In commercial real estate, it can be hard to know the true value of a property. CRE can be challenging to navigate, especially when investors have a lot of properties, are in many industries, or have properties in a wide range of geographic areas. When an investor is looking to grow their portfolio by adding a new property or selling off one they currently hold, knowing the value going into any real estate transaction can be helpful to navigate the next steps an investor and their team have to take.
For CRE brokers, helping investors determine the value of a property and conduct the transaction for a purchase or sale of that property is one of the key elements to their jobs. CRE professionals often turn to a broker for their input on a property’s value. This is often known as a broker price opinion. These estimations of property value can be critical to the sale of a property.
These reports can help you have a better understanding of your property, so you can decide what to do with each property in your portfolio and continue to grow your business, your portfolio, and your success for years to come. Let’s take a closer look at BPOs/BOVs, the different types, the components that go into these reports, and what they might look like in each state you have property in.
What is a Broker Price Opinion in Commercial Real Estate?
A real estate broker or other qualified professional can help to determine a property’s estimated value. This broker price opinion (BPO), also known as a broker opinion of value (BOV), can help to determine the estimated value of any commercial real estate property. This information is used by investors and other CRE professionals as they determine how much a property is worth before posting a listing price. A BPO is often as simple as three pages outlining the value of the property, but it can also be a very detailed 40+ pages, depending on the contents requested by the investor for their unique purpose for obtaining the information.
The Two Types of BPOs
There are two different types of broker price opinions that you can ask for. One is called an internal BPO. This type of opinion involves the broker going into the property to measure the space, look at features and necessary updates, and ensure the inside of the property looks good. The other type of opinion is an external BPO. This one, also known as a drive-by BPO, just takes a look at the exterior of the property and the information that is available about the space.
Some investors prefer one type of BPO over the other, but a qualified real estate professional can help you figure out the true value of the property you own or want to purchase. Each type of valuation report can give you insight into the property’s value, so ask questions of your broker when determining which might be right for your property.
Can a Realtor Give an Opinion of Value?
When you need to determine the property value of any commercial space, there are several ways to go about doing this. In certain states, brokers can provide a broker’s opinion. However, not all states allow this and some even have laws preventing brokers from providing the service. But in the majority of cases, your commercial real estate broker should be able to provide you with a BPO for your property or a property you are interested in acquiring.
What is the Difference Between an Appraisal and a Broker Price Opinion?
Some investors may be wondering what the difference between an appraisal and a broker opinion of value is. There are a few key differentiators between the two that can help investors understand the differences and the use cases for each.
Who prepares the documents: A BOV/BPO is put together by a CRE broker on behalf of a client. The client might request this to have an idea of what their property is worth as they prepare to sell or expand their portfolio. An appraisal is prepared by a licensed third party who usually has no involvement with any party involved in a real estate transaction.
The guidelines that the document is held to: The guidelines for an appraisal are pretty strict, with robust data collection and analysis. A BOV is usually a best guess at the value, backed by market data and industry knowledge; but these documents don’t always have rules they need to follow.
Fees associated with the document: An appraisal will always cost money. A BOV might have a fee associated with it or it might not. Whether or not there is a BOV/BPO fee may be dictated by local laws or it may be up to the broker themself. Even if there is a fee, it is often less than an appraisal because it is often less comprehensive than an appraisal.
How many properties can be included: An appraisal is always just conducted for an individual property. A BPO can be conducted for an investor’s entire portfolio of CRE properties, not just one.
How Does a Broker’s Price Opinion Work?
When an investor orders a broker price opinion, they are looking to more fully understand the estimated value of their property. There are many reasons why an investor may seek out a BPO/BOV, but common ones include estimating a value before purchase or sale, refinancing, and buying out a partner’s interest in the property. When a broker sets out to prepare the BPO, whether it’s the two or three-page version or the detailed 40+ page one, there are a few approaches they can take.
Typically, a broker conducting a BOV will look at real estate comps, market analysis, and other information to determine the value. Some of the most common elements included in determining the valuation are:
- Age of the property
- Size of the property
- Condition of the property
- Income and expenses
- Tax information for the property
- Zoning requirements
- Similar properties
Approaches to a Broker Opinion of Value
There are multiple approaches to a broker opinion of value. Some brokers will use one, while many will combine the approaches to provide a well-rounded estimated value of a commercial real estate property.
