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Thursday, March 12, 2015

About BPOs, CMAs and Appraisals…


Would be home buyers may occasionally hear that the listed price was based upon a BPO. Sometimes, if the property is to be a short-sale the sellers will hear that term, too; as the bank or mortgage company tries to determine a fair market price.  Normal sellers will always hear the term
CMA or Comparative (sometimes Competitive) Market Analysis; and both buyers and sellers will certainly hear the term Appraisal before the deal is done. All of those terms refer to processes done by professionals in an attempt to determine the value of the property. They are all industry terms and all sound better that SWAG (Scientific Wild-Assed Guess), which it also what they all are.

Of the three terms the one with the most science involved is the appraisal, or at least that is what the appraisal industry works hard at portraying. Buried in the fine print of every appraisal is a little sentence or phrase that points out that the work is an opinion about the price.

Like all of these processes, the appraisal involves real data, mainly from past sales of similar homes, and lots of real work as the appraiser tries to adjust the data that he or she has to work with to level the playing field and make the comparison of the “subject property” reflect as close as possible the current value of the house being appraised. There is no intrinsic value to any house and the most honest assessment of value that I’ve ever heard is that any house is worth what someone else is willing to pay for it. Unfortunately, there is also usually a mortgage company involved and so the value becomes whatever the mortgage company says it is worth – thus the need for the appraisal.

So what do the appraisers use to determine a house’s market value? They start with the assumption that the house is worth what others have paid for exactly the same house. Their job is made immensely easier if the house is in a tract sub with lots and lots of recent sales of houses of exactly the same floorplan and amenities. That does happen, but the reality is that no two houses are ever built exactly alike, so the appraisers challenge is to make “adjustments” for the differences.  That’s still fairly easy in big developments; but, what happens when the house being appraised is custom built and off away from other similar houses. That’s where the appraiser starts applying all of his scientific and experience skills to try to create that level playing field, so the houses can be compared as a market.

Appraisers like to work with as little distance involved as possible, so most like to work with similar homes that are within a mile or two, but they will go out further is necessary.  Staying local takes a lot of the neighborhood factors out of the comparison. They also need the homes to be the same in terms of amenities – number of bedrooms (and locations in the floorplan) and baths, style (i.e. single story, multi story, split level, etc.) and age of the build, garage size, basement finish and much more. The appraisers use the term comps or comparable, because they want you to believe that they are looking at a group of houses that are the same (comparable) as the one that you are considering and that it is logical therefore that your house should sell for the same as those examples. It’s a reasonable and logical conclusion to draw.

The appraisal process does have flaws. The appraiser has seldom done more than drive by the comps, so they may not have a good feel for the materials, finishes or conditions inside. They try to make up
for that by looking at all of the MLS pictures that were on line for the comps. So they try to make adjustments for any differences that they note; adding on value or taking off value for those differences. The other flaw is that they are using data from past sales, so the market may have moved on from those sales, sometimes rather rapidly as is has over the last year or so. So they make adjustments for that, too. You start to see why there is that little statement about it being an opinion; a highly informed one of the appraiser is good and has worked hard at it; but an opinion none the less.

Now, BPOs and CMAs are similar processes but done by real estate professionals and dome without nearly as much rigor as an appraiser uses. Banks and mortgage companies hire local real estate professionals to render opinion about the current market value of properties that they are going to put on the market  as short-sales or as foreclosures. Most of the time a Realtor® hired to do a BPO will be required to at least visit the property to assess it’s condition. After that the process is much the same as with the appraisal, but without all of the adjusting efforts.  The Realtor will look for comps, usually within 3-5 miles of the subject property and using sales that are within the last six months within the market area. The agent will use comps that have the same number of bedrooms and baths and other key amenities; but they make no real effort to agonize over the details and make adjustments. They need to get it within a ballpark range for the bank. Because BPOs are ordered and paid for by the lender, they tend to be conservative on the value. They also tend to involve “distressed homes” that may have been damaged or vandalized, many times by the previous owner.

The Realtor that you call to list your house will do a Market Analysis (usually called a CMA) to try to determine what a fair market price will be for the house. He or she will likely find 3-5 similar
homes that have sold within a 3-5 mile radius of your home and 3-5 homes that are similar and are currently on the market.  Realtors tend to be optimistic about the market and forward looking, so they will almost always come up with the highest “value” for your home. They are trying to answers two questions -  what do I think I can get for this house on today’s market and what do I think it will appraise for if I get that price? As a Realtor, I never use the word comps when I present CMA’s that I have done. I’m careful to use the term “similar homes”, because I understand that I have not applied the rigor that an appraiser would to the selection of the homes, nor do I try to make all of the adjustments that an appraiser would. Certainly I take into consideration things like no garage or no basement and style of the house when looking for similar sold or active homes. If necessary I might make a gross adjustment for a major difference, like no garage when all of the similar homes have one.


The bottom line on all of these is that they are the opinion of the preparer, some done with great rigor and some not. The more “cookie-cutter” your house is that more likely they are to be fairly accurate. Things like location (different school districts, for instance, or located on water) or land content (1/2 and acre vs a place with 5-10 acres), and differences in amenities like finished or unfinished basements can make huge differences in the “values” returned by these processes. They are what we have to work with and it is up to you to question how the market value was determined. Like everything lese in life it should make sense to you and if it doesn’t get a second opinion. You’ll note that nowhere in any of these processes do factors like what you need to get or want to get for your house;  or even what your neighbor down the street got last year for his house (unless it is exactly the same as yours). The market doesn’t care what you need. What all of these processes are trying to determine is what someone might pay for it now. Hopefully you’ll be happy with what you can get. Call me or your Realtor to find out more or visit my web site www.themilfordteam.com.

1 comment:

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