The prices in the property listings give you a good idea of what the seller will accept. But this number might not be set by the seller. If they are working with a real estate agent or a broker, the price in the listing could be their opinion instead. Sometimes real estate agents nail the price correctly, and others don't.
So what is a broker price opinion, and how is it different from an appraisal? Let's look at the differences so if you're buying or selling a home, there is no confusion.
What is a Broker Price Opinion?
Frequently referred to as a BPO, the broker price opinion is the real estate professional's judgment of the home’s value. A broker that knows the local market will use their experience to value the property. This information can then be used to set the price the home is listed for or show if the home is really worth the price a seller wants.
The sales of similar homes are part of the broker’s evaluation that help guide their opinion on how much the home should be listed for. In this way, it is similar to a comparative market analysis carried out by real estate agents.
Most real estate agents refer to a market evaluation performed for a seller as a CMA. On the other hand, banks and lenders often use broker price opinions.
A BPO can form part of the arrangement with the seller when listing their home, giving them a better understanding of what it will sell for.
Interior and Exterior Broker Price Opinions
There are two main types of BPO; internal and external. When the broker enters the home to check the condition, measure room sizes, and take photographs, an internal BPO can be produced.
The external BPO only involves the broker judging the home by what it looks like on the outside. Though they will still use information about previous home sales, it isn’t going to consider the inside of the home and is less likely to be accurate.
There are so many things that go into evaluating a property's value. The inside of one home vs. another could be totally different. What is the condition like? Are there apparent repairs needed? Are the kitchen and baths updated? Does the home have carpeting or hardwood floors? Does the floor plan have a nice flow, or is there obsolescence?
Without seeing the inside of a home, it is awfully challenging to make these determinations.
How the Broker Price Opinion is Different from an Appraisal
Appraisals are carried out by professional appraisers who have trained and passed exams to meet accepted standards in valuation. They are considered impartial, which allows their opinion to be trusted by lenders.
Lenders don’t use broker opinions as a valid assessment of the value of a home most of the time. Freddie Mac, Fannie Mae, the FHA, the VA, and the USDA, don’t accept BPOs during their approval process.
Part of the reason for this could be that the broker could have some reasons to raise the valuation higher than it really should be. Since they are paid by commission, if the home is valued higher, they will be paid more when it sells.
An appraiser is a neutral third party, whereas a real estate agent is not.
The appraiser is only paid a fee to create an appraisal report, and more work goes into this valuation than a BPO. A typical appraisal can cost between $300 and $500, whereas the broker opinion is more likely to cost just $50-$100.
The law regarding BPOs in some states says that it can only be used to give buyers, sellers, and other interested parties an idea of what the home is worth. However, these state laws tend to differ on exactly how BPOs should be used.
The end result is the appraiser's opinion is more relevant and robust to any real estate transaction. If a buyer has not waived the real estate appraisal contingency, the appraiser could very well cause the sale to fall through.
When Are BPOs Most Useful?
While BPOs can’t fully take the place of an appraisal, they still have value in certain situations. They have proven useful when dealing with foreclosures and short sales.
During the previous market downturn, there were many foreclosed homes. Lenders found it better to use BPOs to value these foreclosed homes, as it allowed a quicker turnaround of the property and reduced the costs involved.
Though even without a market downturn, the broker price opinion can still prove helpful. Pennsylvania created a law not too long ago stating BPOs can only be used in short sales and pre-foreclosure situations. This law also specifically said that it cannot be used for mortgage approval purposes.
If you are buying a home that has already foreclosed or is a short sale, using a BPO might be enough to assess how much the home is worth. Though even if you do this, don’t expect your lender to let you avoid an appraisal and the costs involved.
Even though the appraisal is required so that the lender can be confident that they aren’t lending more money than the home is worth, the cost will still be the buyer's responsibility.
Despite BPOs offering a faster and cheaper way of finding the value of a home, appraisals are likely to be more accurate most of the time. The accuracy of an appraisal will certainly be better than an exterior broker price opinion.
Final Thoughts on Broker's Price Opinions
One of the most essential things to understand about home values is they can be somewhat subjective. If you had ten real estate agents into your home to get a value, you're likely to get ten different values. The same can be said for having ten appraisers inside your property.
Pricing a home is a skill and an art. There is also going to be human nature playing a part in the value. Does an appraiser or real estate agent love the home, or does it not appeal to them? It could certainly impact their opinion of value. That's how human nature works.
Keep in mind that a broker's price opinion is not gospel. It's just one person's viewpoint.
