There are appraisal organizations that adamantly oppose the use and practice of BPOs. These organizations are relentlessly trying to restrict or completely abolish the use of BPOs. They use arguments which stretch the truth, arguments which are esoteric, and are not representative of actual facts. NABPOP takes exception to these attacks and strives to respond to correspondences and publications which are negative towards BPOs, BPO practitioners, and/or agents and brokers in general. This page is intended to provide the whole story and details the common arguments the appraisal lobby utilizes to discredit BPOs and BPO practitioners. (for brevity, the term broker refers to both sales agent and broker)
The following are the basic arguments against BPOs, click on the links to read about the counter-argument:
- Brokers don’t have the knowledge and training to perform valuations (Click here to auto-scroll) ⇓
- Brokers don’t have formal valuation training which appraisers have ⇓
- BPOs do not have the same accuracy as appraisals and BPOs are far less reliable than appraisals ⇓
- BPOs do not have standards or guidelines ⇓
- BPOs are illegal in 23 – 24 states ⇓
- BPOs are just cheap appraisals ⇓
- FIRREA requires appraisals ⇓
“Brokers don’t have formal valuation training which appraisers have”
To complete an appraisal, appraisers rely heavily on the sold prices of houses. The sold prices which appraisers use are prices which are estimated by brokers and then put to market. To further the appraisal argument, the broker can continue to change prices until they arrive at a good selling price, but this is not reality. A broker’s longevity in selling houses is predicated on their ability to get a good list price on their listings. Brokers who cannot do this do not stay in the real estate industry for very long.
Few will argue that brokers can sell houses. To imply a broker can determine a price which goes to market, but can’t determine a price for a BPO is a stretch. To discredit a broker/agent in their ability to estimate a price is essentially discrediting the appraisers who rely on the sold prices which were initially determined by the brokers.
Buyers (or lack of) determine and drive any market (including real estate). To truly know the buyers’ mindset is to truly know the market. This is especially true in the real estate market. A seller can be wishful thinking and put any price that they want on a house, but if it isn’t reasonable, nobody will BUY it and there it sits. Even in a market which favors sellers (a seller’s market) the overabundance of buyers creates that type of market and the sellers are still responding to the buyers mindset. In any market, sellers need to know what the buyers are willing to pay and sellers determine the sell price based on that. So ask yourself, who is going to best know the mindset of real estate buyers? Appraisers? How many appraisers do you know that go with real estate buyers and look at properties with them? We can’t say that we know of any. We can however give you a directory of brokers and agents who spend most of their time with real estate buyers – evaluating, pricing, and advising – giving their opinion.
Furthermore, NABPOP formally trains agents and brokers how to complete accurate and timely BPOs with fundamentally sound valuation techniques. NABPOP also administers a stringent BPO certification process. Additionally, organizations who order the majority of BPOs, BPO and REO companies, have a vetting process that ensures only the best brokers can provide BPOs not to mention that these organizations have a QC process that each BPO submission is subjected to before being returned to the customer. Brokers are put through the paces to ensure quality and accuracy between the certification process, the vetting process, and QC processes.
NABPOP is not claiming BPOs are more accurate than appraisals. NABPOP is claiming BPOs and appraisals are relatively close in accuracy. BPO accuracy certainly isn’t as bad as appraisal organizations claim them to be. Based on the continued use of BPOs within the lending industry, we knew that BPOs must be accurate and reliable. So we decided to conduct a study.
NABPOP took part in an industry wide study involving multiple valuation companies who perform both BPOs and appraisals in an effort to determine BPO accuracy. Properties were randomly selected which were sold and had a BPO and an appraisal conducted on the same property. Side by side comparisons were conducted which compared the BPO and appraisal price/value to the sold price of each property. The individual valuation companies’ results were rolled up to represent an industry sample. The aggregated studies indicated BPO accuracy was within 2% accuracy of appraisals.
BPOs have been used for many years by the lending industry and mortgage servicers. The industry has developed a self-policing mechanism which ensures quality. Servicers realize the importance of basing their decisions on reliable information prepared in a professional and thorough manner. They require that BPOs meet stringent quality assurance metrics before they are accepted. If BPOs did not prove themselves to be accurate and reliable over time, BPOs simply would not be ordered.
NABPOP has established a set of standards and guidelines. BPOSG – BPO Standards and Guidelines – are a set of standards and guidelines that are recognized within the BPO industry. BPOSG is derived and reviewed by the BPO Standards Board – BSB. The BSB is a compilation of BPO subject matter experts from within the BPO industry. BPO company QC heads, chief appraisers, and BPO brokers participate in the BSB to derive and promulgate the BPOSG. Click here for more information about BPOSG and the BSB
There is not a federal law that states that an appraisal is required other than FIRREA. Some states have placed restrictions on the utilization of BPOs, but there are not laws in 23 states that make BPOs illegal – this simply is a false statement or an extreme stretch of the truth (to be nice). The controversy is spurred by the fact that the laws are subject to interpretation and you could look for any kind of language which is limiting and categorize that as “illegal” which it appears the appraiser organizations that oppose BPOs have done.
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A BPO and an appraisal are two distinctly different valuation products. A BPO is the probable selling PRICE of a house whereas an appraisal is the VALUE of a house. A BPO is forward looking i.e. a prediction whereas an appraisal is historically based – a quote versus statistics. A BPO is not a substitute for an appraisal. When an appraisal is called for, an appraisal is completed by an appraiser. There is a federal law, FIRREA – Federal Institutions Reform, Recovery and Enforcement Act, which requires an appraisal for a new mortgage. Everyone knows when you buy a house, you have to get an appraisal done and, as far as we know, this practice is followed without exception. There are disclaimers on BPO submission forms which state that the “BPO is NOT an appraisal and if an appraisal is desired to contact a qualified appraiser”.
What few people realize is that there is a litany of other reasons to determine the price of a house by a wide array of financial type organizations. In these instances, there is no formal requirement to use any valuation product. Some of the reasons are as follows (but are not limited to): houses that are in default i.e. short sale, foreclosure, and/or REO, to review and/or supplement an appraisal, mark to market accounting of real estate portfolios, home equity loans/lines of credit, refinancing, and PMI removal.
According to NABPOP estimates, there are more than 12 million BPOs performed annually across the country. To remove BPOs from the valuation industry would be disastrous because there simply are not enough appraisers to cover that kind of valuation demand. Appraiser organizations contend there are enough appraisers because there are currently many appraisers looking for work – a surplus of appraisers. This may be true, but to remove BPOs would remove over 100,000 suppliers and in turn overwhelm the appraisal industry. When there is more work than there are appraisers to do the work, quality would slip because there would be little to no competition to get work, people who are overwhelmed have a tendency to cut corners, appraisers could then charge more, and turnaround time would increase dramatically.
Longer turnaround time would have a negative effect on the liquidity of the credit market that is tied to real estate i.e. banks that lend money for homes need to sell these loans off in order to have more money to lend. When you slow down this process (banks/lenders having to wait significantly longer to get appraisals done), you slow down liquidity. When John and Mary Q Public go to get a loan on their dream home, the bank will have to put them on hold to get the money to loan them. Not only will the public have to wait longer to get loans, they would also have to pay more.
Basic economic principles dictate that having a surplus of workers is good for the overall economy – it helps ensure quality and keeps costs in check. Few will disagree that competition is good for the consumer.