Appraisal vs. Broker Price Opinion
The Argument
Many appraisers try to argue that broker price opinions are a HUGE problem in the market. they say that BPOs are causing all sorts of problems since they are basically “cheap appraisals” and the old adage “you get what you pay for” applies. In general, here’s the argument from the appraisers:
- Appraisers are highly-skilled, well-trained experts in valuation.
- Real estate agents do not have the level of training/competence in valuation.
- Lenders rely on a cheap $50 product, what kind of quality can you expect?
- Appraisers are trained to do technical/analytical work, whereas real estate agents are trained to be Marketers/Salespeople. So marketers cannot possibly value a property.
- By using BPOs, lenders can circumvent the USPAP guidelines which were put in place to protect the industry.
Rebuttal
Here’s my opinion to rebut these points (and these points apply to full-time agents, not part-timers):
- Real estate agents who perform BPOs are often MORE in-tune with the market trends than an appraiser, since they are doing more volume and they spend more time in the market.
- Although real estate agents are being paid “peanuts”, there is usually a higher payday down the road with listings – also, the more activity an agent generates, the more money they make (in general).
- Many times, the real estate agent has already viewed the INTERIOR of the comps chosen – at least for the listings – appraisers almost never do this (they just take drive-by photos of comps). Therefore by being “marketers”, this actually gives the real estate agent an ADVANTAGE over the appraiser.
- Lenders normally do not order BPOs for purposes of lending – a full appraisal is still needed. Usually the BPO is ordered as part of a default situation, which is much different from a purchase or refinance valuation.
Real estate agents are more apt to give an accurate value as they KNOW what properties are selling for and they are giving a 30, 60, and 90-day value. A property which is “appraised” for $100,000 will normally sell for a different amount – what good is the appraisal then?
The fact is, when an appraiser gives a value on a property, that value could be a wide range of numbers. The same could be said about broker price opinions. So which one is better? It’s subjective. Appraisers say they are more accurate, and real estate agents say the opposite.
Bottom Line
The bottom line is, there are good appraisers and bad appraisers. There are good real estate agents and bad real estate agents. If you ever got your hands on lender’s “exclusion lists”, you’ll see there are thousands and thousands of appraisers AND real estate agents who are excluded from doing business with that lender. Usually it’s because of shoddy work. It’s these “bad apples” that often get all the press.
But saying all that, I believe there’s a place for both appraisals and BPOs in this marketplace, and I believe the good appraisers realize this.
Tags: appraisal, appraiser, bpo, broker price opinion, reo, valuation
Analytical/Rational, How-To/Instructional | RobH December 28, 2010
10 Comments to “Appraisal vs. Broker Price Opinion”
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By Mary Poland-Smith, December 28, 2010 @ 10:40 am
I’ve been doing BPOS’ for at least 10-15 years and have watched them get more detailed and more difficult. I was like a “babe in the woods” when I first started trying to fill in the blanks. As they became more intense I really did start worrying about crossing over that “Appraisal” line. In order to get them where you really think they should be for marketing, refinancing,etc. then you can’t just slam them together. I have called Appraisers for input info and all of them were very nice , very helpful and we did discuss the fact that I was NOT doing an Appraisal ..just doing my job to help my Client have an “idea” of value. The Appraiser almost always goes to the property when it gets to a certain point. I do know that many Banks have more than one BPO done on a property and sometimes we are not in tune with each other. I have a problem with the “abovegrade square footage” aspect and have had to fight for my Value to be recognized when another Agent will come in(the EASY WAY) and use properties that are close in proximity only..different models, communities, age but with similar above grade ftg…Decent Realtors know Value based on location,etc. I think we do need to stick to our own territory and i do turn BPO assignments down based on that.
The exisitng system seems to work and the Appraiser should always have the ear of the Seller but having a “base line opinion” also helps them not to drastically under or over price their interest in the property.We are all looking at a common goal. Protect your Client. Working together will cover that point. Doing BPOS’ for very little money most of the time is not a snap but we learn a little more from each one we do so just keep doing them!
By RobH, December 30, 2010 @ 10:35 pm
Excellent comment Mary, thanks for your helpful insight. I agree that it’s gotten more & more detailed in recent years. But as you say, you do learn from each one and that’s ultimately something that can set you apart in your marketplace.
By eric aiuger, March 14, 2011 @ 1:04 pm
Hey Rob:
Appraisers are not in touch with supply and demand like agents are and Real estate agents who perform BPOs are often MORE in-tune with the market trends than them. I think it is very important that those agents take some broker price opinion training. There is nothing worse than to see a transaction fall apart due to a bad bpo!
By RobH, May 5, 2011 @ 8:24 am
Thanks for your feedback Eric – I agree that more training is needed!
By RobH, May 5, 2011 @ 8:27 am
Thanks Eric, I agree that there should be more BPO training!
By Mike Puhl, August 30, 2011 @ 9:32 pm
Having been both an appraiser, for 15 years, an a broker/agent for for the balance of my36 years in the real estate profession, I feel able to comment on this situation. The due deligence provisions allow for the use of the BPO and it is not meant to ever take the place of the appraisal.
