Downturn in Market Leads to Upturn in BPOs
BPOs as an alternative to appraisals!
Over the last year, there has been a tremendous increase in the use of broker’s price opinions (a.k.a. comparative market analysis, broker’s estimate of value, etc.) that are being performed by real estate brokers and salespeople, in lieu of appraisals. While BPOs were previously used for very limited purposes, they are now being used as valuation products in the finance arena, primarily for the review of distressed properties prior to short sales or foreclosure. They are also being used in areas previously unimagined several years ago, including segments of the commercial market.
The increase in the use of BPOs for these purposes is largely a result in the downturn in the real estate market, and a reduction in the commissions being earned by brokers and salespeople on the sale of property. Real estate professionals have seized upon BPOs as a way to supplement their incomes. In addition, other industries, particularly in the lending arena, have picked up on the fact that they can save a significant amount of money by ordering BPOs instead of appraisals, regardless of their quality level.
However, the BPO work being done by brokers and salespeople may not be legal. In fact, in West Virginia brokers and salespeople may not lawfully issue a broker’s price opinions or any other estimate of the value of real property for compensation, even in connection with the sale, or potential sale of real property. According to the West Virginia Real Estate Commission, “the rendering a broker’s price opinion for compensation constitutes the activity of real estate appraisal for which a license issued by the Appraiser Board is required.” In many other states, the ability of a real estate professional to perform a BPO is only authorized if it is directly related to a listing or a prospective listing. For example, in Mississippi, it is permissible for a broker or salesperson to “in the ordinary course of business, give[s] an opinion as to the price of real estate for the purpose of a prospective listing or sale.” In that state, any other expression of the value of real property is an appraisal and is subject to appraiser licensing/ certification laws and appraisal standards. Laws similar to Mississippi’s are on the books in at least 17 other states.
The appraisal profession does not dispute that BPOs have their place in the real estate sales marketplace. However, including the review of distressed properties within the definition of the listing process is a stretch. The likelihood that a broker or salesperson will obtain a listing as a result of performing a BPO for a short sale or foreclosure is remote. As such, a broker or salesperson that is performing a BPO for these, and other, purposes could be violating the rules applicable to their profession, or the rules applicable to the performance of appraisals.
Because of this gray area, there has, not surprisingly, been a flurry of activity at the state legislative and regulatory level as it relates to expanding the use of BPOs. Just in the last several weeks, proposals have been offered to expand the use of BPOs to what are typically appraisal assignments, begging the question – if it looks like an appraisal and carries virtually the same information as an appraisal, why isn’t it called an appraisal and subject to the same regulations as an appraisal? In Nevada, the state brokers’ and salespersons organization has approached the Real Estate Commission to issue regulations to expand their authority to perform BPOs outside of the listing process. In Utah, the Department of Natural Resources has proposed using BPOs as an alternative to appraisals when purchasing or selling state land. And, in Alaska the Department of Administration has awarded contracts to determine the market value rent for the properties that it leases throughout the state to several brokers who perform BPOs, rather than to appraisers.
In each of these states, the Appraisal Institute’s chapters are working to protect requirements that certified or licensed appraisers be utilized to perform all valuation assignments. However, beginning in January, 2009 the decision whether to grant additional authority to brokers and salespeople will rest with the state legislatures. The industry can only hope that our elected representatives will recognize the added consumer protection benefits that are inherent in valuation services performed by regulated appraisers, as opposed to non-regulated sales agents.
The Appraisal Institute also continues to remind policymakers, clients and appraisers themselves that the Uniform Standards of Professional Appraisal Practice position appraisers to offer competitively priced products that leverage their unique knowledge and skills. The Scope of Work rule allows appraisers to offer USPAP-compliant services that can effectively compete against BPOs, should they desire.
“Many may see this as an appraiser versus broker issue. It is not,” says Scott DiBiasio, Appraisal Institute’s Manager of State & Industry Affairs. “The questions being asked by clients are critical to the proper function of today’s real estate markets. However, real estate brokers and sales people are experts in the marketing and sale of real estate and can competently prepare a price estimate as part of the listing process,” he said.
“On the other hand, protecting the interests of the lender, the buyer and the public by using their education, training, and expertise to provide an independent opinion of the value for a property is something a regulated appraiser can best provide,” DiBiasio concluded.
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