Blind Squirrel and Acorns

[J Grant]

It is already happening on the non-origination side of the business, where BPOs are used much more often than appraisals in default servicing. The VP of Claim Management at my company insists that BPO's are much more useful than appraisals for his purposes based on his 30 years of claims/default servicing experience in the industry. He told me that his former company used to use both appraisals and BPO's to value properties on defaulted loans until they determined that BPO's were more accurate than appraisals in estimating what the eventual sale price of a REO would be when sold by the lender/servicer. His conclusion is why obtain and appraisal when you can order three BPO's for less than the cost of a REO appraisal and those BPO's are more likely to accurately predict the eventual sale price of the REO when sold by the lender/servicer (which directly affects the amount that we may have to pay in a claim made under our MI policy). Even though I am an appraiser and reflexively favor appraisals over BPOs, I have no evidence that my claim management VP's conclusion is incorrect

It's hard to comment on this when all we have is a VP claim that BPO's are more accurate to "eventually" predict the sale price...the fact that three BPO's could be had for the price on one REO appraisal is clear in appeal!.

A BPO is a PRICE opinion, an appraisal is a value opinion. Since, as we seen, many investors ended up buying REO proeprties at cheap prices, then turning round, putting some uprades and paint in and flipping them for higher prices....so, how good were those BPO's? They predicted a PRICe that could be paid, usually within days, by investors...turns out many of these REO's were sold below VALUE.., since the subsequent resale prices of these very same properties, often with minimal improvements and as little as 3 months later in the case of flips, was so much higher.

I did a fair amount of REO appraisals and I know my market value opinions were good, and that the properties often would sell very close to my opinions, because I tracked them over a period of time. More than a few RE agents were upset though when my values were not "low" enough. On the other hand, I would use REO or short sales as comps when the market indicated that would lead to most credible results, so the properties I appraised did sell within the market exposure and close to the REO addendum second value opinion.

It is true that some appraisers resist using REO sales as comps, due to what they believe is incompatibility with the market value opinion definition. So those appraisers may have been coming up with value opinions that were above what the market could bear in price.

REO appraisals typically have an Addendum with a second value opinion in a limited days on market...wonder which value opinion was relied on in these reports.

I have to wonder how many appraisals were ordered in relation to BPO's to even see a difference. I know once the market declined/crashed, REO appraisal work was MIA for awhile...imo a good many BPO's under valued these properties for quick sales to pocket buyers or investor buyers.... I would not be surprised if it turns out that some former owners who defaulted ended up buying their same properties back at a steep discounted price, perhaps under an LLC or partnership.

which directly affects the amount that we may have to pay in a claim made under our MI policy

What does this mean...if the price of the defaulted on property was lower, would the amount of claim paid out by MI company be lower, aka a percentage of sold price?
​

 

[PropertyEconomics]

JGrant .. how do your comments square with the fact that an appraisal "valuation" in fact is a determination of "most probable price" ... arent you providing an opinion of market value which is in fact, by definition, price?

 

[J Grant]

JGrant .. how do your comments square with the fact that an appraisal "valuation" in fact is a determination of "most probable price" ... arent you providing an opinion of market value which is in fact, by definition, price?

Well yes, but as we all know the definition of most probable price has specifcs attached to it in a market value opinion...a reasonable exposure time estimate, and then all the rest...well informed buyer and seller acting prudently, a price not affected by undue stimulus, etc (too tired to type the whole enchilada of full market value definiotn.

Furthermore, though the definition attached to market value opinin references most probable price, the method to arrive at market value definition has more to it then just the definition...a sales comparison approach using the most substitute similar properties to subject, etc.

A RE agent developing a price opinion has none of those caveats. It's a price opinion! so if they develop a price that lets the property sell in two day market exposure, it's all good! (because they don't identify market exposure). If their price reflects undue stimulus , that's fine too, they dont' adjust for it or disclose it. Their sales approach can use whatever comps are needed to achieve a certain price, etc. Therefore, their price opinions may come true (be more accurate) as they are then allowed to sell the same properties...selling an REO in two days for a low price to an investor buyer waiting to snap them up, for example.

