Successful real estate investing depends on understanding how to measure a property’s value. Without that, how can you project a deal’s profit? As a result, many new investors have asked: Is a BPO better than an appraisal?

Mortgage lenders use BPOs, or Broker Price Opinions, to estimate a property’s value when they can’t justify the time and expense of an appraisal. BPOs require less time and money, but they’re far less reliable. Appraisals are conducted by certified appraisers and are far more reliable for investors.

In this article, I’ll dive into some more considerations about BPOs versus appraisals. Specifically, I’ll cover each of the following topics:

  • What is a BPO?
  • What is an Appraisal?
  • BPO versus Appraisal, Which One is Better?
  • Evaluations – A Middle Ground Approach
  • Final Thoughts

What is BPO in Real Estate?

With a BPO, a real estate agent or broker estimates a home’s selling price. As such, BPOs relate to appraisals. Both processes conduct a determination of a home’s value. However, BPOs tend to be far less reliable than a formal appraisal. Accordingly, they also cost less and require less time.

Mortgage lenders and banks tend to request BPOs in real estate owned, or REO, situations. When a borrower stops paying, the bank eventually forecloses on the property and takes ownership. In theory, the bank can then sell the property to recoup the outstanding mortgage loan balance.

In an REO situation like this, lenders don’t prioritize making a profit on the sale. Rather, they simply want to cover the loan balance and associated transaction costs. This means that the accuracy of a valuation matters far less than it would for a house flipper projecting a deal’s budget. Instead, lenders want a rough value quickly and inexpensively.

For example, assume a borrower who has been foreclosed upon owes $100,000 on a mortgage. If an agent values the property via a BPO between $150,000 to $225,000, that $75,000 range doesn’t matter for the bank. Even if sold on the low end, the REO sale will cover the outstanding loan balance. On the other hand, this massive range of possible values would absolutely not work for an investor. You can’t build a house flip budget based on a valuation range that large, as it creates far too much uncertainty.

This inherent unreliability to BPOs results from how brokers complete them. On paper, brokers themselves complete a BPO. In reality, they outsource them to people with limited training and experience. When a bank orders a BPO, the broker isn’t guaranteed to get the listing, so he or she has limited incentive to pour too much time into the process. Instead, brokers tend to delegate the BPO paperwork and pulling of comps to overseas virtual assistants, with a young kid paid to drive by the house and take a couple of pictures. Brokers can then take a quick look at these BPO packages and make a rough determination of value.

Bottom line, brokers complete BPOs en masse. They don’t put a ton of time and energy into the individual valuations. For this reason, the BPO-determined values tend to be very unreliable. But for banks, they’re also inexpensive (around $50) and can be done quickly, making BPOs an appealing option.

What is Appraisal in Real Estate

Unlike BPOs, appraisals provide extremely reliable valuations. However, in exchange for this reliability, appraisals cost more and take more time.

The reliability of appraisals stems from who completes them. Only licensed appraisers can complete appraisals. This license means two things. First, it means that appraisers have significant training and experience. Second, it means that these professionals are independent, that is, they have no vested interest in the home. As a result, when you purchase an appraisal, you’ll receive the most accurate, unbiased, and reliable valuation available.

Broadly speaking, appraisers use one of three approaches to value a property: cost-to-construct, income-based, or sales comparables (a.k.a. “comps”). For single-family homes, appraisers use the comps approach. They analyze the target property’s characteristics (e.g. size, location, style, etc.), then find properties as similar as possible that have recently sold. Using this comp information, appraisers can as accurately as possible determine the value of your property. Basically, they look at what the market has recently paid for similar properties, and they use those prices to value your property.

While appraisals provide you the most accurate estimated value possible, you need to pay for this reliability. Appraisals tend to cost between $500 to $700, and they can cost even more for after-rehab value (ARV) appraisals. They also take significantly more time. A formal appraisal results in a large, detailed report, and this paperwork takes time to complete. For these reasons, appraisals don’t make sense for lenders looking for quick, inexpensive valuations. But, for homebuyers and investors, appraisals provide critical reliability for home values.

BPO versus Appraisal, Which One is Better?

After broadly outlining the above two valuation techniques, the question remains, is a BPO better than an appraisal? The answer to this question depends on what you want from the valuation.  More precisely, you need to weigh your situation’s cost, time, and reliability factors.

For lenders in foreclosure situations, cost and time take priority over reliability. Lenders don’t need a highly accurate valuation. Instead, they want a rough estimate to confirm how much they’ll receive in a foreclosure auction. And they want this rough estimate quickly and inexpensively. As a result, BPOs tend to make more sense for lenders in REO situations.

On the other hand, there’s really no time when investors should use a BPO. Before entering a house flipping deal, investors need to confirm the deal’s budget. Simply put, they need to confirm that they’ll actually make a profit on a deal. After-rehab value plays an absolutely critical role in this profit calculation. For instance, if a deal’s numbers result in $30,000 profit at a $250,000 selling price, that profit hinges on the accuracy of the selling price. If a $250,000 ARV turns out to be closer to $200,000, that profitable deal just became a loss.

This basic example outlines why investors should never gamble with valuations. While you need to pay more for an ARV appraisal, what you gain in reliability and accuracy more than outweighs this additional expense.

Property Evaluations – A Middle Ground Approach

I also want to discuss a middle ground evaluation approach—evaluations. With an evaluation, a real estate agent assesses property and looks at comps to determine a value. But, they do it themselves (as opposed to outsourcing the process like BPOs).  As a result, evaluations provide A) more reliability than BPOs, while B) costing less than appraisals.

For investors who want a fairly reliable valuation without the expense of an appraisal, evaluations represent a good alternative. However, I wouldn’t advise going this route if you don’t have an established relationship with the agent completing the evaluation. As with any service, the results will depend on the competence and effort of the agent completing the evaluation. Here at Do Hard Money, we do evaluations before funding a deal, first a virtual appraisal done in-house and then we hire two independent agents to visit the property and confirm the values. Evaluations work well when they’re done this thoroughly.

Final Thoughts

Investors should keep in mind that values are fluid. In other words, how the market values a property today will likely differ from the value tomorrow. Interest rates can go up or down, construction costs can increase, and a whole variety of other economic factors can affect values. Whether using a BPO, appraisal, or evaluation, the older the valuation, the less relevant.