Bad BPO Creates a Bad Short Sale Decision
The lender is not getting fully paid in a short sale. However, the lender wants to know that the amount that is being offered is reasonable. No one would expect the lender to settle for an offer of one dollar. So, the lender needs to have some idea of the market value of the property being sold.
The estimate of the value can be an appraisal, but more often it is a Broker Price Opinion (BPO) because it is less expensive. An appraisal is done by a licensed appraiser and costs several hundred dollars. A BPO is done by a real estate agent where the cost ranges from free to about eighty dollars.
One of the biggest problems in short sale today is bad BPOs. Why?
In an old fashioned short sale, a sales contract is submitted to the loan servicer with a closing statement showing the amount of money that is being offered to the lender. Is that amount as much as you could get for the property? If the offer is market value, the answer is yes. The lender?s opinion of the market value is set by the BPO. If it is too high, the lender will reject a good offer and most likely foreclose. There are hundreds of stories where a good short sale offer was rejected and the lender sold it for much less after a foreclosure and spent much more money to foreclose on the property. The probable cause was a bad BPO.
In North Carolina, the Real Estate Commission has indicated that licensed real estate agents cannot do BPOs unless they have a reasonable expectation that the BPO will lead to getting a listing. For example, an asset manager for a lender contacts a Realtor when the lender is thinking about foreclosing on a property. They ask for a BPO to see how much money they would get after the foreclosure. If the lender forecloses, there is a chance the real estate agent will get to list the property. So, in this situation, the agent can do the BPO.
How about in a short sale? The property is already listed with another agent. Most of the time, there is already a contract that has been signed by the buyer and seller. How likely is it that the agent will get a listing?
Because of this requirement, many good real estate agents have stopped doing BPOs. I have heard of Realtors who used to do BPOs for lenders that have eliminated that part of their business completely and laid off all the people who used to work in that part of their company. The agents who will take the risk of doing a BPOs in a short sale situation in return for about $50 are not the cream of the crop.
One solution would be for the servicer considering the short sale to hire an appraiser. That is unlikely. The lender is not sure the proposed contract is any good, so it is a gamble to pay that much money to find out. This is particularly true when you consider that on a national average less than one third of proposed contracts on a short sale make it to closing. Furthermore, this would ask the lender to throw good money after bad, as it is unlikely that they will get the money back. After all the lender is already taking less money than what is owed on the loan.
The exception is Home Affordable Foreclosure Alternative (HAFA) short sales. As a part of creating the Short Sale Agreement (SSA) the price or the net proceeds is established at the time the property is listed. The regulations for Fannie Mae, Freddie Mac and the Non-GSE versions of HAFA all authorize the servicer to hire an appraiser and get an appraisal. In areas like North Carolina where the ability to get top quality real estate agents to do BPOs is restricted, getting an appraisal makes a lot of sense. Of course there are appraisals where the appraised value of the property is questionable.
So, what if the appraisal or the BPO is wrong? The regulations for Non-GSE HAFA short sales require that the servicer have a procedure to resolve disputes in the value. The real estate agent submits information to dispute the value and it is reviewed. Hopefully, the process comes to a reasonable result.
Fannie Mae has a Short Sale Assistance Desk. One if its primary functions is to resolve disputes over valuation. The multiple listing service (MLS) in the area where the property is located has to cooperate with this program by allowing Fannie Mae?s Short Sale Assistance Desk to have access to information in the MLS. The Fannie Mae representatives can review the comparable sales independently and come to a conclusion whether the BPO value or the listing agent?s opinion of the value is correct.
