BPOs Help Evaluate Shifting Investment Markets
A Trusted Valuation Strategy
By Kade Clark
The investment-purpose single-family residential purchase market in the U.S. has seen significant growth in recent years, with several key metropolitan areas emerging as top destinations for investors.
In these markets, the ability to fairly estimate the value of investment properties efficiently can be the difference between profit and loss. Evaluating properties at scale locally, regionally, or nationally may be particularly difficult. With different valuation tools on the market, investors oftentimes look for the right combination of speed, accuracy, and reliability while balancing cost. That is why Broker Price Opinions (BPOs) remain the gold standard for accurately forecasting the final realized sales price of a property.
Let’s explore some of the major SFR markets that are beginning to fluctuate before delving into how the BPO may fit into an investor’s strategy to evaluate the impact to their portfolio.
The Sunbelt Continues to Shine, but Growth is Slowing Down
For investors who purchase single-family rental properties, some of the hottest real estate markets share characteristics that make them attractive to tenants and investors, including robust population growth, strong job markets, and relatively affordable housing compared to coastal metros. This combination creates an excellent environment for rental demand as young professionals and families that may be priced out of purchasing a home seek more affordable quality housing options.
Over the last four years, the sunbelt has flourished as a destination for SFRs, especially metro areas in Georgia, Arizona, Florida, Texas, North Carolina, and South Carolina. In fact, according to the National Association of REALTORS®, cities in these markets have experienced significant population growth and job market expansion, fueling demand for rental properties. However, in recent months some of those high growth areas have begun to slow.
Five of the slowest-growing markets as of February 2024 were in Texas and Florida according to an analysis of Zillow data from Arbor Realty Trust. Likewise, in April 2024, Redfin reported that home prices in Florida and Texas were beginning to stagnate due to softening demand and heightened supply. For example, home prices dropped 4.6% in the North Port-Sarasota metro in March 2024.
Of course, home valuations may play a crucial role in understanding the dynamics in these markets. As home prices have appreciated nationwide in recent years, real estate investors have realized appreciated value in their property portfolio. But as rental price growth and home price appreciation slows down in some areas, SFR owners and investors need to be aware of how that may impact their portfolios.
While markets are shifting across the country, savvy investors are keeping a close eye on emerging opportunities in other regions that may offer similar growth potential with more favorable entry points. To do that, investors need a reliable means of evaluating properties in multiple locations. That is where the Broker Price Opinion (BPO) has proven itself to be an invaluable tool.
What Makes a BPO so Useful for SFR Investors?
Since the inception of the single-family rental asset class more than a decade ago, the Broker Price Opinion has been the go-to valuation solution for institutional investors due to the product’s pricing accuracy, cost, and boots-on-the-ground approach of local agents pricing real estate in their home markets. A BPO is an estimate of a property’s potential selling price, conducted by a local licensed real estate broker.
Typically, a BPO involves a drive-by exterior inspection, though sometimes it may include a brief interior walkthrough. The agent or broker gathers basic information about the property and surrounding neighborhood and compares it to similar properties in the area to develop a price estimate.
Though BPOs may seem akin to appraisals, they differ mainly in the qualifications of the person providing the valuation. A BPO offers the perspective of a real estate agent or broker, while an appraisal is carried out by a certified or licensed real estate appraiser. Additionally, BPOs generally involve less detailed inspections and are subject to different regulations.
As a result, BPOs are usually more affordable and faster to complete than full or hybrid appraisals, with the added benefit of being less disruptive for tenant-occupied properties.
Importantly, Moody’s Investors Service has given its stamp of approval on the BPO. Dating back to 2014, Moody’s rating methodology for assessing credit risks for SFR securitizations includes BPOs as a primary source of initial property valuations. According to their analysis, Moody’s concluded “broker price opinions (BPOs), on average, can provide fair assessments of single-family home values if BPO providers follow detailed and thorough processes and procedures.”
Thorough Processes and Procedures are Key for Quality BPOs
As Moody’s mentions, thorough processes and procedures are key. Moody’s will adjust the property values based on a qualitative assessment of the valuation provider and the method and scope of the valuation used. A valuation provider must follow rigorous protocols to meet the industry standards for BPOs:
» Extensive Documentation // Brokers typically gather and submit detailed evidence supporting their price opinion. This could include taking multiple photographs of the property’s exterior from various angles (front and each side), as well as images of surrounding streets. They also report any visible exterior damage or needed repairs. Additionally, they usually document broader market conditions, such as housing prices, employment trends, and neighborhood characteristics that might impact property values, along with the local housing supply and demand.
» Multiple Comparable Properties // Brokers performing BPOs generally use a minimum of six comparable properties in close proximity to the subject property, including three that have sold within the past year and three that are currently on the market.
» Strict Comparable Property Guidelines // Exacting criteria for selecting comparable properties is typically used, so that comparables are similar in style, age, lot size, square footage, number of bedrooms and bathrooms, and overall condition. Additionally, these comparables are usually located within one mile in urban and suburban areas, and within five miles in rural areas. If brokers use comparables outside these guidelines, they will usually provide justification for their selection.
» Quality Assurance Protocols // Investors may control for quality by cross-checking BPOs against other valuation tools or comparing them with comparable properties listed in multiple listing services (MLS) and any inconsistencies that arise during this validation process should be flagged and rectified.
When these guidelines are in place, according to the Moody’s study, “BPO values accurately approximated the eventual property sales prices. Although a significant number of individual BPOs deviated from the sales price, the volatility was no greater than in a similar comparison of full appraisals to sales prices.”
Putting it Together: Leveraging BPOs for Accurate Portfolio Analysis
Broker Price Opinions may play a critical role in helping to navigate the complexities of hot real estate markets, providing a reliable, cost-effective, and timely alternative to traditional appraisals even while SFR property values fluctuate and market dynamics shift rapidly. Investors who are interested in emerging opportunities should be ready to deploy a trusted valuation strategy that can help them accurately value their portfolio and determine the right markets for expansion.
As leaders in the SFR space, Radian Real Estate Management offers investors a full spectrum of valuation solutions including BPOs backed by a nationwide network of trusted real estate professionals to deliver accuracy, speed and efficiency. homegenius Real Estate, part of the Radian family of companies, has also elevated the standard BPOs to deliver a new best-in-class product that incorporates a rental addendum as well as artificial intelligence (AI) to improve the quality assurance process. For example, the company uses computer vision AI to read the contents of property photos and confirm photo details match the description, such as the address numbers on the home’s exterior.
These enhancements help make BPOs from homegenius Real Estate a superior product that investors can rely on to elevate their valuation strategy.
