Broker Price Opinions are useless

[Chris Seveney]

As an investor who orders a significant number of exterior inspections on properties - I wanted to get others opinion on BPO’s

Primarily I find them useless. The valuations on them appear to be completely arbitrary and in many instances the company seem randomly selected

We had one recently from someone else who provided the opinion and the comps were 7 miles away and from another jurisdiction - whereas this property while in a more rural area had considerable sales that could have been used.

If you use them to get an idea for property condition I find them to have some value but since they have no interior inspection reports, they are at best just a random guess of the value which could be off by 100%

[Jamie Bateman]

I generally agree. This is one reason I like buying HUD HECMs. Interior photos!

[Corby Goade]

Depending on the purpse of the BPO and regulations in your state, you can just call a broker that you like and have them give you a BPO. 

Honestly, it's right there in the acronym- it's just an opinion. No different than an appraisal. I'd say 10% of the appraisals that we order are wildly inaccurate and appraisers have far more training, experience and licensing requirements than brokers- at least in my state. 

[Don Konipol]

Quote from @Chris Seveney:

As an investor who orders a significant number of exterior inspections on properties - I wanted to get others opinion on BPO’s

Primarily I find them useless. The valuations on them appear to be completely arbitrary and in many instances the company seem randomly selected

We had one recently from someone else who provided the opinion and the comps were 7 miles away and from another jurisdiction - whereas this property while in a more rural area had considerable sales that could have been used.

If you use them to get an idea for property condition I find them to have some value but since they have no interior inspection reports, they are at best just a random guess of the value which could be off by 100%

If you think residential BPOs are useless, you should familiarize yourself with BPOs on commercial property…..

First, I’ve NEVER seen a BPO on commercial property that utilizes the income capitalization or cost approach.  It’s all comps.  And it seems that all the BPOs I see are on commercial property where comps are VERY DIFFICULT, properties like marinas, event centers, rural warehouses, etc.  
Second, the brokers who perform these are often brokers with a lot of time on their hands, so the pool of brokers are the LEAST successful and newest brokers
Third, the brokers are not educated in the proper METHODOLOGY to perform a valuation.
Look, if you as a broker run some comps where the subject property is a SFR in a "cookie cutter" subdivision and the subjects age, style, amenities, condition, are similar to the comps being used, you've got a fair shot at a pretty accurate valuation. Otherwise, they maybe less than worthless. LESS, because the borrower who comes to us for a loan and has a BPO often believes (1) that a lender will ,ale the loan without a MAI appraisal or (2) that a BPO is an accurate and realistic valuation and acts accordingly.
What’s really surprising (or maybe not) is that many mortgage brokers ask us if we can use a BPO instead of an appraisal (on commercial property!), which is indicative of either the broker having  no idea of what an appraisal entails and how it relates to the subject property or the mortgage broker is so weak that he is afraid to educate the borrower as to the reality of obtaining commercial loans without appraisals. Or both.  

[Russell Brazil]

I find them about as useful as an appraisal.

[Don Konipol]

Quote from @Russell Brazil:

I find them about as useful as an appraisal.

Russel, are you referring to residential, commercial or both?  Because I find MAI appraisals to be very useful, though often very inaccurate as to market value.  Also, appraisals are valuations at a point in time, and commercial markets can change rapidly.  Also depends on property type and whether the property is income producing.  The appraisals that consisting come in close to what a property actually sells for are where the subject is an income producing  property being run on a consistently and providing consistent cash flow.  Properties that don’t produce an ROI that’s consistent, or are non income producing, can vary significantly. 

[Chris Seveney]

@Russell Brazil

We had an appraisal of a property for $3.8M. It’s been sitting on market for $2.8M….

[Don Konipol]

Quote from @Chris Seveney:

@Russell Brazil

We had an appraisal of a property for $3.8M. It’s been sitting on market for $2.8M….

Try to market with owner financing at 15% down  

[Russell Brazil]

Quote from @Don Konipol:

Quote from @Russell Brazil:

I find them about as useful as an appraisal.

