What Is a BPO in Real Estate?
BPOs are often associated with foreclosures and short sales, but other companies such as relocation firms order BPOs. A BPO stands for "broker price opinion," and it involves using a process very similar to an appraisal, although not as involved nor complicated.
Companies and banks hire a real estate broker to prepare an opinion of value. The representative of the broker, generally a real estate agent, compares a minimum of three similar properties that have recently sold to the subject property and adjusts up or down for differences. The final result 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. But BPOs 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. The problem with that approach is the bank was giving this business often to new agents because generally, only those agents were 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 strapped into their seats in the car as the agent dashed into the home, quickly shot a few photos with her cellphone and ran out.
The banks didn't seem to put too much emphasis on the BPO because the BPO was not always used to determine value. Most likely, the guidelines required a BPO, but banks also use other criteria to determine a sales price, especially when the proposed sale is a short sale. Banks might compare the bottom-line loss with the loss from a foreclosure and determine the foreclose loss pays more, odd as this might sound to you.
Two Standard Types of BPOs
There are two types of standard BPOs: the interior BPO, as described above, and a drive-by BPO. The drive-by BPO is about as useful as some interior BPOs. It doesn't necessarily mean the agent drives by the home because some lazy agents just look at the photo on Google. But it does mean the interior of the home is not inspected for a drive-by. Market value is estimated by numbers alone: the comparable sales within the past 3 months.
Sometimes you will hear a drive-by BPO referred to as a desktop BPO, meaning specialized software estimates a value. It's similar 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 for a BPO value by a bank is either for 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. A ballpark estimate of value is designed to help the bank to avoid bad values sometimes placed on short sales by unethical agents.
Banks are not required to accept the BPO value as true market value, however. A bank can use that value as a guideline and might ask for a higher sales price to try to offset its loss. Just because a bank demands a higher price does not mean the BPO value came in too high. This is a mistake some agents make, blaming the BPO agent for the wrong value when it is the bank that decided to ask for a higher price.
The bank might use the BPO only as additional information. There are many automatic valuation software systems available, and a BPO might be used as only a supplemental report.
The only people who hope the value of a BPO will come in low are generally the buyers of a short sale. But even a low valuation does not mean the bank won't ask for more money. A bank is not required to do a short sale, and that's the thing that many people seem to overlook.