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Are You Shopping For a Broker Price Opinion (BPO) Or an Appraisal?

by Administrator on Nov 9, 2008 Property Appraisal 1074 Views

Some of the public have become confused by the recent offerings on the Internet.  Broker Price Opinions (BPOs) are a new "product" but they are not subtitutes for real property appraisals.  It is important for the public to understand the difference.  BPOs are created by real estate agents to price listings for sale.  While they have been used by decision-makers in the lending process, you have to remember that some of them are the same lender's who have tanked the real estate markets more than once.  In my opinion there's not a lot of thought that goes on behind some of those expensive doors.  The broker price opinions (BPOs) are based on a cursory review of sales, there are no standards established regarding BPO's and they should not be relied upon with regard to market value.  Importantly, there is no regulation of BPO's, you may get some great arguments about how great they are but when anyone can produce one and there is no responsiblity for its accuracy you have to step back and ask "Is this a reliable tool or just a piece of paper that saves the bank money and pretends to be something its not?"

A Broker Price Opinion, sometimes called a competitive market analysis (CMA) by agents, was "developed by the real estate industry to determine a competitive listing price." [1] It is important for consumers to understand that Broker Price Opinions (BPO's) are not appraisal reports and they were never created for the valuation of real properties.  Pricing a property is important, you have to get into the "ball park" or you could really do harm to a seller when you list their property.  But many properties are not sold for their asking price, and value has to do with actual sales not with what people are asking.  If you look around in a place like Las Vegas you can find areas where the asking price of properties is well above what anything has sold for in some time.  Appraisals are based on actual sales, BPO's are based on asking prices, that should be enough information for most people.

As both a real estate broker and a certified general (licensed) appraiser I am often asked by people if a Broker Price Opinion can be prepared for their banker, for bankruptcy court, for a divorce settlement or for some other use.  In many instances a BPO is an entirely inappropriate for a use.  It is understandable that consumers do not want to pay for an appraisal report if they think they can get an equivalent product from a broker for free or for a much lower fee.  The fact is that you get what you pay for, and a BPO isn't much.  You might as well go online and use one of the automated valuation models (AVM's) that display a modeled value from recent data.  If you have used one of these sources and watched the value of your home bounce around, at times 20% or 30% over or under its actual value, you will appreciate how bad and how dangerous BPO's are.

Broker Price Opinions are not equivalent to appraisal reports and they cannot legally conclude market value.  Most of the BPO's that I have seen, even those prepared to procure commercial listings, are poor substitutes for summary appraisal reports. Typically an agent displays what he believes to be similar property sales to those of the potential listing in an attempt to assist the seller with a price conclusion.  Do they consider if the property is in a designated flood area?  No.  Do BPO's consider income?  Some do but they don't derive an appropriate capitalization rate.  Do they consider reproduction cost and depreciation?  No.  The fact is they are often 5 to 10 page reports on properties sometimes worth millions of dollars that my minimal reports require 90 to 100 pages to describe and analyze.  They are definitely not substitutes for an appraisal report.

Some BPO's go further and display adjustments, and commercial agents feel compelled to provide an income and expense analysis with a capitalization rate.  It is not difficult for a reader, or a regulator, to assume that a BPO with adjusted sales and capitalized net income is concluding a market value opinion whether that is stated as its purpose or not.  They are not, and remember that the basis for most of data used is a broker.  Look in the dictionary under "biased" and you will find the broker's picture.  They are biased by the fact that they are entirely influenced by their client who owns the property that they are trying to sell to get paid.  Again is there any regulation that compell a real estate broker to not be biased by his employment status?  No.  No.  No.

In Nevada, Broker Price Opinions cannot be prepared for any reason other than to provide a seller with a potential listing price for his property, and no compensation can be paid for this service. At least that was the way it began.  There used to be a $ 5,000 fine for agents who completed BPO's and I think that the industry has found a way around this by having an appraiser "review" the BPO.  It's kind of like having a jeweler who specializes in diamonds consider the quality of glass knock-offs.  It's supposed to give some credibility to the glass.  Consumers should realize that market value opinions can only be expressed by licensed appraisers, and that BPO's are not accepted as an appraisal substitute, and an appraiser's review of the "work" doesn't make it better, it just paints a bullseye on the back of the appraiser.

[1] State of Nevada, Department of Business & Industry, Real Estate Division, http://www.red.state.nv.us/publications/announcements/bpo.pdf

2012 Update: to the amazement of many BPO's have survived.  One of the reasons behind thier "success" is that bank lending requirements, that were supposed to become "tight" to strengthen banks against defaults, has instead become "loose" and almost evaporated in light of the upside down nature of the real estate market.  Mortgage loans are now being made not based on real property value but based on payment history.  Some government sponsored plans allow for zero downpayment refinancing of mortgages that allow an owner to keep a property that they can no longer afford.  Who needs an appraisal when you don't really care about property value?  

For more appraisal information contact Glenn Rigdon, MA, MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website.

Article source: http://www.appraisalarticles.com/Real-Property-Appraisal/3-Are-You-Shopping-For-a-Broker-Price-Opinion-BPO-Or-an-Appraisal.html

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