Russel, are you referring to residential, commercial or both?  Because I find MAI appraisals to be very useful, though often very inaccurate as to market value.  Also, appraisals are valuations at a point in time, and commercial markets can change rapidly.  Also depends on property type and whether the property is income producing.  The appraisals that consisting come in close to what a property actually sells for are where the subject is an income producing  property being run on a consistently and providing consistent cash flow.  Properties that don’t produce an ROI that’s consistent, or are non income producing, can vary significantly. 

 Appraisals done for the sale of a property come in at value or above value about 90% of the time I believe. That's because most appraisers aren't actually looking to determine a real value for the property, but rather just looking for justification of the already agreed upon purchase price. (BTW, that agreed on price should be the main data point in value).

Even in a commercial appraisal, applying a cap rate to determine value, +- a quarter percent, which is a perfectly reasonable delta amount, will swing those values dramatically.

Like BPOs, appraisals also use terrible comps many times, especially when they are doing so blind with no set sales price set to achieve. I had an appraisal on a refinance recently, and I do enough business that I run into the same appraisers over and over again...so the appraiser asked me what value I wanted on the refinance. I told him, and sure enough, that's what it appraised for.

[Don Konipol]

Quote from @Russell Brazil:

Quote from @Don Konipol:

Quote from @Russell Brazil:

I find them about as useful as an appraisal.

Russel, are you referring to residential, commercial or both?  Because I find MAI appraisals to be very useful, though often very inaccurate as to market value.  Also, appraisals are valuations at a point in time, and commercial markets can change rapidly.  Also depends on property type and whether the property is income producing.  The appraisals that consisting come in close to what a property actually sells for are where the subject is an income producing  property being run on a consistently and providing consistent cash flow.  Properties that don’t produce an ROI that’s consistent, or are non income producing, can vary significantly. 

 Appraisals done for the sale of a property come in at value or above value about 90% of the time I believe. That's because most appraisers aren't actually looking to determine a real value for the property, but rather just looking for justification of the already agreed upon purchase price. (BTW, that agreed on price should be the main data point in value).

Even in a commercial appraisal, applying a cap rate to determine value, +- a quarter percent, which is a perfectly reasonable delta amount, will swing those values dramatically.

Like BPOs, appraisals also use terrible comps many times, especially when they are doing so blind with no set sales price set to achieve. I had an appraisal on a refinance recently, and I do enough business that I run into the same appraisers over and over again...so the appraiser asked me what value I wanted on the refinance. I told him, and sure enough, that's what it appraised for.

Very interesting.  When we engage appraisers to appraise for loans, we do not tell them the loan amount, and we don’t allow them communication with the borrower.  And still the values are as you say higher than reality a large percentage of the time.  If the methodology of the appraisal is sound, and the property income producing, quick sale or liquidation value can usually be assumed to be 70-75% of appraised value, imo.  But your point is well takin, we can’t assume the appraiser is unbiased.  
In truth I have found appraisers holding the MAI designation to provide more accurate and more unbiased appraisals than appraisers who are not Appraisal Institute members.  This is of course “in general”, I’m sure there are great appraisers out  there who aren’t MAI.  But requiring an appraiser to hold the MAI designation provides us with a better chance of getting a more accurate appraisal.  

Russel, do you think appraisers would be more conservative in their valuations if they suffered a financial penalty for over valuing property?  Like if they were required to pay 90% of their appraised value to purchase the property at the seller’s option? LOL 

[Russell Brazil]

Quote from @Don Konipol:

Quote from @Russell Brazil:

Quote from @Don Konipol:

Quote from @Russell Brazil:

I find them about as useful as an appraisal.

Russel, are you referring to residential, commercial or both?  Because I find MAI appraisals to be very useful, though often very inaccurate as to market value.  Also, appraisals are valuations at a point in time, and commercial markets can change rapidly.  Also depends on property type and whether the property is income producing.  The appraisals that consisting come in close to what a property actually sells for are where the subject is an income producing  property being run on a consistently and providing consistent cash flow.  Properties that don’t produce an ROI that’s consistent, or are non income producing, can vary significantly. 

