Appraisal Procurement Fees vs. Finder’s Fees
(by David Maloney) Appraisers often wonder if they are allowed to request a finder’s fee when referring an appraisal client to another appraiser, or a would-be consignor to an auction house. Or if appraisers can pay a fee to others in order to entice them to send appraisal business their way.
It is a confusing issue and the waters quickly become even more muddied when one takes into consideration that many appraisers perform in other roles, such as as dealers and auctioneers—roles which are not governed by USPAP and roles for which the awarding of finder’ fees is a common practice. USPAP sets forth requirements regarding fees or things of value being pro-actively paid by one performing as an appraiser in order to procure an appraisal assignment, but USPAP does not address accepting finder’s fees. (By the way, this is to be expected, since USPAP applies only to appraisers and not to individuals performing in non-appraiser roles such as dealers, estate liquidators, auctioneers, etc.)
Fees Paid by Appraiser to Procure an Appraisal Assignment
USPAP states that, unless disclosed, payments made in order to obtain an appraisal assignment are unethical:
The payment of undisclosed fees, commissions, or things of value in connection with the procurement of an assignment is unethical.
Comment: Disclosure of fees, commissions, or things of value connected to the procurement of an assignment must appear in the certification and in any transmittal letter in which conclusions are stated. In groups or organizations engaged in appraisal practice, intra-company payments to employees for business development are not considered unethical. Competency, rather than financial incentives, should be the primary basis for awarding an assignment. (ETHICS RULE of USPAP)
Fees Paid to Procure an Appraisal Assignment vs. Finder’s (Referral) Fees
The preceding section addressed the issue of an assignment procurement fee paid by an appraiser in order to procure an assignment. A type of fee that might appear to be related but is not is the “finder’s fee” (a.k.a. referral fee).
For our purposes, the two relevant terms are defined as follows:
- An assignment procurement fee is a monetary fee or a thing of value given by the appraiser to a person or entity in order to procure an assignment. It is intended to be an pro-active inducement to the referring entity to send appraisal business to the appraiser. As noted above, according to USPAP’s ETHICS RULE, unless disclosed, such assignment procurement fees are unethical. Disclosure of such fees must be made within the USPAP certification as well as in any transmittal letter in which conclusions are stated.
- A finder’s fee, on the other hand, is a financial reward given to an individual (who could be performing either as an appraiser or in a role other than as an appraiser such as an estate liquidator) who has acted as an intermediary or “middleman” to make a strategic introduction in order to bring two parties together for the purpose of a mutually beneficial business transaction. A common example is a finder’s fee paid by an auction house to an individual who refers a consignor to the auction house.
- The finder’s fee is associated with either:
- The appraiser receiving a finder’s fee for referring someone seeking non-appraisal related services to a non-appraiser (such as referring a seller to a dealer or auction house), or
- The appraiser paying a finder’s fee as a “Thank You” for appraisal business sent to them from an intermediary who is not an appraiser.
- The finder’s fee is associated with either:
While USPAP has taken a position on assignment procurement fees where appraisers are actively offering fees or things of value in order to induce an individual to send them appraisal business, USPAP has taken no position on finder’s fees. However, based on good appraisal practice developed over the past many years, the issue of how to handle finder’s fees can be better understood.
In the opinion of many appraisers, an appraiser (when acting within appraisal practice as an appraiser) should not charge or accept a finder’s fee for referring an appraisal client to another appraiser. The reasoning behind this opinion is that an appraiser has a duty and obligation to the public to refer the appraisal client to a qualified appraiser without compensation. If otherwise, the public’s perception might be that referrals are made to the appraiser paying the highest referral fee instead of to the appraiser who is the most qualified.
The above added emphasis is meant to stress that this rule addresses the referring individual when that individual is acting in the role of an appraiser, and when that individual is referring an appraisal client to another appraiser.
- Note that this rule does not preclude the appraiser from accepting a finder’s fee when he or she is referring non-appraisal clients to non-appraisers.
- Nor are there any prohibitions against the individual receiving finder’s fees for non-appraisal related business activities (i.e., when the referrer is functioning in a capacity outside appraisal practice and outside the role of an appraiser) such as finder’s fees paid by auction houses to an individual performing as an estate liquidator (who also happens to be an appraiser) for a referral to that auction house of a would-be consignor.
USPAP (as well as professional appraisal societies) establishes standards of ethics and practice for the professional only when that professional is performing in the role of an appraiser. They do not establish standards for the professional when that individual is performing an adjunct service outside appraisal practice such as when performing in the capacity of an auctioneer, dealer, broker, estate liquidator, etc.
When making a referral of an appraisal client, a common practice is for the appraiser to provide the names of more than one appraiser so that the client can have a choice. Frequently an appraisal client is seeking an opinion of value for a lone item of property simply for their personal knowledge, but the client does not wish to pay the high hourly rate often charged by appraisers. If the property is suitable for being appraised online, I would recommend the client be referred to ValueThisNow.com, an appraisal management company of which I am Chief Appraisal Officer. ValueThisNow.com makes use of scores of vetted specialist appraisers to provide USPAP compliant reports over the Internet for qualifying property types and intended uses.
The Appraiser Paying a Referral Fee to a Non-Appraiser
A seemingly gray area (and one which USPAP does not address either) regards the appraiser being asked to pay a referral fee by an individual who is not an appraiser, such as a dealer who requests a finder’s fee for having referred an appraisal customer to the appraiser.
USPAP addresses only the paying of a fee or thing of value by one performing as appraiser who is attempting to entice a party into sending the appraiser future business—in other words, an assignment procurement fee. In the above scenario, however, the appraiser is not proactively offering to pay an assignment procurement fee to the dealer in order to “procure” a future assignment. Instead, the dealer independently referred a customer to the unsuspecting appraiser, and subsequently requests a fee for having done so, i.e., requests a finder’s fee. In an after-the-fact situation such as this, if paid, since it is not an assignment procurement fee, not only would it be unnecessary for the appraiser to disclose such a “Thank You” finder’s fee in the report, but it would also be impossible to do so if the report had already been completed.
If, on the other hand, the appraiser enters into a standing agreement that the appraiser will pay the dealer $X for every future referral, then that would constitute an assignment procurement fee. In such a case, the appraiser must disclose the fee in the report in accordance with the ETHICS RULE.
My personal preference is to decline to pay referral fees for appraisals that are sent to me—either by another appraiser or by a non-appraiser. If I am approached by a non-appraiser referring party requesting a referral fee after-the-fact, I will politely decline and explain to the referrer that my policy is to not pay referral fees because of the appearance of conflict of interest that such payments could generate. For instance, if a dealer referred a would-be seller to me to develop an opinion of orderly liquidation value on an item that the dealer wanted to buy from the seller, the perception might be that by me paying the dealer a referral fee (even for an unsolicited assignment), I was performing as a biased advocate for the dealer and, as such, might be complicit in setting a selling price that, instead of being objective and independent, was actually advantageous to the dealer.
And while the ETHICS RULE permits me (with proper disclosure in the report) to pay referral fees connected with actively attempting to procure assignment by paying assignment procurement fees, I choose not to pay them, either. Remember, I can always send a “Thank You” bottle of wine at Christmas.
© 2011 David J. Maloney. Jr.
(The above is an excerpt from the 5th edition of Dave Maloney’s award-winning book, Appraising Personal Property: Principles & Methodology (Appraisers Press 2011))