How Do BPOs/BOVs Work in Commercial Real Estate?
In both commercial real estate, appraisals are an essential in order determine the market value of a property. However, appraisals can be time consuming and expensive, sometimes costing upwards of $25,000 for large commercial properties. That’s why, in many cases, a BPO (broker price opinion), also referred to as a BOV (broker opinion of value) is utilized instead of or prior to a real appraisal.
A BPO or BOV is a property price estimate provided by a commercial real estate broker that helps the parties involved in a potential real estate transaction understand approximately how much a property is worth. BPO/BOVs are most often used by commercial real estate investors who want to ensure they’re not overpaying for a property but are sometimes used by lenders or insurance companies before getting an appraisal. While a BPO/BOV is not held to the same legal standard as an appraisal, that doesn’t mean it’s necessarily less accurate.
It should be noted that BPO/BOVs can vary significantly in nature. A limited BPO/BOV could simply be a few pages of notes and property comps explaining a broker’s rationale for their estimated price, while a more comprehensive BPO/BOV could be a 50-page report as detailed as a full appraisal, including detailed information on every single aspect of the property.
BPOs vs. Traditional Appraisals: What’s The Difference?
As we previously mentioned, commercial and multifamily real estate appraisals can be expensive, typically starting at $5,000, and can often sometimes take six weeks or even longer to complete. BOVs are both less expensive and faster, typically costing as little as $250 (sometimes up to $2,500+ on the higher end) and usually can be prepared in less than a week. Sometimes, a BPO is put together for free, particularly if a broker is trying to win over a seller to get a big listing or to help a buyer with a significant amount of capital.
The difference between a BPO and a traditional appraisal is mainly legal and regulatory in nature. To remain licensed, an appraiser is held to a significantly higher legal and regulatory standard when creating an appraisal report than a broker is when creating a BPO. This is why real appraisals, not BPOs, are generally required for an investor to close on a commercial real estate loan, get property insurance, or to calculate a tax bill. The rules around BPOs/BOVs and their permitted uses vary from state to state.
However, this doesn’t mean that a BPO can’t help a lender deliver an initial term sheet to a borrower, or provide the insurance company enough information to for initial policy underwriting, it just means that they usually want a real appraisal before making a financial commitment.
How Brokers Create BPOs/BOVs
In order to begin the BPO creation process, a broker will first gather initial information about the property, including:
Income and expenses
Tax information
Zoning
Relevant site or environmental data
When it comes to valuation, several approaches are commonly used:
The Sales Comparison Approach: The sales comparison approach is perhaps the most common valuation method used in BPOs, and for a good reason, as it’s often the most accurate. This approach looks for similar properties in the subject property’s area that have sold in recent months.
For example, if trying to value a 50-unit multifamily property, a broker might look for 40-60 unit apartment buildings in the nearby area that are a similar age, have similar amenities, and have about the same monthly rent as the subject property.
When there are no very similar buildings in the area to use as comparisons, an appraiser may either look towards a nearby market with similar price levels for comps. Alternatively, they may use properties that are less similar and adjust their value for compensating factors. For instance, if the 50-unit apartment building in the example was new, they might use an older, 70-unit apartment building as a comp.
Replacement Cost Analysis: Replacement cost is another way to calculate a property’s potential value. A replacement cost analysis attempts to determine how much it would cost to build the property new, and then subtracts depreciation. Depreciation can come in various forms, including the physical breakdown of property elements, like roofing or parking lots.
Depreciation can also come in the form of functional issues, such as an apartment building with tiny bathrooms and closets that may have been acceptable in the 1940s but aren’t in fashion today. Additionally, external factors, such as changes to the neighborhood and local market, can also impact prices.
Income Capitalization Approach: The income capitalization approach values a property based on its net operating income. The direct capitalization approach looks directly at a property’s NOI and cap rate. In contrast, discounted cash flow analysis uses the time value of money (TVM) via the use of future cash flow projections discounted to the present day.
