Plenty of factors impact the value of a property. From its location, to its size, and everything in between, a home’s value is determined by a multitude of components, and bank appraisers will come up with this value according to current market conditions before a sale is made.
Sellers will want to know how much to list their properties for, and buyers will want to know what a fair offer price would be on a home they have their eye on.
But how exactly do banks determine the value of a property? Many times, a “BPO” is ordered for this purpose.
What is a BPO?
A BPO stands for “Broker Price Opinion,” which is a report that a real estate broker prepares for banks that provides their opinion of the value of a property in a given market.
After the housing crisis of 2008 when millions of foreclosures and short sales occurred, BPOs became very important and highly used in the industry to establish approved short sale prices and minimum bids for foreclosure auctions. However, many different companies order BPOs as well in order to come up with a loan-to-value ratio for a refinance or loan modifications.
Why Do Banks Request BPOs?
Banks request BPOs in order to have a property value estimated for a variety of reasons, most importantly to determine how much equity they may have in a specific property. Combined with Automated Valuation Models (AVM) that can be used to determine a rough estimate of a property value, BPOs can give banks a sufficient estimate of how much a certain property is worth.
Two of the more common reasons for BPO requests is to obtain the value of a foreclosure or short sale. Determining the value of a property can help a bank to steer clear of lower values that can sometimes be placed on short sales.
That said, the value obtained from a BPO isn’t taken as actual market value. Instead, banks use the value provided by the BPO to gauge how much they can expect to get back after the short sale or foreclosure process has been completed.
What’s the Difference Between a BPO and an Appraisal?
The process of a BPO is similar to a typical real estate appraisal. The real estate broker who is preparing the BPO will compare at least three similar properties that have sold over the recent past to the subject property. The value is then adjusted based on any differences between them.
However, the two are different in that an appraisal is performed by a licensed appraiser while a BPO can be prepared by any real estate agent, include newbies. BPOs are also typically cheaper than appraisals because they are usually much less complicated than a typical appraisal, the latter of which involves a full interior inspection, square footage measurements, and floor plan sketches.
What Criteria Do BPOs Use to Determine the Value of a Home?
The comparable properties that are part of the BPO must meet a number of criteria when comparing them to the subject property.
• Date sold – Ideally, comparables should have been sold no more than 6 months earlier.
• Distance – All comparable properties should be located within 1 mile of the subject property.
• Property type – Only the same style and type of homes should be compared to the subject property. For instance, if the subject property is a two-story detached home, then the comps should be the same.
• Age – The age of the comps and the subject property should be within 10 years of each other. However, if the home is over 50 years old, this range can expand somewhat.
• Size – The square footage of the comparables should be no more than 2% larger or smaller than the subject property.
• Number of bedrooms and bathrooms – These figures should be the same between the subject property and the comparables.
Once the real estate agent has collected the appropriate comparables based on the above criteria, the necessary adjustments are made against the subject property. These adjustments are made to the comps to identify whether they are inferior or superior to the subject property.
Any negative features of the comps compared to the subject property would result in a lowered price adjustment, while positive features would result in a raised price adjustment. Once all adjustments are made, a new price will be arrived at that essentially dictates what the subject property would be worth in the current market.
The Bottom Line
While BPOs certainly look like appraisals, they’re not nearly as in-depth. As such, they are usually not taken as true market value of a subject property and are instead used by banks to get an idea of what it might be worth, particularly short sale and foreclosure properties. This gives banks some insight about whether or not they would walk away with any monies from the proceeds of a sale, or if they would be taking a loss.