In Florida, the first year or two of REO sales saw very low prices, and much of them were list priced via BPO...as I said, they were flipped and resold higher a short time later and with minimal repair or upgrades, so clearly these price opinions were not that reflective of value (imo)

Later, lender sellers started taking some preventative measures to shore up value...such as REO's had to be listed at least 2 weeks and shown to owner occupant buyers before allowing investor bids, for example. Eventually, that did lead to higher prices, and now investors must be pretty gloomy because the REO property prices have risen considerably (unless the REO is a dump/in terrible condition)

Fannie Mae owned REO's are the most serious about this with their program...they repair and paint a property before it goes to market, often green light it for their financing and they sell at market value or above.

 

[George Hatch]

That's the thing right there - appraisers are working toward the MV definition as actually stated and the brokers are working to "their" version of value irrespective of the definition of MV.

I would say if a lender actually wants the predicted sale price 3 or 6 months from now the BPO-as-of-today probably is the better indicator of that.

 

[timd354]

It is already happening on the non-origination side of the business, where BPOs are used much more often than appraisals in default servicing. The VP of Claim Management at my company insists that BPO's are much more useful than appraisals for his purposes based on his 30 years of claims/default servicing experience in the industry. He told me that his former company used to use both appraisals and BPO's to value properties on defaulted loans until they determined that BPO's were more accurate than appraisals in estimating what the eventual sale price of a REO would be when sold by the lender/servicer. His conclusion is why obtain and appraisal when you can order three BPO's for less than the cost of a REO appraisal and those BPO's are more likely to accurately predict the eventual sale price of the REO when sold by the lender/servicer (which directly affects the amount that we may have to pay in a claim made under our MI policy). Even though I am an appraiser and reflexively favor appraisals over BPOs, I have no evidence that my claim management VP's conclusion is incorrect

It's hard to comment on this when all we have is a VP claim that BPO's are more accurate to "eventually" predict the sale price...the fact that three BPO's could be had for the price on one REO appraisal is clear in appeal!.

A BPO is a PRICE opinion, an appraisal is a value opinion. Since, as we seen, many investors ended up buying REO proeprties at cheap prices, then turning round, putting some uprades and paint in and flipping them for higher prices....so, how good were those BPO's? They predicted a PRICe that could be paid, usually within days, by investors...turns out many of these REO's were sold below VALUE.., since the subsequent resale prices of these very same properties, often with minimal improvements and as little as 3 months later in the case of flips, was so much higher.

I did a fair amount of REO appraisals and I know my market value opinions were good, and that the properties often would sell very close to my opinions, because I tracked them over a period of time. More than a few RE agents were upset though when my values were not "low" enough. On the other hand, I would use REO or short sales as comps when the market indicated that would lead to most credible results, so the properties I appraised did sell within the market exposure and close to the REO addendum second value opinion.

It is true that some appraisers resist using REO sales as comps, due to what they believe is incompatibility with the market value opinion definition. So those appraisers may have been coming up with value opinions that were above what the market could bear in price.

REO appraisals typically have an Addendum with a second value opinion in a limited days on market...wonder which value opinion was relied on in these reports.For REO/Default servicing purposes, the value that is considered is usually the value in the REO addendum with a limited marketing time

I have to wonder how many appraisals were ordered in relation to BPO's to even see a difference.
Literally thousands
I know once the market declined/crashed, REO appraisal work was MIA for awhile...imo a good many BPO's under valued these properties for quick sales to pocket buyers or investor buyers.... I would not be surprised if it turns out that some former owners who defaulted ended up buying their same properties back at a steep discounted price, perhaps under an LLC or partnership.
That is why multiple BPO's are ordered from multiple sources and we simply will not knowingly allow the property to be listedby an agent/broker with any relation to the supplier of the BPO's . Additionally, there is also danger of the appraised value being similarly manipulated under the circumstances as there have definitely been cases of collusion between the
which directly affects the amount that we may have to pay in a claim made under our MI policy

What does this mean...if the price of the defaulted on property was lower, would the amount of claim paid out by MI company be lower, aka a percentage of sold price?
​

No, if the property is sold at a lower price, it would potentially cause us to pay out a larger amount since the claim covers a lender's losses up to the policy limits (which is typically between 12-35% of the loan amount) and the losses would be more if the property re-sells at a lower price.

