BLOG VIEW: More than 20 states require appraisal management companies (AMCs) to get surety bonds when applying to get licensed. To some companies, surety bonds may be a new concept and require explanation. To others, some of the details of getting an AMC bond may be unclear.
Therefore, what follows are five of the most important things AMCs need to know about surety bonds.
What Is An Appraisal Management Company Bond?
Appraisal management company bonds, also known as AMC bonds, are surety bonds that companies often need to obtain when applying at their local licensing department for a business license. The surety bond is a type of contractual agreement that the AMC makes with the state or county licensing department and the surety bond company.
The bond serves the important function of guaranteeing to the state and the public that the surety is covering the AMC and vouches for it. If, for whatever reason, the company violates the terms of the AMC bond and/or the state statutes and regulations that govern AMCs, a claim can be made against the bond.
If a valid and legitimate claim is made, the surety bond company steps in and addresses the claim. Usually, the surety resolves the situation by compensating the claimants up to the full amount of the bond – the so-called penal sum. In return for taking care of the claim, the company must then reimburse the surety for all of the expenses and the compensation it paid for resolving the claim.
Who Needs An AMC Bond?
Such a bond is usually required of AMCs – that is, of companies who work with lenders and appraisers and help homeowners get a more objective evaluation of the market value of their home or real estate.
Whether you need to obtain such a bond or not depends on your state statutes. Some states have no requirement for AMCs to get bonded while states such as Alabama, Arizona, Colorado, Iowa, Mississippi, North Carolina, Oregon and many others do.
To find out whether you need to get bonded, consult your local Division of Real Estate or Department of Occupational or Business Licenses. A full breakdown of all licensing requirements can usually also be found on the website of your licensing department – for example, on the website of the Colorado Division of Real Estate.
Is The AMC Bond Insurance?
No, a surety bond is not insurance. It is sometimes likened to insurance for a business’s clients, but in the strictest sense, it is not insurance. A better definition of a surety bond is that it is like a line of credit made available by a surety company to the bonded business.
By having a surety bond, the business does not need to tie up its own money to serve as a guarantee that there will be available coverage in the case of a claim. The surety bond serves that function, but as any line of credit, if the bonding company has to extend compensation, it needs to be repaid by the holder of bond.
What Is The Bond Amount, And How Much Does A Surety Bond Cost?
The bond amount is the total amount of money that is set aside for the coverage of one or more claims under a surety bond agreement. The surety bond amount is also called the penal sum.
Bond amounts differ from state to state, though most appraisal management bonds vary between $20,000 and $25,000. For example, Colorado and Oregon require AMCs to obtain a $25,000 bond, while Mississippi, Missouri and Pennsylvania require a $20,000 bond.
The bond amount is not the same as the bond cost, though. Bond cost is usually only a small percentage of the bond amount. How much exactly obtaining a bond will cost is determined on a case-by-case basis. Some important factors that sureties take into account when determining the cost of an AMC’s bond are the credit score of the owner and his or her financial statements, among other things.
What Is A Bond Claim And How To Avoid It
Bond claims are usually made by the bond’s obligees in response to a violation on behalf of the bond principal (the bonded business). Since AMCs are expected to offer more objective appraisals of real estate, one possible cause for a claim can be dishonesty or malpractice on the side of an AMC with regard to the appraisal process.
In principle, any action on the part of the AMC that violates the terms of the bond or state statutes and causes losses or damages to a customer can be the reason for a claim.
Bond claims can be very lengthy and complicated processes, putting both the reputation and the financial stability of a bonded company at risk. That’s why the best approach to bond claims is to avoid them entirely!
This is achieved by always adhering to best industry practices, carefully communicating with clients and being as transparent as possible about the appraisal process. Regular communication with your surety is also important. Most sureties have experts who can help you navigate complicated situations, so you should always let your surety know when difficulties arise.
Want To Know More About Bonds?
Do you want to know more about surety bonds and how they work? Leave us a comment – we will be happy to respond to any questions you may have!
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps business owners get licensed and bonded. Lance graduated from Villanova University with a degree in business administration and holds an MBA from the University of Michigan’s Ross School of Business.