BPO: An Explanation of Broker Priced Opinion
What is it, and why does it matter?
In real estate, broker priced opinions (BPOs) are often associated with foreclosures and short sales, but other companies such as relocation firms also order BPOs. A BPO involves a similar process as a real estate appraisal, although it is not as involved nor as complicated, which makes it a cheaper option.
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, recently sold properties to the property needing assessment.
The broker then comes up with a range of values and adjusts that number for variables such as an added pool or a newer roof. The final analysis results in an opinion (and only an opinion) of market value.
2 Standard Types of BPOs
Two types of standard BPOs exist: an 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 it isn't much more useful than a hastily conducted interior BPO.
The agent may not have even personally inspected the home's exterior, and they may not even live in the same country as the home being sold. They may instead just rely on the home's photos already posted on a multiple listing service (MLS) website. Additionally, the interior of the home isn't inspected during a drive-by BPO. In this case, market value is often estimated by numbers alone—usually by evaluating comparable sales within the past three 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 it does not replace an interior inspection, nor a full-blown appraisal.
Why Banks Order BPOs
The two most common reasons banks order a BPO valuation are for a home in foreclosure or a short sale. Banks might request a BPO from two separate real estate companies. This ballpark estimate for a range of values is designed to help the bank 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. A bank can use the BPO value as a guideline, but it might also use other evidence to support a higher sales price to try to offset a loss.
Banks May Change the Value
When a bank demands a higher price for a home, it doesn't necessarily mean the BPO value is that price. Some agents make this mistake, blaming the BPO agent for assigning an elevated value when it was the bank that decided to ask for a higher price.
Generally, the only people who hope the BPO is low are 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.
Banks often use the BPO as additional information. Many automatic valuation software systems are available, and a BPO might only be used as a supplemental report to test or support the software's conclusion.
Past Uses of a BPO
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.
BPOs are as cheap as $30. However, the brokers performing BPOs are usually not as qualified to value a home as a traditional appraiser. During the market downturn from 2006 to 2011, banks had an increased need for BPOs amid rising rates of foreclosure. However, many seasoned agents thought BPOs were a menial task with a low payout, so the task went to newer agents who accepted lower pay. As a result, federal and state authorities passed laws to address the use of BPOs.
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, bank guidelines required a BPO, but banks use other criteria to determine a sales price, especially for short sales.