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BPO/BOV: Broker Price Opinions in Commercial Real Estate
A BPO, or broker price opinion, also known as a BOV, or broker opinion of value, is an estimate provided by a real estate broker to help a potential investor get a better idea of how much they should bid for a property. A BPO/BOV is not held to the same standard as an appraisal, but it is typically much faster and much less expensive.
What Is a BPO in Commercial Real Estate?
A BPO, or broker price opinion — also known as a BOV, or broker opinion of value — is an estimate provided by a real estate broker to help a potential investor know how much to bid for a property. A BPO/BOV is not held to the same standard as an appraisal, but it is typically faster and significantly less expensive.
When creating a BPO/BOV, a broker may take a few different approaches.
Sales Comparison
A broker looks at comparable properties to see how much they have sold for, with a particular eye on those that have sold in the last six to 12 months. Properties with more similarities to the asset in question will usually be weighted more heavily into any calculation. The sales comparison approach is excellent when a substantial amount of similar properties in the area have recently sold, but it may not be effective for highly specialized, unique assets in a market.
Income Capitalization
The broker looks into how much income the property can generate. To do this, they can calculate income via two different methods.
Direct Capitalization: Reviewing net operating income, or NOI, using a cap rate.
Discounted Cash Flow Analysis: Looks at the time value of money by using projections of future cash flow discounted to the present day.
Location Report: This section typically includes a property’s address, descriptions of all buildings on the property (and their dimensions), a map of the site, and aerial images of the property.
Site Description: Detailed site information, often mentioning site visibility, access roads, and other important data.
Property Condition: Additional information about the property, including a description of its current condition.
Tenant Data: Details about the tenants currently leasing parts of the property. This may include company information, creditworthiness, a rent roll, and any other relevant information.
Proforma: A proforma will typically include net operating income, gross potential income, expenses, and any other important metrics. This may either be a stabilized or multi-year proforma.
Comparable Market Listings/Sales Report: This section includes reports about at least three similar properties for sale in the area, also detailing three similar properties that have recently sold. The report may analyze the properties and discuss similarities and differences with the subject property.
Market Trends Report: Details of importance to the commercial real estate market in including employment, population, and building construction trends. Leasing data, traffic trends, and other information may also be included.
Market Value Estimation: The market value estimation takes the data from the proforma, as well as the income and sales comparison approaches to estimate a range of values for the subject property.
What is a Broker Price Opinion (BPO) in commercial real estate?
A BPO, or broker price opinion — also known as a BOV, or broker opinion of value — is an estimate provided by a real estate broker to help a potential investor know how much to bid for a property. A BPO/BOV is not held to the same standard as an appraisal, but it is typically faster and significantly less expensive.
When creating a BPO/BOV, a broker may take a few different approaches. Even though BPOs aren’t legally recognized in many states, and do not count as an official appraisal, they are still often requested. A broker price opinion is typically requested by lenders who want a quick assessment of a property to get some early bearings for the refinancing of a mortgage or a foreclosure procedure. Some property owners also seek a broker price opinion if they are looking to refinance their mortgage or come up with an idea for a possible sale price. In most cases these broker price opinions are only requested for unofficial uses, mainly because they are both affordable and the results are typically given faster than with an appraisal.
It isn’t uncommon for brokers to submit a price opinion in the hopes of winning the listing in question. Some brokers even go as far as to include a marketing plan for the property along with the price opinion to demonstrate how they would represent the property for a sale.
What are the benefits of obtaining a BPO for a commercial real estate transaction?
The benefits of obtaining a BPO for a commercial real estate transaction include:
- A BPO is typically faster and significantly less expensive than an appraisal.
- A BPO can provide an estimate of the value of a property to help a potential investor know how much to bid.
- A broker can look at comparable properties to see how much they have sold for, with a particular eye on those that have sold in the last six to 12 months.
What are the differences between a BPO and a Broker Opinion of Value (BOV)?
A BPO, or broker price opinion, and a BOV, or broker opinion of value, are both estimates provided by a real estate broker to help a potential investor know how much to bid for a property. However, they are not held to the same standard as an appraisal.
A BPO/BOV is typically used for less formal purposes, such as pricing a property for listing or determining a reasonable offer price. Appraisals, on the other hand, are more formal evaluations that are typically required for lending and other financial purposes. They are typically more detailed and involve a more thorough analysis of the property, the market, and other factors.
When creating a BPO/BOV, a broker may take a few different approaches.
How is a BPO used in commercial real estate financing?
A BPO is used in commercial real estate financing to help lenders determine the value of a property. The broker looks into how much income the property can generate by calculating income via two different methods: Direct Capitalization and Discounted Cash Flow Analysis. Direct Capitalization looks at the Net Operating Income (NOI) of the property using a cap rate. Discounted Cash Flow Analysis looks at the time value of money by using projections of future cash flow discounted to the present day. The broker also looks at comparable properties to see how much they have sold for, with a particular eye on those that have sold in the last six to 12 months. Properties with more similarities to the asset in question will usually be weighted more heavily into any calculation.
What are the steps involved in obtaining a BPO for a commercial real estate transaction?
The steps involved in obtaining a BPO for a commercial real estate transaction include:
- Identifying the property and its characteristics
- Gathering comparable sales data
- Analyzing the data to determine the value of the property
- Using either the sales comparison approach or the income capitalization approach to determine the value of the property
- If using the income capitalization approach, calculating the net operating income (NOI) and using a cap rate to determine the value of the property
- If using the discounted cash flow analysis approach, projecting future cash flow and discounting it to the present day to determine the value of the property
- Presenting the BPO to the client
For more information, please see this article.
Cost Analysis
This approach looks at how much it would cost to reproduce the property itself. To determine an accurate calculation, a broker must subtract any accrued depreciation. This can manifest in three forms: functional obsolescence, physical deterioration, and external obsolescence.
Functional obsolescence occurs when an older building can no longer accommodate the requirements of today’s users. Physical deterioration refers to ordinary deterioration of building elements that occurs over time. External obsolescence occurs when a building loses functionality and value due to outside factors, including changes in real estate markets, demographic shifts, excess traffic, and so on.
In many cases, a BPO/BOV combines the sales comparison and income capitalization approach via a weighted average to reconcile the value. While full appraisals also reconcile the cost analysis of a building, only some BPO/BOVs do so.
BPOs vs. Traditional Appraisals
Traditional appraisals for multifamily and commercial real estate can be pricey, often costing between $5,000 and $25,000. They can also be time consuming, taking between three to six weeks. In comparison, a BOV can be more cost efficient, often costing between $250 and $2,500, and they usually only take a few days. So, no matter what type of property you're considering purchasing, it pays to get a BPO/BOV before bidding.
However, BOVs have limitations. For one thing, they generally cannot be used in order to get financing for a property, even though some lenders permit this. A BPO also can’t be used for tax purposes. Brokers typically must be explicitly clear that they opinion they are offering is not an official appraisal. What BPO/BOVs can and cannot be used for is usually subject to state law and may vary significantly depending on your location.
BPO/BOV Report Summary Elements
Broker price opinions vary in nature, but a report typically contains most or all of the following sections: