Broker Price Opinions: Benefits and Pitfalls 

By Thomas Hayostek JD/Bar Candidate  

What is a broker price opinion? 

A broker price opinion (BPO) is a subjective valuation of a property, made by a licensed broker, as it pertains to a potential purchase, sale or lease^[i]. To provide a valid BPO in California, the broker must be a licensed broker making the valuation within the ordinary course of the broker’s business^[ii]. As long as the broker maintains a valid broker’s license, no additional training in valuation is required. There are two types of BPOs, internal BPOs and external BPOs.  

Internal BPOs 

An internal BPO occurs when a broker is granted access to the property. The broker is permitted to take measurements and assess the internal structure of the dwelling. Brokers conducting an internal BPO are verifying the accuracy of the publicly shared information regarding the square footage and quantity of the various rooms (i.e., Zillow). An internal BPO also provides an opportunity for a broker to assess the property for damage to the property that would be difficult to ascertain without an internal assessment, such as the presence of mold or termites.  

External BPO

In contrast, an external BPO occurs when a broker provides their professional opinion of the property’s value based on the outside condition of the property. External BPOs are more reliant on publicly available information and thus have the potential to be less accurate than the internal BPO.  

Along with publicly available information, internal and external BPOs each may consider factors like the age of the home, the size of the property, the neighborhood surrounding the property, any zoning requirements or restrictions, and the condition of the property.  

BPO Alternatives 

The main BPO alternative is a formal appraisal. Section 11302(b) of California’s Business and Professions Code provides the following definition of an appraisal^[iii]: 

‘Appraisal’ means the act or process of developing an opinion of value for real property. The term ‘appraisal’ does not include an opinion given by a real estate licensee or engineer or land surveyor in the ordinary course of his or her business in connection with a function for which a license is required…and the opinion shall not be referred to as an appraisal.” 

 A formal appraisal must be conducted by a licensed appraiser adhering to stringent professional standards that are regulated by statute and the Bureau of Real Estate^{[iv] [v]}.  A formal appraiser must meet certain educational benchmarks, including ongoing educational classes in valuation after they are licensed^[vi]. 

BPO Benefits 

The benefits to conducting only a BPO before a property is sold or leased is the speed and lack of time required to gain an expert’s opinion about the value of a property. BPOs can often be completed in a single day, empowering the client to quickly determine if the transaction involving the property is worth pursuing. BPOs are also much cheaper than a formal appraisal. Appraisals for a single-family home are generally $300-$400 and for multi-family dwellings, the cost can climb to nearly $600. A BPO may cost half as much.  

BPOs are highly effective in foreclosure proceedings. Because buyers are not permitted to enter a dwelling at a foreclosure sale, the external BPO is the most effective valuation tool available. A formal appraiser is likely to reject the job, because they would not be able to conduct all of their commonly performed assessments before providing their opinion, and they may view these limitations as a potential source of future liability. Further, because a bank foreclosing a mortgage can bid up to the value of the mortgage without any cash on hand, the prospective buyer is not likely to spend hundreds of dollars on an appraisal of a building they may never legally enter, let alone own. 

BPO Shortcomings 

The major shortcoming of a BPO is the subjective nature that also makes BPOs so attractive. BPOs rely heavily on a broker’s opinion of the dwelling, the neighborhood, and any faults in the property. If the buyer and seller each conduct independent BPOs, the lack of any statutory guidance can lead to large discrepancies in the valuation of the same property.   

Limitations for BPOs and Federally Related Real Estate Appraisals 

The other major shortcoming of a BPO is their ineffectiveness as an appraisal tool for federally related real estate appraisal activities. “Federally related real estate appraisal activities” refers to real property appraisals occurring in the context of a federally related transaction^[vii]. An example of a federally related transaction would be an appraisal sought to acquire a federally backed loan or to refinance an existing property loan^[viii].  Federally related transactions involve those transactions engaged in, contracted for, or regulated by certain federal financial institutions regulatory agencies^[ix]. These agencies include the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Home Loan Bank System, and the National Credit Union Administration^[x]. 

Thus, federally related real estate appraisals are a limitation on a California broker’s ability to provide a price opinion for a property. Any client seeking federal funding to assist in their venture must hire a certified appraiser to conduct the evaluation on the property. 

Conclusion 

BPOs are a quick and easy way to empower a buyer with more information to make an informed bid on the property. Likewise, BPOs also provide sellers and lessors with a mechanism to ensure their property for sale is not underpriced. While a BPO is not the most accurate appraisal tool, it often is “good enough” for a client to be comfortable moving forward with the next step in their sale or purchase of real property. 

Have questions about Broker Price Opinions in California? Don’t navigate the intricacies of real estate valuations alone. Contact us for legal advice and guidance at 310-619-4941.