A question I get a lot is whether to base pricing on BPO (broker price opinion, ie the value of the home) or UPB (unpaid principal balance of the loan). The answer is pretty straightforward, but the question comes up a lot so I thought it would be worth addressing in a newsletter.
Generally speaking you price based on whichever is lower.
Let’s take an example where the UPB is $20,000 but the BPO is $100,000. You would have to price based on the UPB because that is what you will be able to recover in the event you foreclose. I’m ignoring arrearages and the payoff amount which could be higher just to keep things simple for now. If the property goes to a foreclosure auction you wouldn’t be able to keep all of the proceeds from the auction. If you decided you really wanted the home and planned to bid high enough to win the auction, you would most likely have to pay the delta between your payoff amount and the bid price.
Now if it is a CFD instead of a mortgage, there may not be a foreclosure auction and you may just get the home outright through a forfeiture. Sometimes sellers will say they want pricing based on BPO for this reason. While its true that you could end up with a home worth more than your payoff amount (I did recently…), you still have to bid based on UPB if that is lower than the BPO. The reason is that if you bid based on BPO and the borrower pays off the loan you are going to lose a lot of money. Let’s take our example of the $20,000 UPB and $100,000 BPO. If you bid 50-60% of BPO, and then the borrower repays the $20,000 loan you are going to be in a world of hurt. Not to mention there are many situations with CFD’s depending on the state you are in where a foreclosure could be required anyway.
But what if the loan is upside down? Let’s suppose the BPO value is $100,000 and the UPB is $150,000. In this case it really doesn’t matter what the UPB is exactly. If you foreclose your proceeds are going to be limited to what the home sells for in the foreclosure auction. Or if it doesn’t sell at the auction then your return will be based on what you sell the home for. (I’ll address foreclosure auctions at another time) Keep in mind though that the price you will get at a foreclosure auction is often significantly lower than what the home might sell for at retail. So you need to be conservative in coming up with the value that you assume.
So make sure when you are bidding your price is based off the lower of either the UPB or BPO, and don’t let a seller try to convince you otherwise.