 

[J Grant]

No, if the property is sold at a lower price, it would potentially cause us to pay out a larger amount since the claim covers a lender's losses up to the policy limits (which is typically between 12-35% of the loan amount) and the losses would be more if the property re-sells at a lower price.
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Then perhaps your VP is not such a smart guy after all...he liked BPO's because the thought they predicted prices better, but the prices were below the property's value...so the company lost thousands in each claim payout (but he saved money by not ordering an appraisal!)

Investors snapped these properties up at basement level prices because they knew the value was there..sure enough the properties resold for higher prices later, often a short time later and with no more than a cleanup and paint / carpet..

Fannie Mae imo was the only smart entity at managing their REO properties because they sold them for market value due to their strategy.

From USPAP definitions, Price: The amount asked, offered or paid for a property.

Comment: Because of the financial capabilities , motivations, or special interests of a given buyer or seller, the price paid for a property may or may not have an relation to the value that might be ascribed to that property by others.

Market Value: a type of value stated as an opinion, that presumes the transfer of a property (ie, a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.

 

[Renee Healion]

Hey the stats show the BPO was close to the sales price. Why ask why that magic happened.

 

[DTB]

Would be also interesting to see who gets the "blame" for "killing" a deal, once the appraisers are out of the picture. No more appraiser to blame for coming in low! The AVM did it! I suppose the RE agents or buyers or sellers will file complaints against...who? The lender for deriving the AVM or evaluation value that "killed" their deal, or was "wrong" in their eyes?

Why wouldn't'; an AVM value be as hotly contested or challenged as an appraisal value, (or more so?



.

The cost will be so affordable and the speed lightning quick that sellers will run one when they list the property for sale, the buyer will run one before they make an offer and the lender will run one for financing.

It will likely offer a fairly tight range of values, if required a "person" can visit the property, inspect it, take all the photos anyone would want and the range would be skewed to single point within the range.

If a buyer or seller thinks the property is worth more, the buyer will need to fund the shortfall.

What's to argue at that point?

 

[timd354]

No, if the property is sold at a lower price, it would potentially cause us to pay out a larger amount since the claim covers a lender's losses up to the policy limits (which is typically between 12-35% of the loan amount) and the losses would be more if the property re-sells at a lower price.
__________________
Then perhaps your VP is not such a smart guy after all...he liked BPO's because the thought they predicted prices better, but the prices were below the property's value...so the company lost thousands in each claim payout (but he saved money by not ordering an appraisal!)

Investors snapped these properties up at basement level prices because they knew the value was there..sure enough the properties resold for higher prices later, often a short time later and with no more than a cleanup and paint / carpet..

Fannie Mae imo was the only smart entity at managing their REO properties because they sold them for market value due to their strategy.

From USPAP definitions, Price: The amount asked, offered or paid for a property.

Comment: Because of the financial capabilities , motivations, or special interests of a given buyer or seller, the price paid for a property may or may not have an relation to the value that might be ascribed to that property by others.

Market Value: a type of value stated as an opinion, that presumes the transfer of a property (ie, a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal.

He is actually a very smart guy, it is very stupid to think that a guy like that would not be smart enough not to study whether the use of an appraisal or BPO for internal default valuation somehow affected the sale price that the REO ultimately sold for? They were able to determine that the ultimate sale price on REO's was not affected by whether the company used an appraisal or BPO for internal valuation... which makes sense since the listing agents used to sell the properties were not involved in either the BPO's or appraisals obtained by the company. What they did discover is that their is no doubt that the BPO's were more likely to have a value estimate that was closer to the ultimate sales price than an REO appraisal (which were ordered as REO appraisal with a quick sale value estimate based on a limited marketing time). This guy is very good at what he does and that is why we hired him.

 

[timd354]

Hey the stats show the BPO was close to the sales price. Why ask why that magic happened.

The properties were not listed and sold by anyone involved with the agents who did the BPO's, so no "magic" was involved.