Sunday, March 29, 2009

Thanks, Ken

Although there has been quite a bit of discussion among appraisers and real estate brokers about Broker Price Opinions (BPOs), objective discussion of the difference between real property appraisals and BPOs has been missing from articles directed towards consumers. Count on Ken Harney to take charge and inform the public.

What Might Be Hurting Home Values

By: Kenneth R. Harney

Are low-balled value estimates on short sales and bank-owned foreclosures artificially depressing property values in neighborhoods across the country?

Growing numbers of appraisers and consumer groups think the answer is yes, and are demanding that Congress or state regulators crack down. Their complaints focus on what are called "broker price opinions," or BPOs, which substitute for appraisals.

Unlike standard property valuations performed by licensed appraisers, which can cost hundreds of dollars, BPOs often cost $50 and are performed by real estate agents who may have minimal or no appraisal training and are subject to no regulatory oversight. Real estate agents defend BPOs, arguing that their extensive knowledge of local market trends equips them to render accurate estimates.

I found this part of the article surprising:

The National Association of Realtors, whose 1.2 million members include many of the agents who prepare BPOs, says it has no policy guidance on the issue, but expects to issue a statement in May. Asked whether the association would at the minimum urge members to adhere to state laws and regulations, a spokesman said "there is no policy" on the issue at present.

My reading and understanding of the National Association of Realtors Code of Ethics reveals Articles and Standards of Practice that provide guidance and obligations to members:
Article 1 - When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS® remain obligated to treat all parties honestly. (Amended 1/01)

  • Standard of Practice 1-3
    REALTORS®, in attempting to secure a listing, shall not deliberately mislead the owner as to market value.

  • Standard of Practice 1-14
    Fees for preparing appraisals or other valuations shall not be contingent upon the amount of the appraisal or valuation. (Adopted 1/02)

Article 11 - The services which REALTORS® provide to their clients and customers shall conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage; specifically, residential real estate brokerage, real property management, commercial and industrial real estate brokerage, real estate appraisal, real estate counseling, real estate syndication, real estate auction, and international real estate.

REALTORS® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any persons engaged to provide such assistance shall be so identified to the client and their contribution to the assignment should be set forth. (Amended 1/95)

  • Standard of Practice 11-1
    When REALTORS® prepare opinions of real property value or price, other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, such opinions shall include the following:

    1. identification of the subject property

    2. date prepared

    3. defined value or price

    4. limiting conditions, including statements of purpose(s) and intended user(s)

    5. any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants

    6. basis for the opinion, including applicable market data

    7. if the opinion is not an appraisal, a statement to that effect (Amended 1/01)

Florida law specifically allows real estate licensees to prepare appraisals and Broker Price Opinions. However, if a real estate broker prepares an appraisal, it must conform with the Uniform Standards of Professional Appraisal Practice (USPAP).

After reviewing dozens of BPO forms, including those developed by Fannie Mae and Freddie Mac, I've not seen one that would allow a REALTOR to comply with their obligations under the Code of Ethics without significant narrative additions. Also clear is that few of the folks jumping on the BPO Bandwagon recognize their potential for liability when providing valuation services. It's just a matter of time before users of these "valuation products" start to file complaints with local Associations of Realtors and State Regulatory Agencies.

At any rate, this will be discussed by the National Association of Realtors Appraisal Committee, along with the Home Valuation Code of Conduct (HVCC) during their meetings in Washington, D.C. in May. I'm looking forward to NAR publishing some specific guidance for their members.