Have you ever asked yourself why gasoline prices seem to fluctuate so dramatically? Maybe it’s the weather. Perhaps it is a conspiracy in the Middle East. Surely the politicians are to blame. To be sure, the correct answer is complicated and likely multi-faceted. There is much that goes into what your card is charged at the pump, but not much the common man probably understands. You can bet however that those who make these decisions do indeed know and understand how it all works. Have you ever wondered why a Big Mac will set you back $3.99 at McDonald's, yet any size soda will only cost you a buck? Rest assured, these decisions are not determined on a whim. Successful businesses understand costs and thus are able to properly determine correct prices to remain viable in the current market.
What about appraisers? What do you charge for your services? More importantly; why? If you received a phone call today from a potential customer for a standard appraisal, what would your fee be? Would it make a difference if it were an attorney, a homeowner, an AMC? Does the type of assignment or even the type of customer play into your fee decisions?
As appraisers, we spend a lot of time complaining about our low fees, but where do those fees actually come from? Why is $350 per appraisal a common number in many areas? Who determines fees and how? Is it tradition? Is it just because that is what it has always been? Are they set in concrete? Can we realistically change/raise them? We have the idea that appraisal fees are what they are and cannot be changed (like touching the Ark of Covenant), but does that perception meet reality? Maybe it is time for us as business owners to step back and get to the basics of costs and fees.
Within any business, there are hard costs and soft costs. Hard costs are basically the same every month. They include things such as your building rent, internet access charges, payroll, MLS membership fees, your cell phone bill, etc. Though they may fluctuate slightly, you can basically plan on paying the same fee for them month after month after month. Furthermore, these are costs you incur whether you do 1 appraisal or 100. Soft costs, on the other hand, are different. They will change based on your volume. They include such things as gasoline, print cartridges (another reason to go paperless), contract labor, taxes, and vendor portal usage fees. There are reasons to like and dislike each type of charge. Business owners like hard costs because they are predictable. They can be planned for. On the other hand, when volume is low and times are lean, hard costs are difficult sometimes to satisfy. Soft costs are liked because they are easier to pay when they come due. A high volume means a high income to satisfy obligations. Yet, they are not easy to budget for because they are so volatile. The big question here is, do you know what your hard and soft costs are? I am not asking if you know the definition of the two. Rather, I am asking if you, as a business owner, know your own numbers. Do you know how much you spend every month in hard costs? Do you know how much, per appraisal, you spend on soft costs? The answers to these questions are essential if you expect to remain in business long-term.
The above measure is not as difficult as it at first might appear. Begin by either getting out your receipts from last month and going through them or just go to your Quickbooks (or whatever financial software provider you use) and start putting purchases into two categories; hard and soft costs. Do that for at least two other months from earlier in the year to give an accurate picture. What? You don’t track your expenses that closely? Well, now you know where to begin. Once you have the data you need, it is now time to start analyzing. Don’t worry, you are an appraiser. You can do this!
Once you have determined your hard and soft costs (as well as a realistic monthly estimate of your volume), it is now time to look at your competition. Do you know what Mary T. or John D. Appraiser down the road are charging for a typical appraisal fee? It would be ridiculous to determine your fees without a working knowledge of what other appraisers, doing similar type work in your area, are charging. Otherwise, you could charge whatever the devil you want. Fact is, you live and work in a capitalistic society where competition matters. Charge too little and you go can’t cover your expenses and still have something at the end of the day to take home to your family. Ask for too much and your potential clients will simply choose a comparable appraiser whose fees are less. You have to find a happy medium.
Though there are a lot of moving parts here, there are essentially only two, main components (determining costs (both hard and soft) and knowing your competition). The problem here is that I dare say most appraisers look only at the latter and pay very little (if any) attention to the former. It is not easy to accurately determine your soft and hard costs. It takes work. With so much else vying for our time, this portion often gets neglected. Do not allow it to. If you need to pay an accountant or financial genius to help you out, do it! It will be well worth what you put into it.
It is in step 3 that the real magic happens. This is where you must finally determine what your fees will be on a typical assignment. Frankly, some guesswork must play out here. Though you have some hard numbers on your costs and a pretty good idea as to what your competition is doing, you still have to determine what it is you will do. If I could offer any advice at this point, it is to aim high. You might be surprised at what the market will actually sustain. Maybe you have always charged $350 per appraisal and you can indeed make a living at that amount. What would it do for you and your business to raise that fee to $375? Too much? What would even $365 do for you? Would your clients sustain you in such a minor change? There is only one way to find out?
So, what determines your success in finding the perfect fee in order to run a successful business yet not be constantly passed over for lower fees being charged by your competition? First of all, it is not all about numbers. I assume that, like me, you do not always go for the cheapest product or service out there. Successful consumership usually means not picking the highest prices, but not choosing the lowest either. The old saying that you get what you pay for is usually true. Normally, I look for a mid-level product for a mid-level price. As an appraiser, there are ways to make your product superior to all of your peers yet not necessarily charge the highest fees. Even in the world of AMCs, your end product does indeed matter. Your clients do care about your quality and turn time. I know. I know, but they really do. No really, they do!
Over the past several years, I have been able to successfully develop a business model that allows us to work more efficiently, but not cut corners in the meanwhile. Sometimes it is called working smarter rather than harder, but it essentially allows us to be in a different league than our competition. We are able to keep our costs at a minimum, our productivity high, our quality control strict, and our fees in line (if not slightly less) with (than) our peers. Know your costs. Understand them intimately. Be aware of your competition. Understand not only their fees, but their expertises and weaknesses. Merge these two components and you will know exactly where your fees should be. This is a key to a successful appraisal office in today’s challenging appraisal world.
For more information on this subject, please listen to The Appraiser Coach Podcast Episode:
