The due diligence process can be summed up in four easy parts:
the credit score of the borrower
clear title policy to the subject property
current pay history on the loan and
the value of the subject property
Let’s talk about property values. Specifically residential property values.
Our standard guideline is that we get a bpo (broker price opinion) on every deal we purchase. We do this at our expense. Brokers are not required to provide us with appraisals or bpos. The only exception to this guideline is on deals with less than three payments made. In those cases we do require the brokers to provide us with full appraisals and we get a bpo as well.
A bpo on the subject property provides us with the necessary information we need to determine if the property’s current market value is what was represented when we quoted the loan. It is important for the broker to know what information from the bpo we review during the due diligence process.
Here are the five key factors we review on all bpos.
Comparable sales and listings – it is important that the sales comps used are the most recent (six months old or less) and the closest in proximity to the subject available. For example using comps 2 miles away in a metropolitan market like Houston is a red flag. In markets like this, comps need to be in the same immediate neighborhood.
Neighborhood information – this provides a description of general market conditions such as normal marketing times, market trends (i.e. improving, stable or declining), and a description of the general area, including any boarded up houses in the vicinity.
Condition of property – notes any recommended repairs, as well as whether the subject property is currently vacant or occupied, and notes if the subject is currently listed for sale.
Photo – As they say, “every picture tells a story”. We can tell a lot about the pride of ownership and how the property is maintained just from the photos.
Value – bpos usually provide both a current estimated market value as well as a quick sale value.
Similar information is provided on appraisals as well. My advice to our brokers is to review these five factors on any bpo or appraisal that you order. If something jumps out at you and throws up a red flag, then address it up-front with the agent who did the report. Any explanation you can get that helps offset a concern will only help more of your deals fund
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