1) What is a BPO 

A broker price opinion (BPO) is a real estate professional’s dollar estimate of a property’s worth. It is an opinion, but one often backed up by the selling prices of comparable homes in comparable neighborhoods. BPOs most commonly come into play when setting the price of a property being put on the market: They are typically part of the listing agreement a seller signs with an agent. But they can be called for in other situations, like a foreclosure sale or a short sale. Homeowners thinking of refinancing their mortgages or wanting to get their private mortgage insurance premiums lifted might request them too. Finally, BPOs can be employed in valuing an estate or financial assets.

Types of broker price opinions
 

The two main types of BPOs include:

• Internal BPO: An internal BPO involves a real estate agent spending time inside the property to evaluate the home’s condition, take measurements and capture photographs.

• External BPO: An external BPO is much less involved. The real estate agent doesn’t even enter the property, but instead assigns it a value based on its exterior appearance/condition and its location.
   

Common uses of broker price opinions

BPOs most commonly come into play when you’re putting a property on the market. The home seller gets an understanding of what the property will command, and the buyer gets an understanding of what they will need to pay to own it. However, in certain situations, such as a foreclosure or a short sale, BPOs can also play an important role. “Back in the real estate downturn [of 2006-09], there were so many foreclosures and properties on the market, lenders would use these due to a faster turnaround time and lesser fee,” says Rocke Andrews, past president of the National Association of Mortgage Brokers and owner of Lending Arizona, a Tucson brokerage. And they still do. In some states, in fact, “BPOs cannot be used for any type of mortgage purpose, except for short sales and pre-foreclosure work,” says Jefferson L. Sherman, 2020 president of the Appraisal Institute and founder of Sherman Valuation & Review in Cleveland, Ohio.

When to get a broker price opinion

Homesellers use BPOs to set an appropriate listing price. But homebuyers and homeowners can find them useful too. If you’re a buyer, obtaining your own broker price opinion often makes sense when you’re:
 

• Buying a financially distressed property. Brokers can often offer a more accurate valuation when a home is in foreclosure but exists in a neighborhood with good comparables.

• Making an all-cash offer and/or trying to close quickly. Getting a BPO on which to base your bid is often faster than hiring an appraiser.

• Working with a lender who accepts BPO reports (and in a state that allows them). On the other hand, if you’re a homeowner, a BPO might make sense when you’re:

• Trying to eliminate your private mortgage insurance (PMI). Years after you’ve bought a property, BPOs can work if you’re seeking a valuation of your home and your home equity stake to eliminate PMI (see FAQ). Fannie Mae and Freddie Mac accept BPOs for borrower-requested PMI cancellations on their loans.

• Considering swapping your mortgage or getting another home-based loan, and you want to know if you have enough equity. or home equity line of credit (HELOC) and Many lenders will accept a BPO if you’re seeking a HELOC or home equity loan or want to refinance your mortgage.

How broker price opinions work

To determine the broker price opinion, a real estate agent or broker will use their expertise with the local housing market to assign a dollar amount to a property based on certain factors.“Usually, the agent does this [comparative market analysis] as part of their listing agreement when selling a house,” says Andrews. “They look at similar properties that have sold recently and provide an estimate of what the home should be listed for.”Some private money lenders will use BPOs, too, says Andrews. In traditional mortgage lending, however, when financial institutions determine how much to loan you and what to charge, BPOs are not the go-to method for determining a property’s value. In most cases, a lender will order a professional appraisal for the property, instead of a BPO.

That’s because broker price opinions are not accepted for mortgages sold to Fannie Mae or Freddie Mac — as most home loans are — or insured/guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or Department of Agriculture (USDA), according to Sherman.

Broker price opinion vs. appraisal

While a BPO and an appraisal might sound similar, several important characteristics set them apart:

• Expertise and training: Sherman points out that becoming an appraiser comes with a fairly rigorous set of standards. “Appraisals are conducted by duly certified valuation professionals who have met extensive education, experience and testing standards in valuation, have demonstrated their valuation competency by passing a national exam and adhere to generally accepted uniform valuation standards,” he says.

