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Broker Price Opinion Defined:
Broker Price Opinion - BPO, is a method that a real estate agent or broker uses to estimate the probable selling price of a house. The estimate of price is submitted in a BPO report (2-3 pages) that includes an inspection of the subject house, subject neighborhood inspection and analysis, local and regional market information and trends, and comparable properties (comps) that are similar to the subject house. This method of estimating a selling price has similarities in methodology and report appearance to a residential appraisal and to a Comparative Market Analysis CMA.
BPOs offer a relatively fast turnaround time 1 - 4 days compared to an appraisal 1 – 2 weeks. BPOs are less expensive typically $30 - $100 compared to an appraisal typically $250 - $450.
According to valuation industry internal studies, BPOs are generally close to appraisals in accuracy.
Relevance of BPOs:
The mortgage industry – banks, lenders, mortgage servicers – have utilized BPOs for years nationwide. BPOs are used for a variety of reasons (click here for Common BPO Usages) and according to industry estimates, over 12 million BPOs are performed annually across the country. BPOs provide critical information for decisions and have been widely adopted as a valuation tool in the mortgage industry due to the fast turnaround time, cost effectiveness, and accuracy of BPOs. The BPO industry is a 1 billion dollar industry and the agents and brokers that perform BPOs receive an estimated 500 million dollars in revenues annually.
The FDIC and the Federal Reserve Board recognize the use of BPOs to determine the disposition of distressed properties. The Department of Treasury also recently recognized BPOs as a viable valuation method in the Home Affordable Modification Program which could affect 9 million homeowners nationwide.
Economic impact of BPOs:
Accurate information received in a timely manner is paramount to keep the credit markets associated with real estate as well as the real estate market moving and liquid. Restricting BPO usage slows the information flow and adds costs to each transaction. Aggregated to a statewide level, turnaround times and added costs are significant.
Allowing the restriction of BPO performance removes a significant supply of valuation vendors, agents and brokers, leaving only appraisers to satisfy the demand. Removing a large supply of valuation vendors will increase turnaround time, increase costs, and valuation quality will drop. An economic precept indicates that when demand (the number of valuations needed) exceeds supply (the number of appraisers), then turnaround time increases (not enough suppliers to cover demand), costs increase (suppliers can charge more and get it), and quality diminishes (suppliers don’t have to compete to get work as there is plenty of work to be had).
Removing BPO restrictions will ensure a good balance of valuation supply (appraisers, brokers, and agents) to meet the valuation demand. A balance of supply and demand ensures quality, timeliness, and cost effectiveness.
Federal Statute dealing with appraisals:
The Federal Institutions Reform Recovery and Enforcement Act – FIRREA, deals with appraisal regulation. Among other provisions, FIRREA dictates that when a mortgage is originally being collateralized on a property, an appraisal is required if the value of the loan is over $250,000.
However, FIRREA does not restrict a lender from utilizing BPOs as a supplement to an appraisal and/or for other valuation purposes.