Sales comparison approach: This approach for real estate valuation depends on recent sales of similar properties as the one being valued. The property being compared should fall in the same geographical area and current use.
Income approach to value: This approach is a type of real estate appraisal method allowing brokers or investors to estimate the value of a property based on the income it generates.
Cost approach: This is a real estate valuation method that can estimate the market value of a property by determining the cost someone should pay for that property is equal to the cost to build an equivalent building. The value is equal to the cost of land, plus total costs of construction, less depreciation. Note that this one is less common for CRE valuation than the other approaches.
Components of a Broker Price Opinion Report
Each broker price opinion will depend on the requirements of the investor and the property, but there are a few key components you may see in a report you ask for from your broker. These pieces of the report are each designed to give the investor more information about the property, what the broker looked at to make their estimation, and give some guidance as the investor works to decide on purchasing or selling a property in their portfolio.
Location Information: This would include general information about the location of the property, like address, a site map, any aerial photos, and the size and type of building.
Site Description: This section is more detailed information about the site, including the current ownership, visibility, and access of the property.
Market Area Overview and Trends: This part of the report has information about the market conditions of the area. These things would include employment growth, population growth, construction or local development activity, trends in vacancy and lease rates, noteworthy local news, and demographic summary.
Subject Property Condition: The broker would use this area to provide a detailed description of the property as well as any information on its condition.
Tenant Information: When applicable, the broker would provide information on each of the tenants occupying the property, including lease terms, lease expiration, industry, and other relevant information.
Current Comparable Listings: Brokers can use their resources to provide photos and analysis of current for sale listings of comparable properties in the area (typically this would be at least three properties, when available).
Recent Comparable Sales: In addition to current listings, the broker would include photos and analysis of recent comparable sales, including any adjustments and information on similarities and differences of the properties and sales.
Proforma: A broker can provide information on a stabilized or multi-year proforma for the property that includes Gross Potential Income, Expenses, and Net Operating Income (NOI).
Range of Market Values: This section will summarize the sales comparison and proforma data, and provide an estimated range of values for the property. This range of values should be based on the sales comparison approach and the income approach to market value.
Broker Marketing Plan: This one is often optional, but the section may be included by the broker in hopes of winning the listing. They would provide a marketing action plan to market and sell the property.
Are Broker Price Opinions Legal?
Some investors wonder whether broker price opinions are legal. The short answer is: yes, a BPO is probably legal. However, the long answer is: it’s complicated. Some states have a law that prevents brokers from providing this service, other states have a law that states a broker cannot charge for the service, while other states have further requirements that brokers must adhere to.
There are three categories of states for BPO regulations:
- No regulations or limitations on licensed real estate professionals in AK, IL, IN, IA, MT, NY, OK, SD, VT, WI
- Broad regulations on real estate professionals who can perform BPOs as a function of real estate listings or for other purposes, with some variation of rules for charging for this service, in AZ, CA, CO, FL, KS, LA, ME, MA, MO, NH, NC, OH, SC, TX, WA, WY, VA
- Limited regulations on real estate professionals performing BPOs for real estate listings, with some variation on whether or not they can charge for the service, in AL, AR, CT, DE, GA, HI, ID, KY, MD, MI, MN, MS, NE, NJ, NV, NM, ND, OR, PA, RI, TN, UT, WV
Simply stated, a broker price opinion can be requested by an investor or a lender in most states for real estate listings, refinancing, or foreclosure purposes. Certain states may not allow brokers to charge for the service, while other states’ investors may see a BPO fee from a broker for this type of estimated valuation. Oftentimes, part of a broker’s job is to help determine the appraised value of a property, so that investors have the full picture when they are seeking to sell or purchase a commercial property.
Working with a Broker for CRE Property Valuation
If you are interested in finding a qualified broker to work with for a BOV/BPO for one of your commercial properties, the team at Sands Investment Group (SIG) can help. SIG is a commercial real estate brokerage firm with experience helping clients find, secure, and purchase properties for their investment portfolio. Our team members have conducted research, analyzed data, and created broker opinion of value reports for properties in many different industries, and we can help you understand the value of your property as you identify opportunities for business growth. Get in touch with the team at SIG today by calling us at 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.