• Vested interest: A real estate professional will likely receive a commission based on the home’s sale price, so it’s to their advantage to set a price on the high side. That means that a BPO might be a bit inflated. In contrast, an appraiser is paid solely for the job of determining the property’s value, which limits any potential conflict of interest.

• Cost: Broker price opinions are also less expensive than the cost of an appraisal. An appraisal can run anywhere from $600 to $1000 or more, and a BPO costs half that — and sometimes even less, roughly $100 or so, according to Andrews.

How to get a broker price opinion

The easiest way to get a BPO is by asking your own Realtor or real estate agent to assess the home’s value. However, you can also use most real estate agents in your area. You may also want to consider searching the National Association of BPO Professionals directory instead. Just enter your zip code to see a list of available specialists in your area. This option allows you to choose a professional who may offer more objectivity than your own agent. Your broker will schedule a time to look at the home and deliver a report. Be sure to remember the difference between an internal and external BPO; if you have made significant upgrades to the home such as a kitchen remodel or a bathroom renovation, you’ll want to make sure those changes are accounted for when determining the property value.

 

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2) What is a REO?
 

What Is A Real Estate Owned (REO) Property?

A typical real estate owned (REO) listing has failed to sell during the foreclosure process and is now owned by a mortgage lender, bank or the mortgage investor. Buying an REO property is done through an REO agent or an auction platform. Properties are sold “as is” and often discounted to sell as quickly as possible.

What To Know About Real Estate Owned Property

The big benefit to buying an REO property is that lenders and major mortgage investors are trying to get something out of a property that has been foreclosed on and hasn’t sold at auction. This could mean that they’re often much more flexible on cost and you may get a great deal.

 

One thing that’s important to know before moving forward is that these are often pieces of distressed property. Properties are typically foreclosed on because a person falls behind on their mortgage. If you don’t have money for the mortgage payment, you often don’t have money for upkeep. Additionally, if you know you’re being foreclosed on, there’s not the usual incentive to keep the home in good repair.

How Does An REO Property Gain Its Status?

There are several steps that need to take place before a home becomes an REO property. Let’s run through them:

The Original Homeowner Defaults On The Mortgage

Pre-foreclosure can occur when someone falls several months behind on their mortgage payment and is unable to agree with their mortgage lender on an option that would allow them to remain in the home, sell via a short sale or deed back to the lender/investor via deed in lieu of foreclosure.

The Property Goes Into Foreclosure

When a property goes into foreclosure, a foreclosure sale is held on a specific date for a specific price. If there is no successful purchaser of the property, the lender or the investor on the loan takes over management of the property. If the property is occupied, the occupant will be evicted.

The Home Becomes A Post-Foreclosure Property 

Properties unsold at the foreclosure sale are referred to as REO. If the property fails to sell at the specific price, it becomes REO inventory.

Pros Of Buying REO Properties

It’s important to note that there are pros and cons for both people looking for their next home and those who are looking at them as an investment property. The major benefits of REO investment breaks down to three different areas. Let's touch on them next.

Low Price

One of the typical drivers of REO sales is their low price. Lenders are more motivated to sell REO properties in order to recoup their loss from the foreclosure, so they are more likely to sell the property below market value in order to get rid of it quickly.

No Outstanding Taxes

Buying a home that was foreclosed on by a lender is often better than buying a home that was previously a tax foreclosure. The reasoning for this is that the new owner of the home that was previously foreclosed on for taxes often inherits the tax bill, which can be an unwelcome surprise. You’ll want to do a title search and see what kind of guarantees a lender will give you.

Negotiating With Motivated Banks

Banks, mortgage lenders and other mortgage investors aren't in the business of holding onto and maintaining property. Because of this, they may be more motivated to get what they can and dispose of the property faster than the average seller in a traditional sale. This could give you some flexibility to negotiate on price. Your real estate agent can advise you on leeway.

Cons Of Buying REO Properties

While there are benefits, there are also numerous potential drawbacks to buying an REO property. Let’s go through them.

Sold ‘As Is’

The first drawback with REO is that you are buying a house sold "as is." This means you’re getting the house and everything that comes with it. Sure, that could include a bathroom with a luxurious spa-like ambience, but it could just as easily mean a hot water heater that doesn’t work.

