BPO Short Sale
A BPO, or Broker’s Price Opinion, is essentially an appraisal purchased by the existing mortgage-holder. It is not as an extensive as a full appraisal- but can be thought of as a “mini-appraisal” in terms of cost and comprehensiveness.
A BPO is important because the existing mortgage-holder (typically a bank) is seeking an updated independent valuation on the property. The bank will use the BPO to determine if the short sale offer is within an acceptable range of the current fair market value.
If the current offer is too low (some think more than 14% below the fair market value) the bank will counter the existing offer or reject the existing offer.
In a declining market the BPO process can be a major sticking point in successfully completing a short sale- for the following reasons:
1) BPOs are lagging indicators of value. Many banks want BPO agents (who are typically realtors or appraisers) to use SOLD comparables that are no more than six months old. In a declining market- values may have fallen 5-8% in that period since the last sale. For example, a property may have 5 active competing similar properties priced BELOW the last completed sale in a quarter mile radius. Common sense would indicate that the next sale could be $20-30k below the previous sale- but banks will ignore this data because they put more value on SOLD comparables.
2) BPO agents are underpaid which comprises appraisal integrity. The BPO agents who actually perform the reports are often getting paid under $50 per file, while the bank is paying over $200 for the BPO. Unfortunately, “middle-men” clearing houses are taking huge cuts off the top. The person actually doing the report does not have the time or proper attitude to do comprehensive work and may be doing the “bare minimum” to file the report and move on to the next file.
3) Fixup cost excluded from appraisal. Fixup costs that differentiate houses are often ignored unless pointed out by the realtor. This can be very important toward selling the house in the actual market- but sometimes the mortgage holder is not aware of the extent of the damage. This could be as minor as neglected landscaping to as major as safety and health items that make the house un-financeable through traditional lending channels.
In the next article- we will focus on how effective short sale agents influence BPO’s to create successful transactions….
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