In testimony March 11 before the House Subcommittee on Financial Institutions and Consumer Credit, David Berenbaum, executive vice president of the National Community Reinvestment Coalition, called on Congress to outlaw BPOs when used as appraisal substitutes in distressed property transactions. Berenbaum said that realty agents "develop hasty and inaccurate BPOs that underestimate" the value of bank-owned and other distressed real estate. That lowballing, in turn, "is often destructive to local markets and depresses the value and equity of (lender-owned) properties."
Gary Crabtree, CEO of Affiliated Appraisers in Bakersfield, Calif., says his company's research "shows very clearly" that BPOs frequently understate actual market values by as much as tens of thousands of dollars.
Why would agents lowball their BPO valuations? Crabtree argues that there are inherent conflicts of interest: "They want to sell the property fast" to make bank asset managers "look like heroes" to their bosses. They may also want additional BPO and property listing assignments from those same bank managers, yielding them commission dollars. Many of the properties are snapped up by investors at the depressed prices driven by BPO valuations. Those sales then become "comparables" for appraisers, "which simply intensifies the downward spiral" in local property values, said Crabtree.
Regulators in a number of states recently have expressed concern about excessive use of BPOs. The Nevada Real Estate Division warned agents that when a real estate salesperson "prepares a BPO for any reason other than listing and selling a property, and receives compensation, they have violated" state law.
Nebraska regulators issued a similar warning last December, threatening to criminally prosecute realty agents who are not licensed to perform appraisals but who do BPOs as appraisal substitutes.
The National Association of Realtors, whose 1.2 million members include many of the agents who prepare BPOs, says it currently has no policy guidance for Realtors on the issue, but expects to issue a statement in May. Asked whether the association would at the minimum urge members to adhere to state laws and regulations, a spokesman said "there is no policy" on the sensitive BPO issue at present.
National appraisal groups, including the Appraisal Institute, whose members lose revenue when lenders or property owners order BPOs, are up in arms. Bill Garber, the Institute's head of government relations, said BPOs are an attempt "to pay the least to obtain something" -- appraised value -- "that is extremely important to get right."