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Risky Business

BPOs: How Close Do They Come?

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No lender or servicer wants to keep a portfolio of REO or short sale properties. For starters, they're not in the business of managing properties. Each day an REO or short sale property isn't sold is a day of upkeep and lost interest payments. So if they're so anxious to get rid of these properties, why is it so difficult to purchase an REO or short sale? Despite what some folks think, lenders or servicers are not looking to hold on to properties in hopes of future gains. If they're waiting for the market to turn around and for property to start appreciating, they may as well be waiting for Godot.

Even though they need to cut their losses, lenders and servicers are being penny wise and pound foolish. Many are unintentionally extending their holding times because they're using broker price opinions (BPOs) to value the properties they want to sell. Maybe they think that getting a true and accurate value on an REO or short sale portfolio isn't as important as an accurate value for traditional purchases and refinances. Maybe they think BPOs are accurate enough—that since they're done by local real estate agents who know and understand the market area, if there are any disparities, they couldn't possibly be big enough to make a real difference, right?  Wrong—not even close.

The issue starts with the agents who conduct broker price opinions. It would be one thing if BPOs were completed by the ideal Realtor, one with concentrated professional experience in the market area over an extended period of time. But they're not. The local expert Realtor who knows the market inside and out isn't the one who provides BPOs. In fact, most Realtors who provide BPOs have little, if any, activity with listings. They're generally providing BPOs as a way to make money between listings. They are not qualified and should definitely not be completing appraisals.

Interestingly, the National Association of Realtors has explicit policies stating that a Realtor can not accept a BPO in direct connection with obtaining a listing—a mandate that I find curiously unenforced, to say the least.

Think there's really not a problem? Listen to this real life scenario. I recently got an e-mail from a reader who was submitting an offer of $170,000 for short sale approval. Fannie Mae and the lender counter-offered $220,000, so the reader had an appraiser send several more comps from homes around the radius of the home, all of which ranged from the $160,000s to $190,000s. Fannie and the lender countered back at $220,000 again. Apparently the BPO that they used to determine the price contained two sales in the same complex that sold for more than the comps the reader provided.

One probably sold for $230,000, the other for about $242,000. The issue is that the high priced sales were brand new units. They'd never been lived in, had a warranty from the builder, and the benefit of TV commercials and an onsite sales staff seven days a week.

So Fannie Mae was asking too much, and that short sale was destined to be doomed.  Fannie Mae had depended on an inaccurate BPO and most likely lost a possible sale and kept the REO on its books longer than necessary.

This kind of scenario happens every day because “cost-effective” BPOs are being used to value short sales even though they're not reliable. Cost-effective isn't cost effective if the solution is not reliable. BPOs would only be cost effective if they were accurate.

Every day, faulty decisions costing tens of thousands of dollars are being made on properties worth several hundred thousand dollars, all in the effort to save the price difference between a BPO and a full appraisal—a couple hundred dollars at best. What can be viewed as a short term loss is really a long term gain.

What the inexperienced real estate agent doesn't understand is that the proper way to value these types of properties is to make an adjustment for the condition (new vs. not new) and/or the sales terms. There's a big difference between buying a new home from a builder and getting a very smooth closing, and micro-managing a short sale that could take months. The appraiser would simply apply a "barrier" that divides the sales grid to show the comparison of arm's-length sales vs. short sales—where the differences in value are generally significant. This would demonstrate where the value would be adjusted. It's basic business, these barriers are like the discounts, concessions and other factors applied in the terms of the sale that affect the overall price.

Pick your platitude: "short term loss, long term gain" or "penny wise, pound foolish." The bottom line is the same. If lenders and servicers really want to cut costs, they should focus on overall profitability rather than focusing on proportionately insignificant costs.

Comments (1)
Brian, as far as I know, most large servicing operations use more than just a BPO, which by itself has historically been more accurate than an appraisal that allows sale properties as old as 6 months past, to be included in the price equation. Appraisals in a highly variable market have been less accurate than taking the average of two BPO's. In most cases the BPO's are not paid for by the Servicer. The Servicer basically uses national networks of realtors that they require to do BPO's if they want to receive REO's to market. They are never allowed to do a BPO on any property they are marketing. So,in addition to the BPO, most Servicers also use a back up BPO or a combination of several electronic pricing models. When the variance is more than a certain % they are required to get a third opinion. Also, on occasion, Servicers may not want to sell properties they have already reserved for loss on when the actual loss may be larger than the reserve. This would cause them further capital issues if this were happening on many properties in a market where values were continuing to fall.
Posted by Robert Rosen | Tuesday, March 06 2012 at 5:15PM ET
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