So, how much did AppraiserLoft stiff you for? They got us for close to $3,000. It hurts, but I have heard there are many out there who got hit worse. I spend a fair amount of time lurking (and actively posting) on a variety of appraiser web boards/forums. There are two themes that are loud and clear right now: 1. There are a number of appraisers who want to see the executive team at AppraiserLoft strung up and 2. There is a growing outcry for requiring AMCs to be bonded.
This week, I turn to an expert in the field of bonds, Danielle Rodabaugh, editor of Surety Bonds Insider for some answers.
A.C.: Danielle, thank you for taking the time. Tell us briefly about the Surety Bonds Insider and what you do.
D.R.: I write news articles and editorials for the Surety Bonds Insider, an online publication that examines legal issues and consumer concerns that involve the surety industry. SuretyBonds.com sponsors the publication as a part of its educational outreach program.
A.C.: For those of us who are more focused on appraisal than insurance, explain what a “surety bond” is.
D.R.: A basic definition explains that a surety bond is a legally binding contract that binds together three parties.
1. The person or business that buys the bond is the principal.
2. The government agency that requires the bond is the obligee.
3. The agency that issues the bond is the surety.
The purpose of surety bonds is to guarantee that a business or individual professional will follow specific laws, especially when providing services to consumers. If a principal fails to adhere to the bond’s expectations, harmed parties can make a claim on the bond to gain financial reparation. If the principal cannot pay for the penalty, the surety will be left footing the bill.
A.C.: Why should we, as real estate appraisers, be concerned about surety bonds?
D.R.: Appraisal management bonds are relatively new to the surety industry. At this time, appraisal management companies in 10 states are required to maintain a surety bond. A number of states passed AMC bonding requirements during their most recent session, so surety bonds could become increasingly relevant to the industry on a nationwide scale in just a few short years.
A.C.: With state regulatory boards now overseeing AMCs, which states now require AMCs to be bonded?
D.R.: States that have established AMC bonding requirements include Arkansas, Arizona, Georgia, Kentucky, Missouri, Nebraska, New Mexico, Oregon, Tennessee and Washington. A few of these regulations are so new that they will first go into effect at some point during 2012.
A.C.: Which states, to your knowledge, are currently considering such legislation?
D.R.: At this time all but a few state legislatures have adjourned their sessions for the year. However, since 10 states have enacted AMC bonding requirements in the past couple of years alone, I wouldn’t be surprised if more states were to follow suit in the near future as a way to regulate AMCs in their respective industries.
A.C.: How would surety bonds have changed the outcome of Appraisal Management Companies (AMCs), like AppraiserLoft, who go out of business and leave many appraisers with unpaid invoices?
D.R.: I cannot tell you what would have happened in that specific case if surety bonds had been in use, but I can tell you that the intended purpose behind these bonds is to ensure that AMCs follow industry regulations and don’t leave appraisers and their consumers out to dry.
What many people don’t realize is that the exact protection any surety bond provides depends on the legal language used on a specific bond form. Of the 10 AMC bond forms that currently exist, most explain that while any harmed parties can make a claim on an AMC bond, priority will be given to consumer claims (i.e. homeowners rather than appraisers). So, it’s hard to say how exactly bonds could have prevented the financial losses associated with AppraiserLoft, though minimizing those losses would have been the overall goal.
A.C.: What is the typical out-of-pocket cost for an AMC to become (and stay) bonded?
D.R.: This is a question that cannot be answered simply. Most AMC bonds are issued for a one-year term, and the bonded company will pay the premium once a year. The exact cost an AMC will pay for its bond varies for a number of reasons, but there are two main factors: the bond amount and the applicant’s financial credibility.
The base rate for a premium is calculated as a percentage of the surety bond amount. AMC bonds are typically issued for $20,000 to $30,000, but the Kentucky AMC bond amount is a whopping $500,000. Then the AMC owner(s)’ financial credentials are reviewed. Those with good credit will pay a premium that’s 1 to 3% of the bond amount while those with bad credit could pay up to 25%. Now if you’re talking about a $20,000 AMC bond, that’s $200 to $600 for those with good credit or somewhere around $5,000 for those with bad credit. You can easily see how the $500,000 bonding requirement is much more costly for AMCs.
