When a lender, private or otherwise, evaluates a piece of investment real estate one of the most important parts of the approval process is establishing a current market value. The real estate is the lender’s property evaluation methodscollateral and the lender wants to make certain the property is worth what the buyer and seller thinks it’s worth and should the lender have to foreclose, is the property marketable in its current state?

Depending upon the individual lender and the loan type, this valuation process can take a few different forms. One way to determine value is to order a Broker’s Price Opinion, commonly referred to as a BPO. A BPO is a review by a licensed real estate broker who compares the existing property with similar properties in the area. A BPO may be a licensed appraiser but that is rare.

The best way to reach an independent price evaluation is in fact to have a licensed appraiser make a full inspection report with an onsite visit as well as researching the database for recent sales. A lender can ask for an Automated Valuation Model, or AVM, which is more of a mathematical model based upon the square footage of the subject property and recent sales but is not as robust as a full appraisal.

An appraiser will visit the property, taking note of the property’s current condition, measure the square footage of the structure as well as the size of the lot. In turn, similar properties that have sold within the previous 12 months will also be visited and provide pictures of not only the subject property but the homes used to compare values.

When lenders want a general idea of a current value, typically a BPO is ordered. Banks who want a more statistical value will often prepare an AVM, this is the preferred method when evaluating a home equity loan or line of credit. For a standard mortgage, a full appraisal report will be required.