Broker price opinions can help mortgage professionals determine property values
By Janice Ramocinski, executive vice president and chief operating officer, Kondaur Capital Corp.
Everybody seems to have a different theory about when real estate values will bottom out and stabilize, when default rates will stabilize and recede, and when home sales will increase.
A common consideration in these discussions is property value. Lenders, servicers and investors are grappling with the question: “What is this house worth?”
Brokers need a solid amount upon which to build their mortgage packages, for borrowers and lenders. Broker price opinions (BPOs) can offer them a new way to look at the value question and supplement other valuations they receive.
Although mortgage brokers typically don’t use BPOs, these opinions can be useful before ordering an appraisal. They can help mortgage brokers determine what is happening in a local market remote from their office.
Assessing the assessments
Determining property value is essential in real estate. Traditionally, the typical way to do so is to order an appraisal. But appraisals can be expensive and time-consuming. Then along came automated valuation models (AVMs), which are cheaper and quicker. In the middle, there was the BPO.
BPOs are usually prepared by real estate agents or real estate brokers. BPO-users, which typically are loan servicers, mortgage investors and distressed-debt buyers, may contact a real estate agent directly to get a BPO or may contract with a national BPO-provider.
These reports have some benefits. BPOs cost considerably less than appraisals and take a shorter time to get. And though they are costlier than AVMs, BPOs allow the preparer to see the property and to include recent photos in the report.
In this time of real estate uncertainty, loan servicers and investors are making many critical decisions based only on the BPO results they receive. But there can be troubling issues with doing so.
‘Local, local, local’
The first issue with an overemphasis on BPOs is market familiarity. The traditional real estate dictum is “location, location, location.” In the current environment, the phrase should be “local, local, local.”
It is common for a BPO-preparer to live and work miles away from the subject property. This person may not be the best “boots on the ground” — not like the local real estate agent or broker. Local real estate agents or brokers likely have current listings in the neighborhood and work with local buyers and sellers. A local agent may have looked at the house the last time it sold and likely knows about the neighborhood’s foreclosure and real estate owned (REO) activity.
BPO-users must develop their own data about the neighborhood and property through Internet research and by talking with local real estate agents and brokers.
For instance, if users are developing a foreclosure-sale bid, then they must look at the numbers and prices of local REO listings, recent REO sales, recent foreclosures and pre-foreclosure activity. They should then use the information they collect to determine an internal value and compare that with the BPO. In addition, BPO-users should have access to the BPO-preparer so they can ask questions and resolve discrepancies.
The real cost
If a BPO is less expensive than a full appraisal, then users must be aware of how that can factor into and affect the actual BPO. BPO-users also should be aware of a number of potential issues.
First, they should understand the preparer’s incentive — but the incentive to provide an in-depth and carefully reasoned BPO for $50 to $75 is uncertain at best.
Also, BPO-preparers may be motivated to supply a high value to convince the servicer or investor into ultimately listing the property with them or to prevent the servicer or investor from accepting a short sale through someone else. On the other hand, they may be motivated to supply a low value, get the listing, and sell the property quickly and cheaply to a client.
In addition, when hiring a BPO firm, users should vet the company and how it reviews BPOs. Most national BPO companies review the real estate agent or broker and/or the specific report.
The BPO-user should understand how the firm orders, reviews and reports on BPOs. What is defined as a “good” BPO, and is the benchmark for that rating relevant to the user? What process does the firm have for evaluating the user’s needs, and how does it use BPOs and their practical results?
Know what you want
Another issue for BPO-users to consider is matching the need and the order. They must clearly understand their use for a particular BPO and order it accordingly.
If the user is establishing an REO value, for instance, then the BPO should include REO comparables. Only by talking with the local real estate agent or broker, however, will the user understand if the local REO-listing prices are meant to sell the property or just to list it. When talking with local real estate agents or brokers with current listings of comparable properties, BPO-users should determine the quantity and quality of the offers being made.
Users who ignore actual local REO activity do so at their peril. If there is one foreclosure in a one-mile radius, then it may not matter. If the one- or two-mile radius is saturated with foreclosure and pre-foreclosure activity, however, then the actual REO selling prices will determine the user’s value — not the listing prices and certainly not the non- REO listings in the immediate area.
Effective BPO use is not simply about placing an order and using the results. Rather, it is essential to place an order knowing what you need and to challenge and compare the results with your own local information, using the actual BPO as one of many data points for your decisionmaking.
Scotsman Guide - September, 2008