 Appraisals done for the sale of a property come in at value or above value about 90% of the time I believe. That's because most appraisers aren't actually looking to determine a real value for the property, but rather just looking for justification of the already agreed upon purchase price. (BTW, that agreed on price should be the main data point in value).

Even in a commercial appraisal, applying a cap rate to determine value, +- a quarter percent, which is a perfectly reasonable delta amount, will swing those values dramatically.

Like BPOs, appraisals also use terrible comps many times, especially when they are doing so blind with no set sales price set to achieve. I had an appraisal on a refinance recently, and I do enough business that I run into the same appraisers over and over again...so the appraiser asked me what value I wanted on the refinance. I told him, and sure enough, that's what it appraised for.

Very interesting.  When we engage appraisers to appraise for loans, we do not tell them the loan amount, and we don’t allow them communication with the borrower.  And still the values are as you say higher than reality a large percentage of the time.  If the methodology of the appraisal is sound, and the property income producing, quick sale or liquidation value can usually be assumed to be 70-75% of appraised value, imo.  But your point is well takin, we can’t assume the appraiser is unbiased.  
In truth I have found appraisers holding the MAI designation to provide more accurate and more unbiased appraisals than appraisers who are not Appraisal Institute members.  This is of course “in general”, I’m sure there are great appraisers out  there who aren’t MAI.  But requiring an appraiser to hold the MAI designation provides us with a better chance of getting a more accurate appraisal.  

Russel, do you think appraisers would be more conservative in their valuations if they suffered a financial penalty for over valuing property?  Like if they were required to pay 90% of their appraised value to purchase the property at the seller’s option? LOL 

Financial incentive/punishment like that would just distort the market. $1 million legit properties would all start appraising at $800k, and now if appraiser is forced to purchase it at 90% they pay $720k for a $1 million property.

I think that's interesting that your appraisers don't know the value. I've never done a residential or commercial sale where the appraiser didn't already have a copy of the contract.

[Chris Seveney]

@Don Konipol

We are the lender right and seller has been trying to move it. We still have equity coverage on it but when we did the loan did not go above 60% ltv

This is an example of why people who do 90-100% financing to me is insane.

[Don Konipol]

Quote from @Russell Brazil:

Quote from @Don Konipol:

Quote from @Russell Brazil:

Quote from @Don Konipol:

Quote from @Russell Brazil:

I find them about as useful as an appraisal.

Russel, are you referring to residential, commercial or both?  Because I find MAI appraisals to be very useful, though often very inaccurate as to market value.  Also, appraisals are valuations at a point in time, and commercial markets can change rapidly.  Also depends on property type and whether the property is income producing.  The appraisals that consisting come in close to what a property actually sells for are where the subject is an income producing  property being run on a consistently and providing consistent cash flow.  Properties that don’t produce an ROI that’s consistent, or are non income producing, can vary significantly. 

 Appraisals done for the sale of a property come in at value or above value about 90% of the time I believe. That's because most appraisers aren't actually looking to determine a real value for the property, but rather just looking for justification of the already agreed upon purchase price. (BTW, that agreed on price should be the main data point in value).

Even in a commercial appraisal, applying a cap rate to determine value, +- a quarter percent, which is a perfectly reasonable delta amount, will swing those values dramatically.

Like BPOs, appraisals also use terrible comps many times, especially when they are doing so blind with no set sales price set to achieve. I had an appraisal on a refinance recently, and I do enough business that I run into the same appraisers over and over again...so the appraiser asked me what value I wanted on the refinance. I told him, and sure enough, that's what it appraised for.

