There has been a lot of conversation about Appraisals vs. BPOs. I don't know how it works for existing home sales and residential REOs, although the perspective of residential agents seems vastly different than the comparison I see for commercial REO properties. There are 2 primary drivers when valuing commercial property that do not appear to be as relevent for home sales. First, is the impact of an appraisal on a lender's reserves, and second is impact on price and salability. My experience suggests the proplems are reversed when an appraisal is used to determine sale price of an REOrather than confirm it. When a Lender orders an appraisal to value a commercial property and the valuation is markedly below the value when the loan was written, it may well trigger a requirement for the lender to set aside additional reserves. Add a bunch of those up in a portfolio and it can have serious implications for the Lender. Generally a BPO is quicker, cheaper, and will not trigger an increase in reserves while giving the Lender the info they need to make decisions. This brings us to the second impact; price and salability. Appraisals are a view of the past, adjusted to a point in time - Now. An appraisal must at the very least be adjusted in consideration of events since the date on the appraisal. In common practice however, a new appraisal is often used to set or adjust the value/sale price and remains unchanged for 6 to 12 months. An appraisal in a rising market tends to take advantage of favorable conditions. An appraisal done in a declining market often creates an inflated sense of value and causes the Seller to 'chase the market to the bottom'. BPOs on the other hand are largely a look into the future, done by brokers with knowledge of trends, vacancy, demand, and economics. If the only sales are occurring at all cash, fire sale prices, appraisals give false optimism. A BPO in a declining market is much more likely to indicate what the next sale price will be, rather than what the last sale price was. True REO scenario - Broker tells the Lender/Seller the BPO for a strip center is $3m. Lender hires the Broker to sell the property for $4.5m (nevermind that this is a whole other topic). In the ensuing 18 months the Lender/Seller declines an offer of $2.8m. In the end the Property sells for $1.8m. This appears to be the norm rather than the exception. What have you seen?
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