An industry-wide shortage of appraisers is prompting new approaches to asset valuation.

The appraiser logjam is an aggravating industrywide problem lenders have been forced to accept as immutable reality. The previous standard of 30 days to close a loan now averages closer to 45 days—and up to 90 days in more remote areas. The cost of an appraisal, which just a few years ago was $375, now averages more than $600, and it can run up to $2,000 for more remote housing or loans with speed-sensitive deadlines, according to a Dec. 6, 2021, article in Appraisal Buzz called “How Tech is Working on the Solution to the Appraiser Shortage.”

The reasons for the logjam are manifold. Even before the pandemic, a labor shortage in the appraiser space has meant slower wait times. Then, like everyone else, appraisers have been affected by COVID outbreaks, and many have since left the field as part of the Great Resignation phenomenon. In fact, according to the Appraisal Institute, more than 10,000 appraisers have left their jobs since 2013, plus more than half in the industry are approaching retirement age. Add to that the sheer volume of real estate deals over the past two years and the causes for the backlog become clear.

In the past, appraisal management companies (AMCs) were a great resource for finding, staffing up, and hiring or subcontracting appraisers. However, they are being affected by the same volume of work and slowdowns.

Lenders are likely losing anywhere from 15%-30% of their business opportunities over speed-to-closing issues, which is not a sustainable situation, for home sellers, lenders, or borrowers.

For anyone buying a home, and especially for real estate investors, the wait time for an appraisal is simply not manageable. So many individual investors are now competing against major conglomerates and cash buyers that many properties will be lost in that window. As a result, many are turning toward closing without appraisals, a high-risk practice that any lender with a sustainability goal would not recommend.

Moving Away from the Traditional Appraisal

One possible solution for this crisis is the wider adoption of Broker Price Opinions (BPOs). As a faster, cheaper alternative to a standard appraisal, a BPO is typically conducted by a real estate agent or another real estate professional local to the neighborhood who has a handle on that market.

In lieu of an interior home inspection, BPOs rely on MLS and other accumulated market data to support an opinion of value. The majority of BPOs are based on comparative sold homes of similar style, room and bathroom count, along with square footage. In addition, with new technology tools, a BPO will allow lenders to value the property.

The BPO is just another resource for the lender to use for collateral valuation. As with any resource, the key here is to ensure you are engaging an expert in the local real estate market. Larger financial institutions such as national banks, credit unions, and community banks use the BPO product when underwriting certain types of real estate loans.

Underwriting loans to the individual rather than the property is typically not done in asset-based lending. But when leveraging experience, cash, credit, and cashflow to qualify customers, the BPO option becomes only one piece of the puzzle—along with an inspection and a clear title.

A BPO allows lenders to accommodate a borrower’s time demands, shorten the number of days to closing, and ensure the borrowers will be able to purchase the desired property. Now you can get a BPO within four days and be ready to close the loan in a week or two at most. That means the buyer can jump in, start renovations, and yield profits sooner.

In circumstances where there are no recent interior photos, lenders opting to use a BPO should also require a budget inspection to confirm repairs needed and obtain the necessary photos. Together, the BPO, repair statement, and photos help support the current condition of the property and give lenders a perspective on which to make decisions. As a customer service solution, BPOs allow lenders to better address customer needs and help customers reach their investing goals, which in turn ensures a strong ongoing partnership.

Not a One-Size-Fits-All Solution

An appraiser takes historic real estate trends and data into account—a bigger picture of the market, if you will. If you are not taking a personalized approach to underwriting, you may be opening your company to financial risk with this less official valuation.

Offering BPOs will not work for every lender and every customer. Almost certainly, the BPO will be more subjective and qualitative than an appraiser’s report. Obviously, the person conducting a BPO does not have the same skillset, training, and professional certification of an official appraiser. One risk is the person could have a conflict of interest or other reason their opinion might not be impartial. Red flags to look for are listing or selling agents affiliated with the same company that employs the person conducting the BPO, or a BPO supplied by the borrower.

It’s important to note that BPOs are not a new service. They have been around for at least three decades, most often for people deciding whether to refinance, to determine a listing price for a home, or to facilitate a foreclosure or short sale. However, some state laws prohibit the use of BPOs in some scenarios or may prohibit the individual conducting the BPO from charging or receiving a fee for the service.

Best Practices for BPOs

If you are going to adopt BPOs as part of your qualification process, be sure to carefully vet the candidate who will be conducting them. Going through an AMC eliminates internal bias, and many brokers and real estate professionals are already connected to AMCs to offer BPO services. An AMC will have already done the vetting work because they require a license, resume, and errors and omissions insurance.

Make sure you include a home inspection in conjunction with the BPO. Another resource that can support the BPO is a report from an appraisal validation company, which can be an added layer of due diligence on the valuation determination. Several well-known companies that, in addition to valuation services, will also review the validity of third-party appraisals are Clear Capital, Situs, and Protek.

Investors and lenders should always look closely at a BPO report to ensure it includes property type, property condition, market conditions, sale prices of similar properties, and a final value supported by all the above. Look closely at the distance of comparables to the property in question. Make sure the cited comparables are similar, and double-check the value against the property history to see if it seems realistic and reasonable.

A BPO can guide the market value, but again, it’s not the same as an appraisal. It cannot be used as a be-all, end-all number. It is, however, a quicker stopgap solution until the current appraisal crisis—and all its consequences for the real estate market—abates.