Very interesting.  When we engage appraisers to appraise for loans, we do not tell them the loan amount, and we don’t allow them communication with the borrower.  And still the values are as you say higher than reality a large percentage of the time.  If the methodology of the appraisal is sound, and the property income producing, quick sale or liquidation value can usually be assumed to be 70-75% of appraised value, imo.  But your point is well takin, we can’t assume the appraiser is unbiased.  
In truth I have found appraisers holding the MAI designation to provide more accurate and more unbiased appraisals than appraisers who are not Appraisal Institute members.  This is of course “in general”, I’m sure there are great appraisers out  there who aren’t MAI.  But requiring an appraiser to hold the MAI designation provides us with a better chance of getting a more accurate appraisal.  

Russel, do you think appraisers would be more conservative in their valuations if they suffered a financial penalty for over valuing property?  Like if they were required to pay 90% of their appraised value to purchase the property at the seller’s option? LOL 

Financial incentive/punishment like that would just distort the market. $1 million legit properties would all start appraising at $800k, and now if appraiser is forced to purchase it at 90% they pay $720k for a $1 million property.

I think that's interesting that your appraisers don't know the value. I've never done a residential or commercial sale where the appraiser didn't already have a copy of the contract.

Most of our financings are refis.  So there is no purchase contract 

[Russell Brazil]

Quote from @Chris Seveney:

@Don Konipol

We are the lender right and seller has been trying to move it. We still have equity coverage on it but when we did the loan did not go above 60% ltv

This is an example of why people who do 90-100% financing to me is insane.

 I'd say it could be insane.....or maybe it could be sane. I'd say it depends on the volume and quality of the loans. If you do 10 loans, that are all low quality, then 90% ltv would be pretty high risk. But if they have enough volume to spread out that risk with tighter underwriting guidelines, maybe that could be ok.

But I suppose in reality, most doing those LTVs are also loose on the underwriting guidelines.

[Don Konipol]

Quote from @Chris Seveney:

@Don Konipol

We are the lender right and seller has been trying to move it. We still have equity coverage on it but when we did the loan did not go above 60% ltv

This is an example of why people who do 90-100% financing to me is insane.

I've done 85-90% LTV seller finance to move a property we've owned or get a higher price. I've found that certain buyers are more likely to perform even at a higher LTV. Quite frankly I would be inclined to turn down investors at high LTV, but owner users seem to work out. An example is a community center we sold to a private school with 15% down. The school spent $275,000 on repairs, improvements, made paymemts for 6 years, and paid us off. I wouldn't lend more than 65% on a new loan, or pay more than 65% LTV for an existing loan, and the 65% is if every things prefect. I like 50-55% LTV a lot more.

[Jay Hinrichs]

Quote from @Chris Seveney:

@Russell Brazil

We had an appraisal of a property for $3.8M. It’s been sitting on market for $2.8M….

chris what type of property.. commerical  MF   or SFR vacant etc.. to this makes a huge difference.. what I have seen over the years is high end SFR s  U know the 12k sq ft mansion in Atlanta where they say the value is 5 mil.. but no one will pay more than 3 mil.. so to me those are impossible to value. And I dont play in that sandbox and never will..

[Don Konipol]

Quote from @Chris Seveney:

@Don Konipol

We are the lender right and seller has been trying to move it. We still have equity coverage on it but when we did the loan did not go above 60% ltv

This is an example of why people who do 90-100% financing to me is insane.

Here’s something I’ve done to help the borrower.  Let’s say the borrower is trying to sell the property for $2.8 million cash sale and the note is $2.3 million.  I agree to allow a buyer to assume the note (at an interest rate I llike) with a say $300,000 pay down.  So if the notes currently $2.3 million at 8%, the current ow er can advertise the property for sale at $2.8 million with $800k down and $2 million loan assumption with interest rate of 10%.   I’ll also charge a loan assumption fee.  So the borrower may get an offer of $2.7 million with $400k down, assumption of $2milion note and carry a second for $300k.  

[James Hamling]

Quote from @Don Konipol:

Quote from @Chris Seveney:

As an investor who orders a significant number of exterior inspections on properties - I wanted to get others opinion on BPO’s

Primarily I find them useless. The valuations on them appear to be completely arbitrary and in many instances the company seem randomly selected

We had one recently from someone else who provided the opinion and the comps were 7 miles away and from another jurisdiction - whereas this property while in a more rural area had considerable sales that could have been used.

