Are BPOs hurting home values?

Kenneth Harney’s column in the Washington Post today posits that Broker Price Opinions may be helping perpetuate a downward spiral in home values:

Are low-balled value estimates on short sales and bank-owned foreclosures artificially depressing property values in neighborhoods across the country?

Growing numbers of appraisers and consumer groups think the answer is yes ¿ and are demanding that Congress or state regulators crack down. Their complaints focus on what are called “broker price opinions,” or BPOs, which substitute for appraisals.

Unlike standard property valuations performed by licensed appraisers, which can cost hundreds of dollars, BPOs often cost $50 and are performed by real estate agents who may have minimal or no appraisal training and are subject to no regulatory oversight. Real estate agents defend BPOs, arguing that their extensive knowledge of local market trends equips them to render accurate estimates.

BPOs have become a booming business as foreclosures and short sales have risen sharply. When banks that own foreclosed houses need to put values on them for resale, increasingly they order BPOs that can be delivered quickly at rock-bottom fees.

Also this:

One problem: Selling BPOs to value houses violates the law in 23 states, according to appraisal industry leaders. In other states, BPOs may not be prohibited, but critics say they may be far off the mark in accuracy, typically coming in below appraised values. That’s partly because agents who perform the BPOs may set the value extra low to ensure quicker sales.

And this:

Why would agents low-ball their BPO valuations? Crabtree argues that there are inherent conflicts of interest: “They want to sell the property fast” to make bank asset managers “look like heroes” to their bosses. They may also want additional BPO and property listing assignments from those same bank managers, yielding them commission dollars. Many of the properties are snapped up by investors at the depressed prices driven by BPO valuations. Those sales then become “comparables” for appraisers, “which simply intensifies the downward spiral,” Crabtree said.

What say ye? Are you seeing this trend (and effect) in your market?

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7 Responses to Are BPOs hurting home values?

  1. Jim Duncan says:

    This is a valid concern, and one that really speaks to what has been missing from the real estate industry as a whole for a long time – integrity.

    I think that the most important paragraph in the article was the last – (bolding mine)

    National appraisal groups, including the Appraisal Institute, whose members lose revenue when lenders or property owners order BPOs, are up in arms. Bill Garber, the Institute’s head of government relations, said BPOs are an attempt “to pay the least to obtain something” “appraised value” “that is extremely important to get right.”

    It’s always about the money.

    Here’s another question along the same lines … why do appraisers get a copy of the contract to purchase before they do their appraisal? Shouldn’t they value the property on facts and not based on a “target” price? (not attacking, just questioning)

  2. Matt Wilkins says:

    I do several hundred exterior and/or interior BPOs per month for various reasons (short sale,REO, default, and other various reasons). The quotes conveyed in this article are basically “shooting the messenger”.

    The BPO vendors have guidelines in place and flag reports where the final value opinion falls significantly outside the values of the listings and sale comps used in the report. The lender (the BPO vendor’s client) is the one who ultimately sets the list price of the REO or an acceptable sales price for the short sale.

    Another thing to keep in mind is that with an exterior drive-by BPO we do not know the interior condition of the property or any upgrades it may have. Also determing the exact condition of listing/sale comps used in the reports is not always clearcut since many listings in the MLS lack interior photos.

    Remember, a BPO is pretty much a CMA of the home for the lender who has interest in the proprerty.

  3. Tony Arko says:

    When did an opinion of price become a valuation of real property? The real reason the BPO has become so prevalent is three-fold: They are done quicker (and usually with more timely and relevant comparables), cost less and are reflective of real estate pricing not value.

    I could argue that the BPOs I do for financial institutions are considerably more accurate in determining the price a house will sell at because I take into account not just completed transactions that can be as much as 6 months old but also recent contracts written, current inventory levels and local trends going forward as well as seaonality and lending influences.

    Also, I can argue that I know more about the homes selling in my market because I focus on a very tight geographical area whereas the appraisers that work for lenders will drive many miles into locations they have little if any experience in evaluating. Many times the three of four homes they use as comps are the first homes they have ever seen in a marketplace and they never set foot in them. These are homes I have personally toured and in some cases sold.

    If you really want to place blame on someone, place blame on agents and appraisers that will drive too far into unknown areas and give their opinions or perform an appraisal. Place blame on the institutions and lenders willing to hire people who live 25, 50 80 miles away from a property when capable agents and appraisers live in the same neighborhood as the subject properties.

    In fact, why don’t we stop placing blame at all. Because I could blame the irresponsible journalists and “experts” that added to the housing bubble by writing stories that scared unqualified buyers into buying with projections of ever-increasing prices. Or failed to warn these same buyers of sub-prime, negative amortization loans. These are the buyers, driven by main stream media hype, that created bubble prices, that led to the massive housing crisis that has put the entire globe into a recession. If you want to blame someone, look in the mirror.

  4. I’m sorta with Tony on this. Of all the folks who are culpable for this current market (I happen to think the consumer’s greed and lack of personal responsibility are chief among causes), I feel the media has far more impact on the market than a BPO.

    That said, Agents simply aren’t trained to do valid CMA’s and BPO’s in the online and quickly applied pre-licensing programs. Why then, should just any ‘ol agent be able to do these?

    I’m cynical, but I don’t think an agent sending comparable sales to the lender is the cause of our current or future issues.

  5. A property is only worth what people are willing to pay for it, so even if the BPO or appraisal comes in higher than any short sale offers, if nobody is willing to pay that price, is it really worth it?

    Isn’t that the definition of demand?

  6. Debbie Shickel says:

    I agree with Tony that we need to look in the mirror but I also feel that not just any agent or broker should be doing BPOs. They need some training in doing a BPO and they should not work outside their area of expertise if they don’t know the proper figures to use in determining value. If they do primarily residential and are doing a BPO on a multi-family or a farm how can they put a proper value on it? Along with Jim, I question whether an appraiser needs a copy of the contract unless the conditions and concessions will be reflected in the appraisal. I would rather have an honest appraisal than a target appraisal but remember during the last market that appraisers were pushed to meet the loan amount by lenders and various other people when some of the comps did not support the value. The appraisers should give us an honest value versus one that would make the deal work. Maybe some of the current mess could have been avoided if we had not had everyone including agents, lenders, buyers and sellers pushing to make the deal work.

  7. James Boyer says:

    I think this is a very important concern as well. There are many who REO companies who just want to move the real estate and really don’t much care what happens to the neighborhoods in the process. I have known a few people who work for such companies and they basically say as much.

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