Have you ever wondered how banks determine the fair market value of real estate? How do they determine an approved short sale price? Where does the minimum bid at a foreclosure auction come from? How do banks determine the loan-to-value ratio for a loan modification or refinance? In many cases, the answer is by ordering a BPO.
A BPO is short for a Broker Price Opinion, which is a report prepared by a real estate broker that gives their opinion of the current market value for a particular property. In this market downturn, the BPO has become an important tool that banks use to determine an estimated value for properties that are being foreclosed, properties that are in a short sale or properties that are candidates for a loan modification or mortgage refinance.
Why Banks Need a BPO?
Banks need a neutral party to estimate values for a variety of reasons. Most importantly, they want to know what their equity (or lack thereof) is for a particular piece of real estate. There are a variety of Automated Valuation Models (AVM) that banks can use for a rough estimate of property values, but real estate is highly localized, and there is no substitute for an in-person, local analysis of a property and its neighborhood. A BPO, combined with AVM data, can provide banks with a reasonable estimate of what a piece of real estate is worth.
I’ve personally done BPO reports for six different companies, and they are very consistent across different banks. Here are the criteria that are evaluated as part of a BPO:
- Exterior vs Interior – Most BPOs are actually exterior, or drive-by reports. Brokers need to visit the property in person and take photos of the home and neighborhood, paying special attention to any obvious defects on the outside. It is a little challenging to determine an exact value without seeing the interior, but you have to estimate what it might be like based on the exterior appearance and any historical data and photos that can be found.
- Comparable Properties – BPO reports usually include 3 comparable properties that are currently on the market and 3 comparable properties that have sold in the past 3-6 months.
- Within a 1-mile radius of the subject property.
- Above Ground Living Area (AGLA) is +/-10% from the subject property. (Finished basements carry very little weight compared to above ground living space.)
- Age is +/-10-20 years from the subject property. Usually it needs to be within a 10-year range for modern properties and a 20-year range for older homes.
- Similar bedroom/bathroom configuration.
- Neighborhood Data – BPO reports include neighborhood statistics to help the bank get a better understanding of current market conditions. Are local property values declining or stable? Are there many bank-owned and short-sale listings that are dragging down values? What is the “pride of ownership” for a particular neighborhood? What is the average marketing time for listings in the neighborhood?
- Adjustments – No two pieces of real estate are the same. You may find a home that is nearly identical, but has a better view. Sometimes a home is very similar, but has one extra bathroom. BPO reports usually include adjustments, which are amounts that a broker estimates a buyer would apply when making an offer.
- Repair List – If obvious repairs are needed, like a new roof, those are incorporated with adjustments to the property value.
- Value Estimate – Based on the recent sales of comparable properties, the broker will provide an estimate of what the property will sell for during a typical 90-120 marketing timeframe. Often the report also asks for a “quick sale” estimate, which is a lower price where there property will sell within a month.
Can I Help the Broker With a BPO for My House?
By their nature, BPOs and appraisals are designed to be free of influence by parties who have a vested interest in the transaction. Actually, for an exterior BPO, you may not even realize that your property has been visited and a report completed. But if an interior BPO is ordered, you may know that the broker is going to visit the home. Applying pressure or trying to influence the final value of the BPO is a big no-no, but if there are important facts or hidden details about a home that will influence its potential value, educating the broker about these can be appropriate during their interior inspection.
BPO Versus Appraisal
If you think this sounds like an appraisal, you are correct. Appraisals serve the exact same purpose as a BPO, but are performed by licensed appraisers and involve a deeper analysis of the property. Appraisals are more costly and time-consuming because they involve an interior inspection, along with floor plan sketches and square footage measurements.
Banks utilize BPOs as a lower-cost, quicker alternative to appraisals in a variety of situations. There is considerable debate in the industry between brokers and appraisers about the qualifications and education level of real estate brokers compared to appraisers. Appraisers do have more formal training than brokers when it comes to property valuation, and in theory should be better equipped to provide accurate property value estimates. Speaking from practical experience, however, there are good and bad appraisers, and a knowledgeable broker may be equally skilled in preparing an estimated value.
The debate between BPOs and appraisals is a valid one, but the current market economics pretty much dictate that BPOs are a preferred method for banks to value their loan assets. BPOs have faster turnaround times and usually cost a tiny fraction of what a formal appraisal does. Banks still use formal appraisals in many situations, but the BPO remains a preferred tool for many banks.