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Appraisers say cheaper valuations open door for short-sale abuses

WASHINGTON – April 6, 2010 – A run-up in housing prices contributed to the downfall of real estate, but now some appraisers fear low-ball valuations could lead to the next market muddle.

They say a new federal rule to speed up short sales will increase banks’ reliance on broker price opinions (BPOs) – cheaper, quicker and unregulated home valuations that some argue could lead to an emerging type of mortgage fraud called “flopping.”

Banks have increasingly used Realtors to do broker price opinions, or BPOs, to set list prices as the market swelled with short sales.

Already losing money on the deal, a lender can pay a Realtor for a BPO and avoid a professional appraisal bill costing perhaps hundreds of dollars more.

The new Treasury Department rule streamlines the process for short sales, in part, by requiring participating banks to accept purchase offers that meet preapproved list prices, which can be determined by a BPO.

It’s all very dense, but consider a $1 million home that is inaccurately valued at $700,000, then sold at that amount. The bank is out the $300,000, and neighborhood values decline.

“If you pay an agent … to do the job of an appraiser … how much time and accuracy do you think you’re going to get?” said Realtor Jared Dalto of West Palm Beach-based Seawinds Realty.

Realtors who do BPOs argue appraisers are just angry about losing business. They say a BPO can actually be more accurate in some cases because Realtors know area market trends better than appraisers.

“We’re on the street every day. I’m seeing what’s happening,” said Realtor Frank Verna, who specializes in distressed property sales in northern Palm Beach County. “An appraiser may do a more in-depth study, but that doesn’t necessarily mean it’s correct.”

Another concern voiced by appraisers is that an agent doing a BPO could have a conflict of interest to assign a specific value to a property to help it sell. The issue was stressed in March letters to Treasury Department officials from national appraisal groups, which noted concern that using BPOs exclusively could increase “flopping.”

The definition of flopping varies, but it generally includes a BPO assigning a lesser value to a home, which is then sold by the bank based on the discounted value. The buyer then flips the property, selling it at its true market value and giving a kickback to the Realtor who did the original BPO.

Palm Beach County Realtors and mortgage brokers interviewed for this story said they haven’t encountered flopping here, but Peter Zalewski, a principal with the Miami research and brokerage firm Condo Vultures, said he sees it in his area.

“It’s definitely happening,” Zalewski said. “If you have access and information, you can put a spread on anything today, and buyers are coming in with cash, which means there is no need for an appraisal.”

Verna, who said there is no licensing requirement for Realtors who do BPOs, recently had 25 properties to look at in one day. He said one BPO takes about an hour to complete.

Mike Slade, a principal with Callaway & Price appraisals in West Palm Beach, said his appraisers can take up to a day to complete one appraisal.

While both appraisals and BPOs may involve only a few minutes spent physically looking at a home, an appraisal is supposed to include more research on area prices, sales and upgrades.

Appraisers are licensed and regulated by the state. Realtors are expected to adhere to a code of ethics set by the National Association of Realtors. The association defends BPOs, saying they benefit borrowers because they are less expensive yet are widely accepted as reliable and accurate.

“While misconceptions in the industry persist, there is no evidence that a BPO exacerbates mortgage fraud or abuse,” said NAR President Vicki Cox Golder.

Plus, Verna added, most short sales have multiple BPOs done on them. “It’s not one person controlling the value of the property,” he said.

Bank of America didn’t return a request for comment about the use of BPOs. Another large lender didn’t want to speak on the record about the issue but said BPOs have been useful given the large volume of properties it now deals with.

Skip McDonough, a broker with Family Mortgage in Jupiter, said he has seen “tremendous inconsistencies” in property valuations done by a certified appraiser vs. a Realtor.

“A good broker will do a good job and a BPO can be a valuable tool,” said Slade, of Callaway & Price. “Unfortunately a broker may have the expectation of getting a commission on the sale. As an appraiser, the only fee I’m getting is what you pay me.”