BPO stands for “broker price opinion.” It is a part of the short sale process that the lender uses to evaluate the merit of a short sale application. Simply put, the lender uses a BPO to ensure that the proposed sales price is aligned with market conditions. Some Westchester County Short sales, for example, are 20% less than the house’s value from 3 or 4 years ago. A home that was purchased in 2005 for $500,000 may only be worth $400,000 currently. Just to be certain, the lender sends out a 3rd party to verify this.
The BPO report looks very similar to an appraisal. There is a description of the subject property, and usually at least 4 recent comparable sales. If the offer on your home is $380,000 and the comparable sales are $410,000, $395,000, 375,000 and $355,000, then the lender will know that the value is legitimate. If all the comparable sales are over $425,000 and there is no compensating factor, such as deferred maintenance or needed repairs, the bank may deny the application. As much as the BPO report resembles an appraisal, it is not an appraisal, which is more expensive and produced by a licensed appraiser.
Often the lender will forego a BPO and do a full-blown appraisal. The theory here is that the appraiser will be more accurate. This is a sound theory, but one pitfall I have personally experienced is that lenders have a bizarre habit of contracting appraisers from a different marketplace who turn in robotic, formulaic reports based solely on price per square foot and not local market conditions. We have had short sales denied because the home has over appraised, causing more work and, in one case, a foreclosure. After it was repossessed, the home ended up selling for $100,000 less than what the lender claimed to be market value. That lender is no longer in business.
As prices continue to shrink, overpriced BPOs and appraisals are becoming less common. The BPO usually comes after the rest of the process is complete, so in those cases a decision from the lender on the short sale ought not be far off. Some lenders do them earlier, but as the marker changes I see that less and less.
J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com