BPO vs Appraisal for Short Sale Properties
Setting the price on short sale properties is always a bit of a guessing game. It’s important to strike a balance between the loss the bank is willing to accept and the amount buyers will actually be willing to pay. There are two ways of evaluating a home during the sale process. The original lender typically uses a broker price opinion (BPO) to determine an appropriate selling price. This is a “fast and dirty” way for the bank to assess how much a house should be listed for. In some cases, the real estate broker hired to offer their opinion does no more than drive by the house. They simply take a look at the exterior and compare the approximate square footage to other, similar properties that are currently listed or have recently sold in the same neighborhood. The whole thing costs about $50 to $75. As you can imagine, the result is sometimes only a very rough estimate of the home’s value.
An Appraisal Goes Much Deeper
The bank lending money to the buyer of the short sale home is going to want an actual appraisal from a licensed property appraiser - not just a real estate agent. This involves a walk-through to spot any obvious issues, measurements to verify the dimensions of the property, and a more detailed look at other factors that can impact the reasonable selling price of the home. The resulting dollar figure is considered a good estimate of the true value of the home (although the appraiser’s professional opinion also comes into play). The reason the buyer’s bank wants a more thorough and accurate estimate is because they are taking on the risk of a new mortgage when they lend money to the buyer. The bank that is allowing the current owner to short sell just wants to offload it without incurring too many extra costs. Since a formal appraisal can cost several hundred dollars, it’s easy to see why the seller’s bank isn’t interested in footing that bill for short sale properties that are already costing them big bucks.
What If There Is a Gap Between the BPO and Appraisal?
Several problems can arise if the BPO is significantly higher than the appraisal. The seller’s bank might refuse to come down on the short sale price they agreed to based on the original BPO. The buyer may have difficulty getting approved for a loan for their original offer amount if the appraisal shows the home actually has a lower value (the buyer’s lender won’t want to issue an upside down mortgage). In this situation, the buyer might have to cover the difference between their original offer and the amount they can get approved for their mortgage loan. Or, they may want to come back and negotiate for a lower offer price. At this point, the deal may simply fall through. This is an important reason to make sure the original BPO is done by an experienced short sale agent who knows the local area and can establish a reasonable sales price for the property.
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