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 usually takes a few different approaches, including:
Sales Comparison: A broker looks at comparable properties to see how much they have sold for, in particular, those that have sold in the last 6-12 months. Properties which have more similarities to the property in question will usually be weighted more highly in the calculation. The sales comparison approach is excellent when a substantial amount of similar properties in the area have recently sold, but may not be effective if the property is very unique in its market.
Income Capitalization: The broker looks into how much income the property can make. To do this, they can calculate income via two different methods:
Cost Analysis: 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 (changes in real estate markets, demographics, excess traffic).
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
Appraisals for multifamily and commercial real estate can be pricey (often costing between $5,000 and $25,000) and time consuming (often taking between 3-6 weeks.) In comparison, a BOV can be more cost efficient, often costing between $250 and $2,500, and only taking a few days. So, no matter what type of property you're considering purchasing-- whether it's retail space, an office building, or even a hotel property, it pays to get a BPO/BOV before bidding. However, BOVs have their limitations; they often cannot be used in order to actually get financing for a property (though some lenders permit this) or for tax purposes, and 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 can vary significantly from state to state.
BPO/BOV Report Summary Elements
Broker price opinions can vary greatly in nature, but a report typically contains most or all of the following sections:
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, expiration timelines, and other relevant information.
Proforma: A proforma will typically include Net Operating Income (NOI), Gross Potential Income, Expenses, and potentially other important metrics, and may either be a stabilized or multiyear proforma.
Comparable Market Listings/Sales Report: This section includes reports about at least three similar properties for sale in the area, as well as three similar properties that have sold in the area (two different sections). The report may analyze the properties and discuss their similarities and differences with the subject property.
Market Trends Report: Details of importance to the commercial real estate market in including job/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.