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How To Start An Appraisal Company

How To Start An Appraisal Company

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How To Start An Appraisal Company

How To Start An Appraisal Company

In the world of real estate, appraisal companies play a vital role. They provide objective, unbiased evaluations of properties to help buyers, sellers, and lenders make informed decisions.

If you’re considering starting your own appraisal company, you’ll need more than just appraisal expertise. This guide will provide an overview of the appraisal industry, steps to starting your company, and answers to common questions new business owners have

Business Overview

A home appraisal business performs a property appraisal on land, residential real estate, and buildings to determine the property valuation.  Appraisals are usually done on behalf of a mortgage lender when a home is being purchased or refinanced, but lenders also do them for businesses that need funding.  They may also be done for insurance reasons or when an estate is being settled.  The appraiser evaluates the property and, based on the condition and comparable home sales, provides an estimate of the home’s market value.

Industry Summary

Real estate appraisers are professionals who estimate the market value of properties, usually before they are sold, financed, taxed, or developed. Appraisals are required for mortgage lending and other transactions involving federal entities.

In 2022, the appraisal industry included an estimated 34,752 real estate appraisers that generated $12.7 billion in annual revenue. It is a fragmented industry, with the top 50 companies accounting for 40% of revenue. Many appraisers are independent agents, but large appraisal management companies (AMCs) handle assignments for banks and mortgage companies.

The housing market is the primary driver of demand. As mortgage rates fell to historic lows in recent years, refinancing and home buying activity surged, increasing the need for appraisals. Conversely, when the market slows down, so does the need for appraisal services. Therefore, it’s crucial to keep a close eye on real estate trends and adjust your business strategy accordingly.

However, alternative valuation methods, like automated valuation models (AVMs), are becoming more widely used and reduce the need for on-site appraisals. Seasonal fluctuations also impact demand, as more homes sell during summer months.

Steps To Start An Appraisal Company

Step 1: Market Research

Starting a business is a big decision, and starting a new appraisal company is no different. Before jumping in, it’s important to do market research to determine whether the company will have a viable market and what kind of competition it may face.

The first task is to determine what type of appraisals you will specialize in and who your ideal clients will be. Will you focus on commercial or residential appraisals, or will you specialize in a niche area? Analyze demographic and economic factors in your geographic area to determine the potential market size. This will give you a better understanding of the demand for your services and how profitable your business can potentially be.

Once you’ve determined your target market, research local competitors to see what your potential competition looks like. Search business directories, online listings, MLS records, and local networking groups to make a list of competing appraisal firms and independent appraisers in your target area. Evaluate their market share, pricing strategies, service offerings, and customer reviews. Be sure to identify what will make your business unique enough to convince customers to spend their money with you instead.

Also, consider reaching out to potential referral sources such as real estate brokers, mortgage lenders, banks, and credit unions. Ask them who they currently use for appraisals and if they are satisfied with their current providers. Gauge their interest in a new appraisal company and learn what they find most valuable in an appraisal company. This information can guide you in tailoring your offerings to align with what is most important to your target market and possibly get you a few clients before opening the business.

This research may uncover a unique niche that could be very profitable. Be on the lookout for opportunities to differentiate your business by providing appraisals that are underserved in your local area. This could mean offering appraisals for unique properties such as green homes or vacation homes, or offering services such as litigation support or expert witness testimony.

Step 2: Write a Business Plan

Creating a business plan is the next step in launching an appraisal company. This step is important because it’s easy to get excited about a business idea, and a business plan forces you to look at your business idea critically and objectively. This is where you ask yourself the tough questions. Who will my customers be? How much will I charge? How will I find my customers? What makes my appraisal company different from the rest?

Another benefit of a business plan is that it allows you to project your income and expenses. Understanding the financial side of your business in the planning stage helps to find out if your idea will be profitable. Think of it as a reality check. If the numbers don’t add up on paper, the may not add up in the real world.

Related: How to write a business plan

Step 3: Obtain Required Credentials

If, after doing market research and working on the business plan, you still have a green light, the next step is to make sure you can legally offer appraisal services.

All states require residential appraisers to obtain a real estate appraisal license, typically from the state real estate appraiser board.  In most cases, commercial appraisers require certification. The requirements vary by state, but to become a certified appraiser, educational training, passing an exam, and supervision from a licensed appraiser is typically required.

If you don’t already have the proper credentials, you can work on this step while completing the rest of the steps.