A.C.: How can we, as appraisers, find out if the AMCs we work with are bonded and whether or not the bonds are secure?
D.R.: Contact the AMC you’re working with to verify its bonded status. If the company tries to “overlook your request,” contact the state department that’s in charge of AMC licensing, as posting a surety bond is a prerequisite to getting an AMC license. Remember, though, that only 10 states currently require AMCs to be bonded. If you work in one of 40 states that doesn’t utilize AMC bonds, don’t expect the AMC to have one. Once executed, the bonds are secure until they expire or are cancelled, but AMCs cannot legally operate without a bond if the state requires one.
A.C.: How can/should the typical appraiser become involved in this issue?
D.R.: Because AMC bonding requirements vary by state, appraisers should contact the licensing department that regulates their state’s AMCs when looking for more information on the topic. If they live in a state that does not currently require AMCs to post surety bonds, appraisers can contact their representatives to express their support for or hesitance toward potential AMC bonding requirements in the future.
A.C.: Thank you, Danielle, for your informative insights.
I want to again express my appreciation to Ms. Rodabaugh for her time and expertise. Bonding, in general, can be a complicated subject and she did an excellent job in making it understandable.
In closing, I want to share with you my thoughts regarding the bonding requirements that are becoming more and more popular with various legislatures across the country. In doing so, I know that I will rub many of you wrongly (based on the opinions I have heard over the past few weeks on this issue). Many of my appraiser friends and followers believe it is a needed and warranted step in the right direction for the government to require such bonding by AMCs. Though I agree that bonding is a useful and positive tool, I do not agree that it should be required by law.
Though it is easy for those who are most venerable to hurt (did I mention I lost $3,000 to AppraiserLoft?) to call on the government to ‘put more regulations on that industry,’ is it always the best course? I even read a post from one appraiser recently who said, “The government highly regulates us, why shouldn’t we want them to do the same for the AMC’s?” Well, with all due respect, isn’t that the very reason we would NOT want the government to step in? If there is anyone who understands how over-regulation by the government does not solve the problems, it should be appraisers. Should we desire (and even pressure) the AMCs we work for to be bonded? Absolutely, but it should be our decision whether or not to work for AMCs who aren’t and not the hand of Big Brother to force it.
That being said, here are my 5 tips to never getting stiffed by an AMC again:
1. Do your homework. Before you ever begin working with an AMC, talk to other appraisers and/or find credible reviews online. Be sure of who you are working with.
2. Only work for AMCs who are bonded.
3. Be proactive with your billing. If an invoice is over 30 days late, consider rejecting any new work from that AMC.
4. Do not work for only a few AMCs. Diversify both the companies you work for and the type of work you do. Do not put all of your eggs in one basket.
5. When you are not paid in a timely manner and you cannot get a hold of the accounts payable department, or you get a response such as, “We are revamping our payment system so your checks will be delayed,” RUN FORREST, RUN!
In the end, no plan is foolproof. There will continue to be bad actors in the marketplace, but we should do everything we can to avoid another AppraiserLoft. Insisting that our clients be bonded is one more tool that can/should be used.
Now, go create some value!
Danielle Rodabaugh is the editor of the Surety Bonds Insider, an online publication centered on developments in the surety industry. As a part of the Surety Bonds Insider educational outreach program, Danielle has recently taken an interest in writing about appraisal management bonds because they are new to both the surety and real estate industries.
Dustin Harris is a multi-business owner, but he made his fortune as a self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and mentor. He owns and operates The Appraiser Coach (www.theappraisercoach.com) where he personally consults and mentors other appraisers helping them to also run successful appraisal companies and increase their net worth. He is also the Founder and President of Your Appraisal Office (www.yourappraisaloffice.com) which implements some of the systems he has developed to help lower costs and free up time for real estate business owners. He and his wife reside in Idaho with their four children. This article may be reproduced and distributed only in its entirety without permission from the author.