What Is a BPO in Real Estate?
In real estate, BPOs are often associated with foreclosures and short sales, but other companies such as relocation firms also order BPOs. A BPO stands for "broker price opinion," and it involves using a process very similar to a real estate appraisal, although not as involved nor complicated.
Companies and banks typically hire a real estate broker to prepare an opinion of value for a given piece of real estate. The broker's representative, generally a real estate agent, compares a minimum of three similar properties that have recently sold to the subject property, comes up with a range of value, and then adjusts that number up or down for differences, such as an added pool or a newer roof. The final analysis results in an opinion of market value.
Broker price opinions are sometimes controversial, especially if the agent preparing the BPO has little experience or knowledge about the neighborhood or appraisal techniques. While BPOs may offer a less-refined or "accurate" opinion of value, they also typically cost much less than a full-blown appraisal.
During the market downturn from 2006 to 2011, banks were paying about $50 to $75 for a BPO. This approach had issues because banks were often giving this business to new agents because generally, those agents were the only ones willing to work for so little. It was not unusual for a part-time agent to pull up to a seller's house, leaving her children still strapped into their car seats, and dashing into the home, quickly shooting a few photos with her cell phone and running out.
At that time, the banks didn't seem to place as much emphasis on the BPO because it wasn't always used to determine value. Most likely, certain guidelines required a BPO, but banks also use other criteria to determine a sales price, especially for a short sale. Banks might compare the bottom-line loss with the loss from a foreclosure to determine whether taking the foreclose loss makes more sense than a short sale loss.
Two Standard Types of BPOs
Two types of standard BPOs exist: the interior BPO, and a drive-by BPO. The interior BPO involves photographing and assessing the home's interior. A drive-by BPO involves assessing the home only by its exterior and is not much more useful than some interior BPOs.
The agent may not have even personally inspected the home's exterior and may instead just rely on the home's photos already posted on an MLS website. Additionally, the interior of the home isn't inspected for a drive-by BPO. In this case, market value is often estimated by numbers alone: the comparable sales within the past 3 months.
Sometimes a drive-by BPO is referred to as a desktop BPO, meaning specialized software has been used to estimate a value. This works similarly to the types of values estimated by some popular websites such as the Zillow Zestimate. It can be accurate to a certain degree but does not take the place of an interior inspection, nor a full-blown appraisal.
Why Banks Order BPOs
The two most common reasons banks order a BPO value are for either a home in foreclosure, about to enter the bank's inventory of REO homes or a short sale. Banks might request a BPO from two separate real estate companies. This ballpark estimate for a range of value is designed to help the bank to avoid inaccurate BPO values sometimes placed on short sales by unethical agents.
Banks have no requirement to accept the BPO value as true market value, however. A bank can use the BPO value as a guideline, but might use other evidence to support a higher sales price to try to offset its loss. When a bank demands a higher price for a home, it doesn't necessarily mean the BPO value came in at that price. Some agents make this mistake, of blaming the BPO agent for a too-high value when it was the bank that decided to ask for a higher price.
The only people who hope the value of a BPO will come in low are generally the buyers of a short sale. A bank is not required to do a short sale, so a low valuation does not mean the bank will automatically sell at that price, which many agents and would-be buyers don't understand.
Banks often use the BPO only as additional information. Many automatic valuation software systems are available, and a BPO might be used as only a supplemental report to test or support the software's conclusion.