Believe it or not, there are boards of directors of multiple listing services around the country that will not allow Fannie Mae to have access to the data. I belong to one MLS that has taken that position. Agents like me who have been in the business for decades remember when the listing book was confidential information and the MLS wanted to keep it to themselves. I fought major battles to be able to put the listings that were for sale on my websites. Now, every listing in the MLS is all over the Internet. It looks like we are still fighting that same battle, because some members of these boards feel that the information about sold properties is proprietary. You can get most of that information from the tax records, just not the amount of closing costs paid and some other details. I cannot understand why the MLS sees a value in preventing the use of that information by Fannie Mae in a situation that will help agents, homeowners, buyers and neighboroods by resolving issues in short sales with a result that more short sales will close. Fannie Mae?s use of the information does not make that data public, they look only at what they need and do not open the data up to anyone but their organization.
In order to make the Short Sale Assistance Desk system work there are some MLSs that need to be more flexible. You could argue that Fannie Mae should be more flexible and look at the tax records, as they are public record. For high tech areas like Wake County, North Carolina, that would work fine as the data is all online. However, the tax records are not online in a large number of counties in America, as illustrated by several of the counties adjacent to Wake County.
Many of the loan servicers have an appeal procedure to review bad valuations. However, most of those procedures start with the listing agent submitting an appraisal. The short sale seller is broke, so that source of funding for the appraisal does not exist. The listing agent is taking a gamble already with all the time and money invested in the short sale. It is unreasonable for that agent to be the source of funding. The buyer is going to get an appraisal as a part of the financing for the buyer?s loan. However, most buyers will not invest the cost of the appraisal until the short sale is approved i.e. they do not want to pay for it until they know that they get to buy the house. There are some occasions where the buyer may be willing to take that risk.
The other choice is to provide enough information that anyone can see that the BPO value is not even close. I had a short sale being reviewed by Cartus, a good quality company that some loan servicers use to outsource the review of proposed short sales. We had a sale where a buyer, who had a pre-approval letter from a lender, would not perform when it was time to fund the loan. So, the sale did not close. I found a new buyer with virtually the same terms. The investor guidelines require that BPOs be current, and if they are too old, the servicer had to order a new one. Cartus ordered a new one. The BPO did not pass the smell test.
This was a sale in a condo complex of 360 units, so it was a big enough neighborhood to have its own value. I had sold five of the same condo units in that complex in the last six months i.e. the same bedrooms, baths, garages and square footage. The prices range from $128,000 to $135,000. The BPO said the value was $152,000. The BPO did not use any comparable values from the complex itself going into much more prestigious areas to find ?comps?. Cartus could not approve my short sale even though the same lender had approved a short sale on the same property at the same price just a month before.
I figured out who did the BPO by checking the reports of who showed the property. The agent was from way, way out of town. I called him. He said he could not talk to me, so I said he did not have to talk, he could just listen. I sent him the comps from the complex and suggested he might want to keep his relationship with whoever ordered the BPO. If his value was found to be way off, he might not keep that relationship. So, he might want to send in an amendment to improve the quality of his rating with whoever ordered the BPO. He would not listen.
So, Cartus ordered another BPO. This one got the value right. However, during the delay, the buyer walked away. You have probably noticed a recurring theme thoughout Creat A Short Sale. The mistakes and delays in the review process cause the buyers to walk away. If found another buyer and the short sale has just been approved.
The previous story will give you one tool you can use to overcome a bad BPO. The BPO will die a natural death if it gets too old. So, wait for it to die. Then, the reviewer can ask for a new BPO and you get to pray that its value is better. You may have to let the file get closed, then get it re-opened. You may have to resubmit the whole short sale. Or, you might have a negotiator that is able to keep the file long enough for the smelly BPO to die. Find out the procedure and you may be able to use a delay in the review to your advantage, for once.
In a previous chapter, I discuss how you can help the reviewer by providing comparable values, knowledge of the market trends and information about defects, repairs, mold and other issues that affect the value of the property. When you get a second chance, do everything you can to help the BPO agent get a valid value.
BPOs remind me of a favorite phrase used by my grandson Sam when he was about three years old. When I would discover him creating a disaster in the kitchen, he would say ?It?s a mess.? It is hard for a grandpa to be upset when he is laughing at a cute phrase, good move Sam. Sammy is right, when it comes to BPO values, ?it?s a mess.?