Sometimes, a price estimate will combine two or more of these methods in some type of weighted average.
Tools for BPOs/BOVs
To get the data to create a BPO/BOV, a broker might first turn to an MLS like Loopnet, which typically provides basic data on the properties listed on the platform.
Using the data from Loopnet above, we can see that this property would be an excellent comp for a waterfront apartment building in the Fort Lauderdale, Florida market built between 1940-1960 with between 30-40 units. Typically, a broker would find two more similar properties, as comps without at least 3 comparison properties are less likely to be accurate.
In addition to Loopnet and other commercial MLS providers, brokers might also use real estate data and market intelligence software platforms like Reonomy to provide more detailed data.
What A BPO/BOV Report Actually Contains
Much like a traditional appraisal, a BPO/BOV will typically contain multiple sections, each with their own purchase. These often include:
Executive Summary: A summary often included at the beginning or end of a report. This usually contains a value abstract, which summarizes the broker’s price estimate and the general rationale behind it, including some basic supply and demand factors, expected sale price, asking sale price, and price per square foot (PFS). This is often set as a range. For instance, an apartment building may have a $2 million to $2.15 million asking price at a PFS of $69-$75, while the expected sale price may be $1.85 million to $2 million at a PFS of $64-$69.
Property Comps: The comps, or property comparison section, will usually examine a minimum of similar properties in the area that have sold in the last three to six months, and may also include three properties currently for sale. To determine an estimated property value, these prices will usually be calculated as a weighted average which accounts for the differences between the comparison properties and the subject property (such as differing amounts of units/square footage, or minor differences in the property’s quality and overall condition).
Location Information: This is a report that usually comprises a map of the site (often with aerial images), the address of the subject property, and detailed descriptions and size information for each building.
Tenant Information: A tenant information report usually includes details about each tenant currently on the property, and may reference or fully include the property’s rent roll. about the tenants currently leasing parts of the property. For non-multifamily commercial properties, this may include company data, business credit scores, and other relevant information.
Property Proforma: A proforma is a document which estimates the potential future financials of a commercial property. This may represent the property’s current condition and occupancy rate, but may alternatively estimate the property’s financials after increased occupancy or some property upgrades. A proforma will estimate the property’s NOI (Net Operating Income), expenses, PGI/GPI (Potential Gross Income/Gross Potential Income), and other information. It may be levered or unlevered (meaning that it includes any loans on the property as part of the financials), and could also include information for investors, such as projected IRR or cash-on-cash return.
Property Condition: A property condition report may be independent, or could be included in another section, such as a site description or location report. Property condition data may include the age of the property, the age of core property elements, such as roofing, electrical, and plumbing, and any deferred maintenance or damage that may need to be quickly repaired by the new owner.
Site Description: A site description report will typically mention elements such as access roads, site visibility, and may mention information about surrounding properties of the neighborhood the property is located in.
Location Report: The location report may include the property condition and site description data sections, or these may be listed as independent sections, without any location report section..
Market Report: A market report attempts to summarize the market supply and demand for the subject property, and may include population demographics, job and local employer information, comparable PFS rental prices, and could even get as granular as an analysis of traffic near the subject property.
In Conclusion: BPOs/BOVs are a Valuable Tool for Investors, Lenders, and other Stakeholders
Before buying commercial real estate, getting an accurate price estimate is essential, and getting a BPO/BOV is the fastest and least expensive way to do just that. While not as official as a true appraisal, a BPO/BOV may be just as accurate, particularly if the broker is highly experienced and writes a detailed report. Since appraisals are significantly more expensive and time-consuming,
in many cases, they should only be utilized after a property is under contract and the investor is seriously ready to make a purchase. In addition, as previously mentioned, BPO/BOVs may also help with other aspects of the commercial property sale process, such as getting pre-approval for a loan or an accurate quote for a property insurance policy.