Loan Based on Broker Price Opinions or Appraisals?

In the world of trust deed investing, many people wonder what the difference is between using an appraisal as opposed to a broker price opinion (a “BPO”) to secure a hard money loan for either a residential or commercial property. The truth is that they serve the same purpose, as private money loans are issued by private investors, and the loan’s conditions are greatly affected by the value of the asset being used to secure it. In fact, a borrower’s equity in the property is a key consideration when underwriting a loan.  While both the BPO and the appraisal will give the private money lender a value on the property, are the costs, report detail, and skill level of the valuation analyst the same?

Appraisals and BPOs are two different ways to assign a value or an opinion of value to the asset or real property that backs up or secures the hard money loan. The lender will want to know about factors such as the general conditions of the home, gross living area, construction material, the size of the lot, the condition of the neighborhood and community as well as historical sales and recent sale “comps” or comparable properties for like-homes in the area. The idea of these reports is to understand the value of not only the house, but the external conditions that affect its value, as people often look for homes in neighborhoods based on factors outside of its construction and aesthetic.

For trust deed investors, the biggest initial difference between the BPO and the appraisal is price as appraisals are two to four times more expensive than BPOs.  One reason for the price difference is that BPOs can be performed by a larger group of people than can issue opinions of value, as BPOs can be generated by any person who has a real estate license in the particular state where the real property is situated.  The regulations imposed on BPOs also vary greatly from state to state, so it is also important to contact a local lawyer to fully understand how the brokers in your area conduct their hard money loan valuations if using BPOs. Appraisals also are controlled by state laws and generally are prepared by state licensed appraisers, and the typical appraisal report is a more in-depth and thorough report than BPOs.   Additionally, many lenders and trust deed investors believe appraisals are more objective given they are typically performed by a licensed non-biased third party, while a BPO can be conducted by someone who might be associated with the broker or a party to the transaction who is attempting to influence the transaction.  While this could be true of both an appraisal and a BPO, the key is to work with a private money lender who only engages neutral third parties when it comes to assessing the value of the subject property whether it is a BPO or an appraisal.

An appraisal or BPO tells a bank or private money lender what its equity is worth for the piece of real estate and helps a lender understand values in the general area where the real property is located. Banks often prefer appraisals given they have more market data but will use BPOs as well.  Appraisers often use automated valuation models to create a rough estimate of the subject property’s value.  Since real estate is such a local phenomenon, appraisals provide more specific and accurate information for trust deed investing and greatly affect the conditions of a loan. But the details included in an appraisal, such as floor plan sketches and square foot measurement, are hard to replicate in a BPO.

While many investors often prefer an appraisal for its in-depth analysis, in today’s economy, private money lenders who represent the borrower (and have a fiduciary duty to them) often make the case that the extra expense of an appraisal is not justified when making a loan at a relatively lower loan-to-value ratio.  While every situation is case specific, there are many times when a loan for a relatively lower loan amount with a low LTV only require a BPO; in these situations where there is substantial borrower equity in the subject property, the need for an appraisal’s in-depth report is simply not necessary.  And borrowers, who ultimately have to pay the cost for the valuation process, are price sensitive and seek to reduce the loan’s costs wherever possible.

The debate between BPOs versus appraisals will long endure as the cost-effectiveness, fast turnaround times and general simplicity of the BPO will always make borrowers and private money lenders wonder if a BPO will suffice.  In the wake of the economic crisis of 2008, borrowers are simply trying to limit the loan costs associated with a purchase as big as buying a home.  For trust deed investing and investors, it is important to understand the differences between the two forms of valuation, and to work with a knowledgeable private money lender so as to understand when they employ BPOs versus appraisals and the reasons why.  We here at Val-Chris Investments have been doing private money loans since 1975, and we would be happy to talk to you about when we believe BPOs are appropriate and when they are not.

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