It’s standard practice within the note industry to obtain a Broker’s Price Opinion, or BPO, to place a value on a property within an investor’s portfolio. When selling a note, it is expected from buyers that a BPO will be in the offering package, but how accurate are BPOs and do they add value to an investor when making a decision on buying a loan?
Broker’s Price Opinions are almost universally ordered by larger funds and note investors when they buy and/or sell loans. The investor will place an order, typically through a national company that hires local real estate agents to do what appears to be a miniature version of an appraisal. Since the report is not as in depth as an appraisal and the person doing the BPO is a real estate broker, the cost is considerably less than an appraisal. The large BPO companies usually charge around $75 to provide a BPO while the actual broker that performs a BPO is paid $35-$40 for their work. In order to make a living doing BPOs, brokers will have to crank out numerous BPOs to simply make ends meet.
BPOs are the note industry standard for valuations, but Castle Rock Capital Management has steered away from using BPOs in their underwriting process. Instead, they order similarly priced “Property Condition Reports” which, rather than determine value, provide an idea of the occupancy of the property and, as the name of the report alludes, an idea of the property’s condition. They are usually performed by contractors as opposed to real estate brokers.
The reason Castle Rock does this stems from inaccuracies in past BPOs that they have received. In one instance, the portfolio manager visited a property in St. Louis that, from the BPO picture of the property, was cute little bungalow. When he arrived, there was simply a grassy lot where the home should be. When the portfolio manager inquired with a neighbor about the home, he was told that the home had been torn down years before the BPO picture was supposedly taken. In other words, you get what you pay for. The real estate broker that performed the BPO simply took an old picture off of the internet to place on the BPO rather than do what they were supposed to do, which is to visit the property.
Many BPOs aren’t worth the paper they are printed on. Having a local agent visit the property and provide you with an idea of the property’s value is normally easy to do provided that you aren’t wasting the agent’s time and you are giving the agent the property to sell at a point in the future. Getting an idea of the property’s condition, however, is incredibly valuable when making a decision on buying a particular note.