Real Estate Mentor Student Gets A Lesson on Reverse BPO Values.
My real estate mentor student did everything correct when he met with his appraiser. Even after 40 years in real estate investing we are always finding out new things. Recently an FHA appraiser and home inspector did an appraisal for one of our real estate mentor students and said he had always been fascinated with how investors find deals. The Student invited him to our next club meeting and he showed up as he had promised.
At the meeting I was speaking about how to get massive discounts on deals we have under contract and discussed what I refer to as a “Reverse BPO”. A normal Broker’s Price Opinion (BPO) is typically ordered by a lender for either a short sale or for an REO to determine Fair Market value (FMV). In the “good old days” banks got appraisals on each property but decided the cost was prohibitive and resorted to grossly underpaying Realtors® to do the same work for $45 to $75 versus $250 to $350 for an appraisal.
Almost always the real estate agents compare only the highest comps without consideration for the interior condition or possible rehabs that may have been done illegally. They never take into account what the costs are to remove or repair these illegal additions. Some agents never even see the property, a few will do a drive-by, and even fewer will meet with the seller or buyer and tour the property. Sometimes the comparable sales cross neighborhood boundaries and the property comparisons are not apples to apples.
I have never seen a Realtor® properly estimate repairs even when they know they have to be done. It is entirely the investor’s responsibility to meet the BPO person and give him/her a Repair Estimate to submit with their BPO to the lender. This doesn’t illegally influence the BPO and it’s only fair to a perspective buyer.
The Reverse BPO is the exact opposite of using the highest comps. In this case the lowest applicable closed comparable sales are chosen to determine a market value. As I explained the process at the club meeting the FHA appraiser was on the edge of his seat. We use the Reverse BPO for listing agents who want to see how we got our offer before they will submit our offers to their seller and for sellers who want to know the value of their property. After my presentation, he come over and said that he had been doing Reverse BPOs for many years!
He went on to explain that FHA (Federal Housing Administration) has him do two appraisals on a property one of which is not shown to anyone but FHA. This much lower value is used internally for risk management calculations and is appropriately called the Liquidation Value. The point is to determine if a property has to be liquidated for whatever reason and what the FHA can expect to get by selling it.
The next time you do a Reverse BPO and an agent tells you that you can’t do it, explain that if it’s good enough for the Government (FHA) it should be good enough for you! Using the Reverse BPO directly with a seller is a very powerful tool to get a better initial price before you start talking about needed repairs. Your report should include closed comparable sales, lowest active listings (wishful thinking by listing agents that are not selling) and the “Depressed” properties in a one mile radius of the subject property. Depressed by definition here doesn’t necessarily refer to the property’s condition but rather properties that are already REOs or have had a lis pendens delivered to the owner. These properties will likely be coming to market within a year – all of which are competition for the subject property being sold at full market value. Information like that is taught to our real estate mentor program students so they understand real estate investing to the fullest capacity.
To your limitless success,
Dave Dinkel
Real Estate Mentor Program Founder