If you use them to get an idea for property condition I find them to have some value but since they have no interior inspection reports, they are at best just a random guess of the value which could be off by 100%

If you think residential BPOs are useless, you should familiarize yourself with BPOs on commercial property…..

First, I’ve NEVER seen a BPO on commercial property that utilizes the income capitalization or cost approach.  It’s all comps.  And it seems that all the BPOs I see are on commercial property where comps are VERY DIFFICULT, properties like marinas, event centers, rural warehouses, etc.  
Second, the brokers who perform these are often brokers with a lot of time on their hands, so the pool of brokers are the LEAST successful and newest brokers
Third, the brokers are not educated in the proper METHODOLOGY to perform a valuation.
Look, if you as a broker run some comps where the subject property is a SFR in a "cookie cutter" subdivision and the subjects age, style, amenities, condition, are similar to the comps being used, you've got a fair shot at a pretty accurate valuation. Otherwise, they maybe less than worthless. LESS, because the borrower who comes to us for a loan and has a BPO often believes (1) that a lender will ,ale the loan without a MAI appraisal or (2) that a BPO is an accurate and realistic valuation and acts accordingly.
What’s really surprising (or maybe not) is that many mortgage brokers ask us if we can use a BPO instead of an appraisal (on commercial property!), which is indicative of either the broker having  no idea of what an appraisal entails and how it relates to the subject property or the mortgage broker is so weak that he is afraid to educate the borrower as to the reality of obtaining commercial loans without appraisals. Or both.  

I think you really hit the nail on the head here. 

Myself personally, I was taught how to appraise by an MAI Appraiser, so fortunately for myself I believe I was "correctly" trained and use "correct" actions for formulate my cma's/BPO's. 

I am shocked any would use comp in commercial as frontline, that's just dumb! I always, ALWAYS go financial first, replacement second, and if IF there is not a really good concurrence there than I add in comparable solds because in commercial there is rarely an accurate comparable sold far as "like kind" is concerned.     And it's commercial, intent is for revenue purposes, so revenue is the most important of the 3 to consider, by far, unless there is some extenuating circumstance. 

But see, there I go rambling on. I clearly know my stuff BUT that's the thing, I am way too busy DOING transactions to run around burning time doing BPO's unless they are for my clients and connected to something actionable.    If i were JUST doing BPO's and that's it, nobody would want to pay me fee to make it worth my time. 

And that's the harsh kiss of reality, right, ya get what you pay for.... 

[Dave Van Horn]

We've ordered thousands of BPOs over the years, and I tend to agree about the overall value accuracy but we're not always looking for value. We're using BPOs more to look for property descriptions and photos so that we can make a potential renovation judgement or to validate values we have from other sources.

We also have REO agents in specific locations where we buy often. And since they're dispositioning assets, they tend to give us better quality BPO reports.

Also when you're reading a lot of these reports you can start to tell from these descriptions who is good at BPO's and who isn't - and who to use again. We'll also will call the BPO agent sometimes to confirm data on it to get more details(another way to figure out the quality of the report pretty quickly).

Also keep in mind that bad BPOs can make you money too, like when the bank is using that for example, and you have quality boots on the ground giving you a more accurate value. So, I've found it works both ways!

[Marcus Auerbach]

Determining the correct value of a property is one of the hardest skills to acquire. That class is always full and not only new agents. It is part art and part science.

Many of our rental properties are almost identical down to the finishes and cabinets (and in the same suburbs of Milwaukee) and I get a 10% swing on appraisals - at least 5% in either direction. Purchase appraisals are magically always like 2k over PP. Refi appraisals lack the reference point and tend to be more all over the map. And once in a while I see an appraisal that is just flat-out wrong, but it is always hard to get an appraiser to admit their mistake, it has to be pretty obvious. 

And if something appraises for X still does not mean you can sell it for X. Real estate is an in-efficient market, that's why banks require 25% down - that is deemed a sufficient buffer in case a property has to be liquidated.