Understanding appraisal fees

Like any consulting or advisory services, Machinery and Equipment (M&E) appraisals can vary widely in price. Even the same appraiser working with the same group of assets may charge very different fees for two engagements that appear similar on the surface.

Why would those fees be different, you may be wondering? How is an appropriate fee determined? And what can clients do to understand and potentially reduce your fees?

Let’s talk about it!

We Have Standards – But We're Not Standardized

US-based M&E appraisers follow a government-endorsed standard called USPAP. These standards set expectations for ethical behavior, transparency, and common terminology. They standardize many aspects of appraisal practice and client interactions.

However, what these standards do not do is standardize actual appraisal assignments. Each appraiser has the freedom to determine a scope of work for each assignment as they deem appropriate.

Some appraisal types have been effectively standardized by influential users, the most well-known example being residential real estate appraisals for Fannie Mae and Freddie Mac.

M&E appraisal, however, has no such standardization in the marketplace. Influential users with the potential to standardize – the SBA or large audit firms, for example – have not generally required the appraiser to fill out a report form, nor do they typically pre-define the scope of work for assignments.

This means that when you request a quote for an M&E appraisal, it is always a custom quote. Even if your appraiser simply quotes you a fee with no other details, that fee is based on a series of decisions and judgments the appraiser made regarding the time, effort, and expertise required for your specific assignment.

Switchboard Model for Fee Quotes

So how does your appraiser make these decisions and judgments?

While we can’t speak for every M&E appraiser, we like to think of quoting fees like operating a switchboard – like the kind people would solder for their basement train layout using old radio wires and wheat pennies. Here’s why:

• The client’s RFQ (Request for Quote) brings power to the board. This represents all of the potential time, effort, and expertise required to complete your assignment.

• All of the appraiser’s decisions and judgments regarding scope of work are on/off switches. The switches are laid out in several rows of hierarchy, allowing for a multitude of paths for power to flow down the line.

• On the other side of the board is a row of lights. This is the meter showing how much power is flowing – how much time, effort, and expertise is required – when all the switches are set. The more bulbs glowing, the higher your fee.

When you request a quote, all of the lights are burning – the maximum amount of time, effort, and expertise required for an assignment. This is a big fee.

But the fee you are quoted is generally much less than this. The appraiser toggles switches based on the circumstances of your assignment. You receive a quote based on how many bulbs are burning when the appraiser is finished working the switchboard.

The Big Switches

In order to determine which switches to turn on and off, your M&E appraiser is going to ask you some questions.

The first tier of switches corresponds to your reason for needing an appraisal.

Are you using it for collateral financing? Transactional due diligence? Litigation? Insurance? Charitable donation? Purchase price allocation? Sale price determination?

Each of these big switches will lead to its own unique downline – more tiers of switches.

The next tier of switches involves the scope of inspection. Are we going to physically inspect the assets? If so, does this require a short drive, long drive, flight, or hotel stay? Do we need the senior appraiser or a junior associate to inspect? If we are not going to inspect the assets, who is going to provide all of the information? Do they have the tools and time to do a good job? Are they available for follow-up questions? Can they do a video walkthrough?

As the appraiser toggles through the board hierarchy, the amount of power flow (the required time, effort, and expertise for the assignment) is being determined. The bulbs on the meter are lighting up or going dark as we move down the line.

The third major tier of switches involves the scope of analysis. Who is relying on these results? Will this be scrutinized by an auditor or attorney, or are you using it internally? Are you relying on the values for major immediate decisions, or do you just need broad direction for long-term planning? Is the valuation easy or difficult to support and defend?

The final major tier of switches relates to the scope of reporting. Do we need to lay every valuation out in detail, or will a narrative summary suffice? Who is reading this report? How much asset description is required? Is it going to be read out loud in a courtroom, or is it going to be skimmed and buried in a file?

These are all examples of common switches we consider. In reality, each assignment brings its own unique downlines of questions and answers to consider.

The Meter

Regardless of the complexity of the switchboard, at the end the appraiser will see a certain number of bulbs burning on the fee meter. This is the final estimate of the amount of time, effort, and expertise required for your assignment.

The meter reading is the basis for your quote. The appraiser will settle on a final quote within the context of other factors such as desired turnaround time and current workload.

Pulling Back the Curtain

Most of the time, the clients don’t see the appraiser operating the switchboard. All they see is the final fee quote. This is not because the appraiser is trying to hide anything.

More often than not, the appraiser is simply trying to reduce hassle for the client by making sensible assumptions and providing quotes quickly without a lot of discussion.

However, if you want to understand your fees, or if you want to see if a lower fee is practical – all you have to do is ask:

• “What were the major factors that determined this fee quote?”

• “What are the pros and cons of doing a desktop appraisal in this situation?”

• “If we extend the timeline, will that affect your fee?”

• “How can we organize the inspections to optimize travel costs?”

• “Are there places we can reduce the scope of work while still getting what we need?”

Finally, be assured that your appraiser will want to make sure that if you are comparing quotes, you are comparing apples-to-apples.

Our biggest fear in quoting assignments is not losing the bid to a capable competitor – it’s losing the bid when my competitor plans on doing less work.

As the client who is paying the bill, it is your right to know how your fee was determined. Your appraiser should be happy to discuss how they arrived at a quote and whether reduction in the scope of work is possible or practical for your situation.