Unfortunately the problem lies with the fact that there are many BPOs completed and distributed that were done by unlicensed individuals on the strength of some other persons license. There is simply no real policing of the BPO business. BPO mills will place BPO orders directly with the “agent” and then pay directly to the “agent”. Where is the oversight? There is no supervision on a very high percentage of the BPOs completed. The sad truth is that neither the BPO mill nor the lender do anything about it because it is a cost item and as long as they get the reports quickly the ones in the trenches, at the BPO mills and ordering institutions, really don’t care. I’m not saying that this is allowed, or not allowed, but I doubt it would be allowed if the upper levels at the ordering institutions knew it was going on. If they do they are turning a blind eye to it and that makes everything even worse. I would venture to say there isn’t a single person out there, that does BPOs, that doesn’t know of someone, not licensed, being involved in the BPO completion process, especially the property inspection portion. Most think this is just simply to go out and take pictures. There is only one way to really make an attempt to control this and that is through the real estate broker. Orders should go directly to the broker for the brokers assignment to his agents and the broker then would need to sign off on the BPO as well as the agent that completed it. The broker could quickly tell it the agent was doing the assignment or have someone complete it for them. I’d like to think the lenders and institutions think this is happening anyway. Do they? Isn’t the brokers license and E&O insurance on the line? Let’s face it most E&O insurance is in the brokers name and the BPO mils all require both a licensed real estate professional and E&O insurance. In California it is real clear that any real estate service that a license is required for and compensation paid, that the transaction go through the broker. Just ask yourself could you, or would you, really accept a BPO that is 50 miles from your office and complete it for $40. I know of one BPO mill that pays $20 abd the agents that accept the assignments are on the other side of a mountain range??Give me a break.
As for BPOs verses appraisals most agents have access to better and more recent data then appraisers and that is what is required for the most up to date market values. On the other hand a good appraiser will consult with, or be a member of the local MLS, so they have access to that data. As a long time real estate professional I can say that whenever I recommended a price for the seller it was always ultimately their decision as to what that price would be. They unbderstood I was only offering an opinion of value and unless it was grossly out of line they would be hard pressed to hold me accountable BUT as an apprasier my appraisal did hold me legally accountable and I inturn understood the need for the appraisal to be more detailed and value conclusions more supported. There is a need for both and both should be done correctly, by real estate professionals.
By RobH, September 13, 2011 @ 10:04 pm
Wow thanks Mike for the detailed response. I think you make a lot of valid points and understand your point about brokers receiving the BPO assignments rather than their agents. This would certainly make sense.
By website broker, November 30, 2011 @ 4:45 am
If one wants to be a master as broker then must get trained as a professional! nice post…
By Charles H., January 4, 2012 @ 6:54 pm
I have a question that is somewhat unconventional but still, I believe, in the spirit of this thread.
I work in a niche area of investment financing on distressed financial assets. Recently I have begun working with distressed mortgage note investors, each with their own methods for valuing not only the mortgages themselves but the underlying real estate as well. As such, I want to better understand what these guys are relying on for their property valuations and what I should look out for as a risk manager for their investment capital.
This thread has some interesting information regarding BPOs versus appraisals, but I think I still don’t fully understand the positive and negative aspects of each.
It would appear that BPOs are generally more prevalent when viewing real estate from a liquidity perspective (and I am seeing it more frequently than appraisals in my own due diligence), but from some of the statements made in this thread it sounds like there are some risks to look out for. Being a few steps removed from the process, what questions can I ask our business partners regarding the BPOs they order on properties to limit the risk that they might be relying on a BPO performed below spec? How can I evaluate the quality of a BPO as well as the quality of an appraisal with only a cursory knowledge of real estate transactions and without ever having seen the property? Is there a good way to identify red flags?
Any guidance would be greatly appreciated. Thanks!
By RobH, January 23, 2012 @ 5:53 pm
Charles, great questions. I would say that for the most part, you’re right in that BPOs are a large part of the distressed property process. Much of it is because of simple economics: it’s cheaper for a note holder to get a BPO than a full appraisal. The BPO gives them a “general” idea what their property is worth, and it’s a better value than an automated system would give them. Plus, the note holder can see the condition of the property through the photos in the BPO.
For lenders doing a new mortgage, however, the BPO is simply not reliable enough to risk a huge lien against, they want the official, full appraisal done to make sure they are getting the most accurate value.
The things you want to watch for on BPOs are many of the same things you would watch for on an appraisal: namely, are the comparable properties on the BPO actually “comparable” to the subject? Or did they just make up a number and “find” comparables to justify that number? For example, if you have an older property that’s one street over from a newer development, the BPO agent could come up with comparable sales that are the same size & room count, but much higher in value due to the newer neighborhood. So you want to make sure the BPO agent is using similar properties. Really, you should have a trusted in-house QC department that looks over the BPOs to ensure they are high quality. That’s what the BPO and asset management companies do. (normally these are licensed appraisers themselves).
Other red flags would be if the BPO agent goes too far out for comparables, or too far back in time for comps. In today’s market, the comps should be within 6 months and in urban areas, the comps should be under 1 mile away (often much closer). Suburban areas should be 1-3 miles (again the closer the better) and rural areas, can go farther (3-10 miles or more, if it’s extremely rural). If you see agents in downtown Chicago going out 3 miles for comps, that would be a red flag.
I have a few other posts throughout my blog on determining value, here’s one here that may be helpful to you:
BPO Determing Value. Thanks for visiting my blog.