Home Valuation Services (fictitious name; actual company name withheld) is a nationwide Appraisal Management Company (AMC) that specializes in providing residential real estate appraisals for banks and mortgage lenders. HVS accepts orders from their mortgage clients and then assigns to local field appraisers to fulfill the work. In past years there have been numerous complaints filed against AMC’s concerning low fees paid to appraisers for completing assignments. Due to these complaints, Congress recently passed legislation to ensure that appraisers are paid customary and reasonable fees. While this sounds like good news for appraisers, the legislation is unclear about precisely what is “customary and reasonable” to pay an appraiser.
AMC’s and mortgage lenders are working together to define what constitutes an appropriate appraiser fee. The general consensus is that there are two main factors that can affect an appraiser fee – location and appraised value. Average home values vary tremendously across different parts of the country, and there are numerous factors that may contribute to complexity of assignment such as local market conditions, density, and uniqueness of property. It is also well documented that higher valued properties require substantially more work to appraise, so appraisers are typically paid a larger fee. There are other possible factors to consider when setting fees for appraisers, but HVS is focusing on appraised value as the primary indicator.
Appraiser fees can be quite different from state to state depending on local markets, so orders are grouped together by state and county. HVS has decided to analyze samples of fees and appraised values at the state and county level in order to set appropriate fees. They are looking at the fee the appraiser was paid, as well as the appraised value of the home. HVS is sampling 100 orders from each of 4 California counties: Los Angeles, San Francisco, San Diego, and Sacramento. All orders are zoned in urban/suburban areas and similar in scope of assignment, meaning all are single family homes in residential neighborhoods.
HVS is interested in seeing if a single appraiser fee is appropriate across the entire state, or if fees should vary by county. The company wants to know if one standard fee is sufficient for all appraisals in CA, or if they need to consider multiple fee points. HVS is using several statistical methodologies including evaluating descriptive statistics and graphical representations of data, constructing confidence intervals, creating hypothesis tests, analyzing variance, and performing regression analysis. Based on their findings in CA, they will apply the same approach to the remaining 49 states in order to implement a standard customary and reasonable appraiser fee schedule for their nationwide appraisal management business.
Analysis and Approach
We first analyze the data using descriptive statistics to gain a quick understanding of the variable’s distribution. The mean, median, mode, standard deviation, and variance provide valuable information when comparing the appraiser fees in each county. Table 1 displays the descriptive statistics for each county.
Table 1 – Descriptive Statistics for Four Counties Appraiser Fees: | Los Angeles | San Francisco | San Diego | Sacramento | All Four | | | | | | | Mean | $359.78 | $338.10 | $251.18 | $226.83 | $293.97 | Standard Error | $11.69 | $8.85 | $5.35 | $0.85 | $4.80 | Median | $350.00 | $325.00 | $225.00 | $225.00 | $246.25 | Mode | $350.00 | $385.00 | $225.00 | $225.00 | $225.00 | Std Deviation | $116.88 | $88.53 | $53.52 | $8.54 | $96.05 | Sample Variance | $13,660.85 | $7,838.27 | $2,864.33 | $72.97 | $9,225.40 | Skewness | 1.10 | 1.25 | 2.13 | 4.96 | 1.76 | Range | $570.00 | $475.00 | $225.00 | $53.00 | $570.00 | Minimum | $225.00 | $225.00 | $225.00 | $225.00 | $225.00 |