Today’s WSJ  “US Grasps for a Workable Approach To Foreclosure Crisis” written by Ruth Simon.  Her last paragraph mentions how government can get a real handle on what properties are really worth. 

What is a “BPO”?  Broker Price Opinion.

Real Estate Agents mostly rookies are getting paid $40 to $50 to do a “drive-by” BPO or $60 to do an interior BPO.  Banks will send the request out because the bank just received a short sale contract on the property, going into foreclosure or loan modification.   

I will now give you  a case example of the system the banks have in place for property evaluation that is more toxic than the asset itself.

Last year I worked 52 transactions including numerous short sale transactions in the last few months and the transactions that have had trouble getting closed are because of the the “BPO”.  Which I have renamed it  “Baloney”.

I took a phone call from an agent coming from Waterbury, Ct. to do a BPO on a house listing I had in Farmington CT that went under contract.    Waterbury, CT median Sale Price in December was $133,000 and Farmington, CT was $315,000.  Waterbury is a city, Farmington is a small suburban town. Instantly I have major red flags with this agent.  He is driving 45 minutes one way which is way out of his market zone for Connecticut and knowing his market is totally different than our market. 

It gets worse.  I asked the agent how many BPO’s he had done.  He answered, “thousands”.  I then asked him how long he had been in the business.  He answered, “3 years”.  This Raised Ranch he inspected had standing water in the basement because of a pipe burst, all window seals were  shot, septic system was 25 years old, couldn’t close the slider so the cold air could not be sealed off not unless you buy a new door, kitchen was trashed, floors needed resanding and all new carpets, the back porch had separated from the house because of rot and last mold was in the entire full bath on the first floor which meant a complete gut job.  I knew that this property would have to be sold “as is” because a bank would not loan a dime on this house in this condition.   My market value was $120,000 for this house “as is” taking the com-parables in the area and then doing all of the adjustments.The  purchase contract actually was at $123,000.  This property completely renovated inside and out would sell for $280,000 because it only had a one car garage.   His BPO gave it a value of $215,000 – “as is”.

The bank that has the mortgage on this property of $270,000 rejects the buyers contract on this property because the bank now thinks they have a property that is worth $215,000.  Keep in mind the mortgage at this point is 10 months behind.  So they have not collected funds for 10 months and it is still not in Active foreclosure.

This can go two ways from this point:

I can throw in the towel and tell the selling agent the contract didn’t get approved for their buyer.  House goes into foreclosure after another 4 or 5 months at a minimum which means the house will sit and rot even more and keep the neighborhood in a depressed state.  So, now we are at month 14 or 15.   The bank starts the auction at $227,000 thinking the house is worth $215,000 because the added attorney fees for the auction.  One person shows up at the auction just to see the process.  There are no buyers because the  buyers have inspected the house and will not pay anything over $90,000 because of the mold, water damage, etc.  House doesn’t sell at auction.  Bank hires real estate agent to list house at $180,000.  No bites – bank starts reducing price process to get it sold.  This process takes 4 to 6 months at a minimum.   Bank accepts offer of $100,000 at best 20 to 24 months later the property finally closes.

Or…

I tell the agent that has the contract in at $123,000 to tell their buyer to hire an appraiser – spend the $300 to get the accurate value of the property if they want the house.  Appraisal comes in at $130,000.  I fax to the bank.  Certified appraisal overrides a BPO and remember banks don’t want to pay for a certified appraisal.  Bank approves sale at $123,000.  Asset is off books in 12 months. Property is out of the MLS supply inventory.  Buyer starts working on house  on month 12 and neighborhood is now happy because it is not looking at this major “eye sore” .  Emotions are positive for everyone involved.  Appraiser got some work and will be able to pay some bills or buy something, Both Realtors sold a house can pay some bills or buy something, buyer is going to have a nice house when complete – heads over to Lowes and Home Depot to get all supplies and hires some contractors to do some work, neighborhood is happy and everyone starts to feel good about the world around them.  This is the route I went with this property because I knew I was right becaues I know my market.

Bottom line, banks if you want a true evaluation. Spend the money and hire licensed appraisers to do full appraisals not “desk top” appraisals which is another BPO scenario that will be starting May 1st.  Values are going to be too high most of the time or too low in this approach.   Put appraisers to work  and get the correct value for the property “as is”.

 Get the properties sold quickly in a short sale once a homeowners decides they have to go that route if they can not modify their loan.  By modify I don’t mean do “forebearance agreements” that raise homeowners payments  more than double from there original mortgage payment.  If they can’t make their payments now how do you expect for them to make a double payment for a few months?  I see the Forebearance agreements that are given when I am at their kitchen table listing these properties and I just shake my head.  These are not the loan modification homeowners need when their incomes have been slashed in half.   

Loan modification systems are constipated along with short sale systems and proper decisions are not being made based on bad practices.  How can America feel good about itself when all we are seeing in our own neighborhood is dispair and rotting vacant properties?

Stop listening to the Exec’s in the Jet’s that we are now paying for that are only focused on their bottom line based on erroneous facts because of bad business practices.  Listen to  professionals  like myself  that are with people at their kitchen tables dealing with the current problem head on.

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