Uncertain Title Status

Beyond that, sometimes you won’t get a full guarantee that no one else has a claim to the home, so the purchase of an owner’s title policy could be a huge boon to give yourself some protection in case there are later title issues.

Can Require Expensive Repairs

As we started to get into above, REO homes may require extensive repairs in order to make them livable. The previous homeowner may not have had the funds for upkeep.

 

Generally, it’s a good idea for homeowners to save 1% – 3% of the purchase price of the home annually for maintenance. However, a foreclosed home can easily exceed this figure.

 

To give yourself some level of certainty, it’ll be important to get a home inspection. Although the lender or mortgage investor is highly unlikely to fix anything because they want to make as much money as possible rather than sinking money into the property, this could give you some negotiation flexibility. Additionally, it’ll let you know what you’re getting into.

May Be Occupied

If the home is a single-unit primary residence, the lender or their representative will ensure the previous homeowner has vacated the property. However, if it’s a multi-unit or investment property with tenants, you’ll need to tread a little bit more carefully. The Protecting Tenants at Foreclosure Act requires giving the tenants 90 days’ notice. In some cases, you may be required to honor the terms of the existing lease. Laws in some states may give tenants rights beyond this. Consult a local real estate attorney if you have any questions.

How To Buy REO Properties As Real Estate Investment

Buying REO properties is often a popular method of real estate investing. There are a few key areas in which buying an REO property differs from the traditional home buying process. Let’s lay them out:

1. Find A Real Estate Agent With REO Experience

When buying an REO property, you have to have a real estate agent. Lenders typically won’t entertain an offer for an REO property from just anyone. You’ll have to work with a real estate agent who submits your offer to an REO agent. These REO agents specialize in dealing with lender sales and represent their interests in the transaction.

2. Get Your Initial Mortgage Approval

Lenders want to be sure you’re a serious buyer. Because of this, you’ll need to have a letter attesting to the fact that you can afford the offer you’re making. While this is true for most home sales anyway, you won’t find a lender who entertains an offer without preapproval.

 

Additionally, there will likely be different requirements you’ll need to meet if you’re buying an REO property as an investment property rather than a primary residence, so you’ll want to be sure you’re fully aware of any qualifications you’ll need to meet as you begin the mortgage approval process.

3. Find An REO Property

If the REO property is owned by the investor, these can be found through portals maintained by the major mortgage investors:

• Fannie Mae’s HomePath

• Freddie Mac’s HomeSteps

• Federal Housing Administration (FHA) owned homes sold on the Department of Housing and Urban Development (HUD) Home Store

If the mortgage investor does not manage the REO then the mortgage lender does. In these instances, the mortgage lender would have to be contacted to purchase through the auction platform or listing agent.

 

REO properties may be labeled as such on multiple listing services (MLS). These services, commonly pulled in through home search sites such as Rocket HomesSM 1 may include ways to filter by REO properties and you’ll likely be able to figure out who the REO agent is.

4. Submit An Offer

You’ll likely submit an offer through the lender or investor’s REO website. Typically, the websites used to submit your offer are the same ones where investors list the homes, such as HomePath from Fannie Mae (FNMA).

5. Hire A Home Inspector

Before you close on your REO property, you’ll want to be sure you get a home inspection. It may sound tempting to skip this step since it’s unlikely the lender will make repairs on the property, but getting a home inspection is still the best way to ensure you’re fully informed on the property’s condition and any work it might need before you buy it.

 

You might consider trying to include an inspection contingency in your offer so that you have the opportunity to back out of the sale without penalty should the inspection uncover any deal-breaking issues.

The Bottom Line: REO Properties Can Be High Risk, High Reward

Real estate owned properties in the possession of lenders and mortgage investors can be the source of a good deal on a home because a lender is highly motivated to get rid of it. They’re also somewhat less risky than tax foreclosures from an investment standpoint. On the other hand, while you may get a deal, these homes are often sold as-is, so you need to be prepared to make repairs. Make sure to work with an experienced agent who can guide you.