Step 4: Source Funding

Starting an appraisal company requires more than just a great business plan and market knowledge – it also requires money. Even though the cost to start an appraisal business can be very low, we need to make sure that you have access to the money needed to start the business. Below, we’ll discuss some common funding sources for starting an appraisal company.

Self funding: The first place to look when starting a business is your own pocket. Using personal savings can give you a good start, but it may not be enough to cover all the startup costs. If that’s the case, you’ll need to explore outside funding sources.

Bank loans: The most common source of outside funding is bank loans. Banks generally require borrowers to invest at least 15% of their personal funds towards the total cost of the project, have a good credit score, and have sufficient collateral. If a bank feels that a loan is too risky, they might opt for an SBA (Small Business Administration) loan guarantee, which can help secure the loan.

Friends and family: Friends and family are another avenue to obtain funding for your business. They might be willing to invest in your business or lend you money. However, it’s important to put any agreements in writing to avoid misunderstandings down the line.

Microloans: If your funding needs are low or if you aren’t able to secure credit through a lender, microloans might be an option. These are small loans typically used by startups and other small businesses. Some microloan providers even offer business training in addition to funding, which can be a valuable resource for new entrepreneurs.

Related: Finding the money to start a business

Step 5: Register the Business

Starting your own appraisal company involves several legal steps to ensure everything is set up correctly. Here’s a general breakdown of what you need to do:

Choose a business structure: Selecting the right business structure is the foundation of your company. Each type has its advantages:

  • Sole proprietorship: This is the simplest form of business to start. It’s just you running the show, which means startup processes and costs are usually lower. However, it does not provide liability protection, which means your personal assets could be at risk if your business is sued.
  • General partnership: Similar to a sole proprietorship, but with two or more people. It’s still fairly straightforward to establish, sharing control and responsibility among the partners. Like a sole proprietorship, there’s no liability protection.
  • Corporation: A more complex structure that is a separate legal entity from its owners, offering liability protection. Starting a corporation involves more paperwork and higher costs, but it can be worth it for the legal and financial protection.
  • Limited Liability Company (LLC): An LLC combines the liability protection of a corporation with the simplicity and tax benefits of a sole proprietorship or partnership. It’s a popular choice because it shields your personal assets while remaining relatively simple to manage.

Related: Comparison of business structures

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.

Some popular LLC formation services include:

IncFile - $0 plus state fees & free registered agent for 1 year!

ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!

Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Professional licensing: Previously mentioned in Step 2, but it’s worth repeating again. Licensing or certifications are required from the state to provide appraisal services. Continuing education is also mandatory.

Obtain business licenses and permits: Depending on your location, there will likely be a variety of general licenses or permits needed before opening. This could include a local business license, seller’s permit, and Employer Identification Number (EIN).

Related: State guides for general business licensing

Step 6: Set Up Operations

Next, with the business registered, it’s time to begin setting up the operations of the business.

A lot of appraisers choose to work from home. It helps keep costs low. What do you need? Not much, really. A desk, a computer, and some appraisal software should do the trick. You’ll also need access to the Multiple Listing Service (MLS) and a library of sample appraisals. Of course, if working from home doesn’t suit you, there’s always the option to lease an office space.

Once your workspace is ready, it’s time to think about your appraisal process. It’s more than just looking at a property and saying what you think it’s worth. There’s a whole process behind it. You’ll need to know how to receive assignments, research properties, visit sites, select comparables, analyze data, prepare reports, and invoice clients.

You’ll also need to learn about the Uniform Appraisal Dataset (UAD) and Uniform Standards of Professional Appraisal Practice (USPAP). These are guidelines that help you make sure your reports meet industry standards.

Last but not least, there’s insurance. Errors and omissions insurance is a must. It protects you if someone claims you were negligent in your work. General liability insurance is also important. It covers you if there’s a claim of property damage while you are appraising the property or someone gets injured.

Step 7: Prepare to Launch!

Once the core steps are in place, there are still several tasks that still need to be taken care of. Everyone’s journey is different, but here are some of the common tasks to look at.

Hiring and training staff: Many appraisers operate without a team, but if you plan to hire, be sure to understand the requirements as an employer.

Setting up bookkeeping: Getting your accounting systems in order is like making sure your business finances are in order. Consider setting up software like Wave Accounting (FREE) or Quickbooks to handle daily transactions, taxes, and financial statements.

Opening a business bank account: A dedicated business bank account is helpful for managing finances and maintaining clear records of business transactions.

Creating a marketing strategy: Let people know you’re open for business. A logo, professional website, and building relationships with referral sources like real estate agents, brokers, lenders, and attorneys are at the core of marketing an appraisal company.

