the client the amount of the fee rendered to the appraiser.
The new regulations could drastically alter the role of AMC’s. Either way, it is important for consumers using appraisals to know what’s happening.
Ordering a commercial appraisal directly through an appraisal company, such as Colorado Appraisal Consultants, removes AMC’s from the equation entirely.
This page may contain errors and is not to be construed as legal advice.
