A recent article in The Wall Street Journal highlights a rise in so-called “drive by” home appraisals used by major real estate investors in the U.S. These appraisals, also known as “BPOs” (broker price opinions), are a form of informal price valuations conducted for far less than the cost of traditional home appraisals. BPOs are often referred to as “drive by” appraisals because the appraisers typically do not do much more than identify homes on Google Earth or on popular websites such as Zillow.
Following the financial crash, Congress banned the use of BPOs for traditional mortgages as part of its effort to pass tighter financial regulations. But as the Journal reports, the prohibition did not extend to real estate investors who purchase tens of thousands of homes, such as large investment companies. These large investors are still permitted to use BPOs as a cheaper alternative to traditional home appraisals.
The rise in BPOs has led to a sub-industry for realtors and other industry members who perform inexpensive valuations for large real estate investors. Large investors recognize the value in farming out valuations, and today many BPOs are even performed overseas in India.
Although BPOs provide an inexpensive means of obtaining home appraisals for large investors, they are certainly not without risks. BPOs have been used to value collateral for more than 20 billion dollars in bonds issued by large institutional landlords. Given the inherently risky nature of BPO valuations, financial markets could face trouble if many of these BPOs turn out to stray far from proper valuations. Ordinary home buyers are already banned from using BPOs—and for a good reason. Home appraisal is a complicated business best left to professionals.
Whether Congress eventually bans large investors from using BPOs may depend on the nature of the next financial crisis.