Appraisal News and Business Tips

Fee splits – too high or too low?

This article was written in 1993. Not much has changed since then, except that it is difficult to hire trainees due to lender restrictions on signing reports (residential) and there are very few staff appraisers left at lenders. Also, some costs have gone up.
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This article was previously published in Appraisal Today newsletter in February, 1993 and was written by Ann O’Rourke. For more information on the newsletter, go to Appraisal Today Info. It is copyrighted. For reprint permission, Contact Us

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Note: some appraisers think that payment on a fee split basis automatically means the person is an independent contractor and cannot be an employee. That is not correct. See the article on Using Independent Contractors – Be careful in the list of Biz  tips articles.
Two rules:

  • If you’re paying the fee split, it’s too low.
  • If you’re receiving the fee split it’s too high.

Payment of appraisers on a fee split (commission), rather than salary basis, is very common in appraisal companies. Both employees and independent contractors are typically paid on a commission basis. Even if there is a base salary, quotas are set and bonus incentives are offered. Many lenders are (or will be) paying their staff appraisers on a commission-only, or salary plus commission basis. Draw against commission is another option.

Fee splits, or payment on a commission basis, seems simple at first. But if all the factors are analyzed, fee splits are actually complicated, with many variables.

FACTORS TO CONSIDER
1. Your competitor’s fee splits.
2. Availability of appraisers.
3. Employee vs. independent
contractor.
4. Clerical support.
5. Experience.
6. Marketing.
7. Production.
8. Timing of commission payment.
9. Benefits.

Evaluating Competitors’ Fee Splits
Compensation is very important in appraiser recruitment and retention, and in job satisfaction. You want your appraisers to feel that they’re fairly compensated for their work.

When comparing fee firms with yours, be sure to find out if their appraisers are employees or independent contractors, as this is one of the main differences. Also, find out what benefits are offered.
To find out what individual firms are paying, call them on the phone when they advertise, or talk to their employees or independent contractors. Sometimes an owner will share data with you. Exchanging ideas and information is a big part of networking.

An individual firm’s fee split levels tend to be stable over time, so you can often use old data. The primary reason for significant changes is re-classifying from independent contractors to employees.

Availability of Appraisers
Supply and demand is an important factor in how much you will have to pay an appraiser. The best time to recruit is when business is slow and no one else is hiring. If the newspaper is full of appraiser ads and all your competitors are complaining that they can’t find anyone to hire, you’ll probably have to offer a higher commission or more benefits.

Employee vs. Independent Contractor
Fee firms tend to overpay their employee-appraisers. They fail to take into consideration all the taxes and government mandated benefits. Those companies paying employees the same (or very close to) the fee splits paid to independent contractors are actually paying their employees at a much higher rate than independent contractors! Employees’ fee splits should be at least 10% less than independent contractors’, unless you’re in a state with few mandated benefits.

There can be problems recruiting employee-appraisers. If you’re trying to get appraisers from other fee firms using independent contractors, they are used to receiving a higher fee split and a “gross” check, with no deductions.

If you are hiring employee-appraisers, be sure to explain fully to a potential new hire about what you are paying for, and what your competitors don’t. There are many appraisers who don’t want to be self employed as independent contractors, particularly if they’re recruited from lenders. They don’t want to worry about paying quarterly taxes and setting up a business, and want insurance such as unemployment and worker’s compensation.

Comparison of sample government mandated benefits for an employee and an independent contractor in California:

Employee pays Employer pays  Ind. Contr. pays
FICA 7.65% 7.65% 15.3%
FUTA (fed. unemployment) 0 $434 max. 0
Disability insurance $412 max. ?
Workers compensation 0 1.2% (varies) ?
Unemployment (state) 0 Varies – Est. $210 max. ?
Totals 7.65% + Disability 9.25% + unempl. 15.3% + ?
  • The numbers above were for 1991/92 and may not be the current numbers. 
  • Employer obligations vary by state. Check with your state.
  • The employer pays 50% of an employee’s FICA, and none of an independent contractor’s FICA.
  • The independent contractor pays his or her own disability insurance, and uses savings for any periods of unemployment.
  • All of the taxes above have a maximum income limitation. For example, FICA rates above are up to $53,400 (in 1991). FUTA (federal unemployment) is 6.2% of a maximum of $7,000. State disability and unemployment are similarly calculated.
  • An independent contractor usually pays slightly less than 15.3%, as there are certain deductions for self employment tax, and other deductions not available to employees.
  • California examples were used for state payroll tax percentages. Workers compensation rates depend on how appraisers are rated. Check with your accountant for your state’s rates and mandated insurance. Add up all the mandated employee benefit costs in your state to determine the required fee split difference between employees and independent contractors.

