It’s an unavoidable fact of modern life that lenders and AMCs go out of business. Just about every week we are notified that another lender or AMC has ceased operations. When a large lender drowns in a sea of red ink, it makes the mainstream news. But when a smaller lender closes its doors, or an AMC of any size meets its demise, it generally doesn’t make news outside the lending industry.
Generally speaking, lenders and AMCs don’t plan their demise. They don’t “wind down”. They don’t stop taking loan applications or placing appraisal orders one to two months beforehand. Usually the employees just arrive at work one morning and the doors are padlocked. That’s it. Finis.
When this happens, the local media focuses on the employees who have lost their jobs, and/or on the property owners who have loans pending who have lost their application fees and/or people whose loans were scheduled to close the next day and now have to start back at square one. But I’ve been an appraiser for almost 25 years, and so when I hear about one of these lender or AMC closings, I always think of the appraisers who are left with outstanding appraisal invoices.
My first experience with bad appraisal debt occurred during the refinance boom of the early 1990s, which was the first such boom I had ever experienced as an appraiser. Our small five-person appraisal shop had a local lender client that ordered appraisals directly from us, paying full fees. During this time, we were so busy that we didn’t notice that they hadn’t paid us in a couple months. They racked up about $8,000 in appraisal fees, and in response to our collection efforts sent us a letter that stated they were having financial troubles and were unable to meet their obligations. They offered to pay us 50 cents on the dollar for the outstanding invoices if we agreed not to pursue further collection efforts. Fearing they would declare bankruptcy and that we would receive little or nothing, we accepted their offer. Lesson learned. Never think you are too busy to pay attention to outstanding accounts.
Most of us are small business people. Even a few hundred dollars in uncollectable debt is a big pill for us to swallow. And mortgage appraising is not a lucrative enough business that we can just afford to write off collection losses against obscene profits (see subprime lenders, circa 2004).
With that in mind, here are a few tips from experts regarding collections:
- Get paid in advance. That’s a no-brainer. I know it’s not always possible, but every appraisal job for which you are paid in advance is one that you don’t have to worry about collecting later.
- Keep a close eye on accounts receivable. If you notice that a particular client is slow or irregular in paying, be wary of taking additional work from them. Know your individual clients’ payment patterns, and look for changes in these patterns.
- Once an account has become delinquent, send frequent collection notices and make phone calls. Some appraisers are good at this and others aren’t. But even if you are uncomfortable pursuing collection efforts, bite the bullet and make them. Phone calls are the most effective. Such efforts should be regular, i.e., at least once or twice a week. Some appraisers suggest you make daily phone calls to delinquent accounts. You may be concerned about “pestering” the debtor, but don’t be. After all, they’ve got your money.
- Be proactive. Make your best efforts early in the process. The longer the uncollected debt sits out there, the less chance you have of eventually collecting it.
- Know the laws in your state, and use them to your advantage. If you have the ability to file a judgment against a company or an individual, tell them you are going to do it, and then do it. If the debtor is a financial institution, contact the agency in your state that regulates financial institutions. If the debtor is an AMC, check to see if your state is one of the 30+ states which regulate AMCs.
- Hire a professional. For very large debts, or for debts that you think are uncollectable, hiring a professional debt collection agency may be a worthwhile investment. They usually base their fee on a percentage of the money they collect for you, so if they don’t collect, you don’t pay.
Of course, many of these tips will not protect you if one of your clients goes belly-up. Perhaps the best way to manage this risk is to deal only with reputable companies, and don’t let a single client make up a majority of your book of business. But even that strategy is no guarantee. Who in the appraisal community foresaw the demise of Express Financial Services in 2009 or AppraisalLoft earlier this year? Both of these AMCs left hundreds of appraisers holding thousands of dollars of uncollectable debt.
Spending time and effort trying collect appraisal fees is personally bothersome. We would all rather spend that time pursuing other interests, such as completing appraisals, marketing our business, or spending time with our families. But collection efforts are part of the fabric of small business today; those who choose to ignore this are themselves in peril of economic demise.
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