Common Questions When Starting An Appraisal Company

How much does it cost to start a home appraisal business?

Starting an appraisal company can cost between $2,000 to $5,000 initially. Here are the typical start-up costs:

Business registration: Registering your business name and legal structure will cost $50 to $500.

Licensing: Appraiser licensing fees are about $400. Trainee licenses are less.

Equipment and software: You’ll need a reliable computer, appraisal software, and access to MLS listings. Equipment and initial software costs can range from $1,000 to $2,500, while MLS access can cost around $20 to $50 per month.

Office setup: Basic home office furniture like a desk and chair will be $300 to $500.

Insurance: General liability and errors and omissions policies range from $600 to $2,000 annually.

Marketing: Business cards, website, signs, and promotional materials will be about $500 to start.

Training and certification: The cost of appraisal courses and obtaining a license can range from $1,000 to $3,000.

Accounting: Basic bookkeeping software or an accountant may cost $200 to $800 to setup.

How profitable is an appraisal company owner?

The profit potential for appraisal company owners can vary greatly depending on factors like location, niche, and client relationships. However, a rough estimate can be made using some common industry metrics.

For example, the typical residential appraiser performs around 250 appraisals per year at an average fee of $350 each. That equates to $87,500 in annual revenue (250 x $350).

If operating from home, fixed overhead expenses like licensing, insurance, marketing, mileage, software fees, etc., often come in around 30%, which would be about $26,250 (30% x $87,500 revenue). That results in an estimated net profit of $61,250 ($87,500 gross profit – $26,250 overhead).

These are rough estimates but provide a look at the profit potential and factors impacting earnings for an appraisal company owner. Performance, efficiency, and pricing flexibility all contribute to overall profitability.

What skills are helpful in running an appraisal business?

Running an appraisal business well means you need a mix of different skills. It’s not just about knowing how to value a property; you also need to be good with people, understand the details of running a business, and stay on top of your schedule.

Here are some skills that can help:

Understanding of real estate: Knowing the ins and outs of property types, market trends, and local laws is essential. You need to be able to look at a house or building and understand what makes it valuable.

Attention to detail: You’ve got to catch every little thing that could affect a property’s value, from the age of the roof to the layout of the neighborhood.

Time management: You’ll often handle multiple appraisals at once, so managing your time and staying organized is key.

Customer service: Being friendly and clear when talking to clients helps build your reputation and can lead to more business through referrals.

Business knowledge: You need to know how to manage money, market your services, and keep good records.

Analytical skills: Appraising properties isn’t just about looking at them. You have to crunch numbers, compare different properties, and come up with a value that makes sense.

Should I work for an AMC as an employee or as an independent contractor?

When starting out in the appraisal industry, one question you will likely ask is whether to take work from an Appraisal Management Company (AMC) as an employee or operate as an independent contractor. Both paths have their merits and challenges, and the best choice depends on your personal and professional goals.

Being an employee of an AMC can provide a steady flow of work, which means regular assignments and consistent income. This can be especially beneficial when you’re new to the industry and looking to gain experience. Steady work from an AMC can fill your schedule while you build your reputation and client base. However, AMCs often pay lower fees per appraisal than what you might earn from private clients. This can impact your earning potential in the long run. Additionally, working as an employee usually means you’ll have less control over which assignments you take and how you manage your workload.

Many appraisers choose the independence that comes with being a contractor. You have the freedom to set your own schedule, pick your clients, and potentially charge higher fees per appraisal. You’re essentially running your own business, which means you can cultivate direct relationships with lenders, real estate agents, and other sources of appraisal work.

The downside is that independent work can be less predictable. You’re responsible for finding your own assignments, which can lead to fluctuations in your workload and income, especially during slow periods or when you’re still establishing your name in the industry.

It’s not uncommon for appraisers to balance working independently with partnering with AMCs. This hybrid approach can offer the best of both worlds. You can enjoy the steady work and income from AMCs while also pursuing higher-paying independent assignments that offer more control and professional growth.

When deciding which path to take, consider your need for stable income versus your desire for independence and control over your work. Think about your long-term career goals and what you’re looking to achieve in the appraisal industry. Remember, your decision doesn’t have to be permanent. Many appraisers evolve their business model as their career progresses and their goals change.

What is the NAICS code for a home appraisal business?

The NAICS code for a home appraisal business is 531320.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code and how to find yours

How To Start An Appraisal Company

How To Start An Appraisal Company

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