If you already have support employees, adding an appraiser employee is not too much trouble or expense. The first employee you hire is the most expensive, as it subjects you to all the reporting requirements!

Many business publications quote an additional 30% of an employees’ salaries for benefits. They must be including vacation, sick leave, health insurance, etc. See the benefits section below. You aren’t required to offer any of these benefits to employee-commissioned (fee) appraisers. If you do, reduce their fee splits.

Clerical Support
Does the appraiser hand the staff person a handwritten report, or does the staffer receive a complete appraisal, ready to go out the door? Good clerical support is expensive. Typing up reports, exhibit preparation, and packaging are all time consuming and costly.

Typing up handwritten reports is hard to justify today, since it takes less time for the appraiser to type than to handwritten an appraisal report and have someone else type it. If they are unwilling to use a computer, they should be paid a lower fee split.

If your support staff is typing up dictated reports, be sure to evaluate the cost. Dictation is an art. A skillful dictator can more than make up the transcription costs in increased production. A poorly skilled dictator can be much more expensive to transcribe than hand-written appraisals.

Clerical support is often an individual appraiser’s preference. Those skilled and fast at clerical work may prefer to “do it all themselves” and get a higher fee split. Others, less skilled and quick, may prefer to use support staff, receiving a lower fee split. For example, a residential appraiser requiring ½ hour of extra clerical support, costing $10 (don’t forget to include salary plus benefits), for an appraisal billed at $300, would have a 3.3% (10/300) lower fee split than an appraiser not requiring that extra half hour of support time. A commercial appraiser requiring an extra 8 hours of clerical support at $20 per hour for a $5,000 appraisal would be paid 3.2% less (160/5,000).

Experience
Experience is an important factor in setting a commission. Experienced appraisers need less supervision. Be sure to determine what type of experience is important for your shop. Experience that will fill a gap in your business may be worth a higher commission. For example, an experienced residential reviewer, or a commercial appraiser with extensive condemnation experience could be a valuable addition.

If an appraiser wants to get experience in a new type of appraisal assignments, a lower fee split could be offered. For example, a residential appraiser wanting to move into commercial work would receive his or her standard commission for residential work, and a trainee fee split for commercial work. A residential appraiser wanting to move into relocation work, or an apartment appraiser wanting to do office buildings could receive lower fee splits for those assignments while being trained.

Marketing
There are few, if any, fee firms that couldn’t use a few more good clients. An appraiser who brings clients with him or her when coming to work for you, or an appraiser with sales ability or connections can be a very valuable addition to your company.

Appraisers who get good new clients could be offered a higher fee split, say 5% extra, for work done for that client, for a period of time, or some other form of a bonus.

Production
Many fee firms have a production incentive program, with appraisers getting a higher fee split after a certain dollar amount of billings. For example, an appraiser would get a 50% commission up to $100,000 in billings, and 52% on billings over $100,000.

Another method is to base the fee split on monthly production, with an extra 2% fee split for billings over $10,000. For residential firms, the monthly bonus percent may work out better, due to work-load volatility from month to month.

Timing of commission payment
If an appraiser is willing to wait for payment until the company is paid, a higher fee split can be offered. The fee appraisal business is very labor intensive, and matching income with labor expenses is very helpful in managing cash flow.

You will need to establish a policy on late collections and uncollectables. For example, if a bill has not been paid after 60 days, the appraiser is paid anyway, and the firm absorbs the cost of uncollectable billings. You won’t keep appraisers very long if they’re not paid for the work they complete!

If you have a high volume residential appraisal firm, be sure you can handle and keep up with the extra accounts receivable work required to pay the appraisers only after you’ve been paid.

Benefits
The greater the benefits paid for by the employer, the lower the fee split. The value of a 2 weeks vacation, for example, would be 2/52nds of a typical yearly billing, or 3.8%. Health insurance can be paid for by the employer, employee, or they can split the cost. Even if the employee pays all the monthly fee, there is a cost to the employer for administering the plan. Pension plans, such as 401-K’s also have employer administrative costs. For example, a cost per employee of $100 per month would translate into 3.3% if the employee averages $3,000 per month gross income.

The costs to the employer of mileage and auto expenses also need to be calculated. For example, mileage reimbursement at $.29 per mile for 300 miles per month would be $87, or 2.9% if the employee averages $3,000 per month gross income.

If you offer educational benefits, such as tuition reimbursement, consider them in your fee split. If they are relatively small, such as 50% of one $500 course, it’s probably not worth the hassle. But if it’s much higher, for example, $2,000 per year, build it into the fee split. For example, $2,000 per year for a $40,000 per year employee would be 5%.

Don’t forget E&O insurance. $500 per year for an appraiser earning $25,000 per year is 2%.

Don’t underestimate the costs of benefits. They can really add up fast.