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Lenders Seek Alternative Products for Valuations

The current mortgage crisis has caused an industrywide re-evaluation of the use of BPOs. Today, lenders have no margin for error, thus it is imperative that every loan decision is based upon the most accurate information.

This is being sought through the use of alternative valuation products. A number of asset managers in the REO/loss mitigation world are combining an automated valuation model and a broker price opinion in conjunction with other market analysis values.

Lenders use BPOs when there is a legitimate chance that the REO property will go to listing. In this instance, Realtors offer valuable insight for how quickly the home might be sold and can detail what repairs are needed to sell the house at market.

While BPOs and AVMs have a legitimate place in the marketplace, there are better alternatives to these products, according to Brian Coester, CEO of Coester Appraisal Group, a nationwide appraisal management company based in Gaithersburg, Md.

"If it's REO-owned and the bank is taking up bids or they are looking to sell it, a Realtor goes into the home and puts a BPO report together and says, 'Here's what needs to be repaired for us to list it. Here's what I think we can sell it for as-is.' That adds tremendous value. They might even have buyers lined up sometimes. But other than that, I don't think it's appropriate," Mr. Coester tells MSN. "It's important to know your plans and what you want to do with the property."

If price were not a concern, most lenders and servicers would choose to order a full property appraisal, he stresses.

"The problem is it's too expensive. It can run $300 to $450 and $450 for a full-on appraisal is way too much to pay. Even a drive-by appraisal is $275," says Mr. Coester.

"An AVM is kind of a necessary evil that's not always accurate. It's data that's average that's calculated. A BPO is the median where essentially you have a Realtor who is familiar to the area. They have local access of the MLS and will go and take a photo of the property. Are they trained to do a proper evaluation? No. I think that's the problem we are having. Lenders are taking these BPOs as extremely credible. The number the Realtor puts on there is really not the number. Sometimes it's very far from that number."

Mr. Coester believes the industry will see a shift to more of a desktop appraisal evaluation where an appraiser who is familiar with the area to sit at his computer, pull MLS, pull three or four comps together.

The company is right in the middle of launching Value Save, a desktop appraisal that runs around $100 and provides an accurate picture of the subject and market value that can be completed in a day. "It does a better job on evaluating the property. Realtors are not trained to evaluate properties and come up with a good market value that intensely," he said.

Three or four years from now, BPOs will not be around, predicts Mr. Coester.

"The government is already talking about legislation forbiddance to get rid of them. The feds have posted that commercial BPOs do not meet the requirements of a valuation. If a bank has to re-evaluate their commercial loan, they were using BPOs. Essentially, the feds have said that does not qualify as a property valuation, because they are not trained to do that."

Local real estate markets have become quite complex with erratic property value trends, high foreclosure rates, pervasive fraud, minimal sales activity and poor property maintenance.

"Therefore, lenders have a need for a much higher level of analysis and expertise than ever before," says Jeremy McCarty, founder and CEO of Valligent, a Roseville, Calif.-based provider of real estate valuations.

Valligent works with servicing companies, lenders and their REO departments to implement a BPO-type replacement product called an APO (appraisal price opinion) done by appraisers instead of Realtors.

"FIRREA's $250,000 threshold for use of licensed appraisers has allowed portfolio lenders and others to utilize BPOs on lower-valued properties. Relocation companies also utilize BPOs as a screening tool for selling the employees' home or in bidding on the potential destination residence."

There are various reasons why BPOs are not the appropriate solution, he adds, stating they do not require certification that the agent actually prepared the conclusions.

"BPOs are illegal in 24 states when used to establish market value. BPO providers are not disinterested third parties. They hope to get the listening and will value the home according to their best interests," he said.

"Agents typically only get paid $25 to $50 and therefore spend the least amount of time on them as possible."

Valligent believes the future of collateral valuation is about expertise and analytics and not about filling out forms and unsubstantiated opinions of value.

"It's very difficult to determine the right value for certain properties. Some have been in rehab and are in good shape and others are falling down. It's hard to know what interior your subject property is in," says Mr. McCarty.

"We believe the people with experience, who are licensed and insured to do valuation, is a much better solution than a Realtor that may not have that knowledge or the tools available to them to determine what's going on in that market."

Kevin Marshall, president of Clear Capital in Truckee, Calif., a provider of BPOs and other real estate valuation data, says financial institutions should be able to choose form a wide variety of proven and reliable valuation tools.

"Some state appraisal boards and appraiser groups are petitioning the federal government and state legislatures to enact regulations that will restrict financial institutions to a single valuation perspective, an appraisal," Mr. Marshall said.

"We know that BPOs, AVMs and other alternative valuation products are important and necessary tools which reduce costs, increase speed and strengthen accuracy.

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