CRE lenders and investors have long relied on appraisals — the traditional method to determine property value. But the problem is that appraisals are often expensive (they can cost more than $25,000 for large properties) and can also be time-consuming. That’s why many CRE investors rely on broker price opinions (BPOs) or broker opinion of values (BOVs), which are quicker and more affordable alternatives. These methods can be used before or instead of a formal appraisal.
How BPOs/BOVs Work in Commercial Real Estate
BPOs and BOVs essentially give you an estimate of a property’s value based on a broker’s expertise. They help you understand how much a property is worth so you can make smarter offers and avoid overpaying. In some cases, lenders and insurance companies use them as a preliminary step before conducting an appraisal.
Even though BPOs and BOVs aren’t held to the same legal standards as appraisals, they can still provide accurate insights. Their scope varies — there are simple reports that might include just a few pages with key points and comparable properties, and there are also detailed reports that could span 50+ pages. The flexibility in terms of detail means that you can choose the level of information that fits your needs.
BPOs vs. Traditional Appraisals
You have probably dealt with appraisals before and know that they’re not only pricey but also take a lot of time. A CRE appraisal can cost at least $5,000 and sometimes take six weeks or longer. In contrast, BPOs and BOVs are faster and more budget-friendly — they cost $250 to $2,500 and can be completed in under a week. In some cases, brokers might even prepare a BPO for free to build a working relationship with you.
The main difference between traditional appraisals and BPOs/BOVs is their legal and regulatory standing. Appraisers must follow strict guidelines to maintain their licensing and ensure that their reports meet the requirements for securing loans, getting insurance, or determining tax obligations. BPOs and BOVs don’t meet these same requirements. The accuracy of a BPO depends on the quality of the data and the broker’s experience.
Still, BPOs are useful in many situations. Lenders use them to prepare initial term sheets or provide insurance companies with enough data to start underwriting. That said, when it comes to finalizing financial commitments, a full appraisal is usually required. Keep in mind that the rules for using BPOs vary by state so you need to understand local regulations where your CRE property is.
Also Read: How to Get Started on Your Commercial Real Estate Investment Business Plan
How Brokers Create BPOs/BOVs
First, brokers gather essential details about the property:
Income and expense records
Tax information
Zoning regulations
Site or environmental data
They then analyze this data to estimate the CRE property’s market value. Do you need a brief overview or a detailed analysis? The broker tailors the report based on your goals.
Common BPO and BOV Valuation Approaches
Brokers often rely on a few standard methods to ensure that their estimates are as accurate as possible. Each approach has its strengths and is chosen based on the property’s characteristics and available data.
The Sales Comparison Approach
The sales comparison approach, because of its reliability and accuracy, is one of the most widely used methods in BPOs. In this method, the broker analyzes recently sold properties in the same area that share similar features as the subject property.
For instance, a broker valuing a 50-unit multifamily property might look for apartment buildings in the same neighborhood with 40 to 60 units, with similar amenities and comparable monthly rents. If there are no closely-matching properties available, they might either look at a neighboring market with similar pricing or use less comparable properties and adjust their value accordingly. For example, if the CRE property they’re assessing is new, they might use an older and larger building as a comparison and account for the age and size differences.
Replacement Cost Analysis
This approach estimates a CRE property’s value based on what it would cost to rebuild it today while factoring in depreciation (which can include functional issues as well as physical wear and tear, like roof damage or aging parking lots). For example, an apartment building with small bathrooms or closets and other such outdated layouts may lose value because design preferences have changed. External factors such as neighborhood changes or market trends can also influence depreciation.
Income Capitalization Approach
The income capitalization approach determines a property’s value based on its NOI. This method uses two strategies:
- Direct capitalization calculates the CRE property’s value using its NOI and cap rate
- Discounted cash flow analysis factors in the time value of money by discounting future cash flow projections to their present value
Brokers may sometimes combine these valuation methods using a weighted average to come up with a more balanced estimate.
Tools Brokers Use for BPOs and BOVs
Brokers also rely on different tools to gather the data they need for accurate BPOs and BOVs. Multiple listing services such as LoopNet are often the first resource for basic property details that can be used for comparisons. Using such MLS databases, a broker could identify a property as a strong comparison for a waterfront apartment building in Florida built between 1960 and 1980 with 40 to 50 units. Many brokers use at least three comparable properties for more accurate analysis.
In addition to MLS platforms, brokers might also use real estate data and market intelligence tools like Reonomy that offer more comprehensive property data.
Also Read: Key Factors Driving Current Commercial Real Estate Market
What A BPO/BOV Report Actually Contains
A BPO or BOV report is structured much like a traditional appraisal — it has multiple sections providing detailed insights about the property, each contributing to an overall understanding of the building’s value.
- Executive Summary – Most BPO and BOV reports usually begin or end with a section that highlights the broker’s price estimate and the reasoning behind it, factoring in supply and demand, expected sale price, asking price, and price per square foot (PFS). The values are often presented as a range.
- Location Information – You can expect the location section to include a map of the site along with aerial images, the property’s address, and detailed descriptions of each building, plus the size and layout of the property.
- Property Comparisons – This section examines at least three similar properties sold in the past three to six months along with up to three currently for sale. The broker calculates the estimated property value as a weighted average. They also adjust for differences such as unit count and square footage, or the overall quality and condition of the properties when necessary.
- Tenant Information – Does the CRE property have tenants? Then the report will include a section providing details about its current occupants and the rent roll. For non-multifamily CRE properties, this part of the report might also include company information and business credit scores along with relevant data about tenants.
- Property Proforma – The proforma outlines the CRE asset’s financial potential and will likely present both its current financials (if there are occupancy rate and operating income information) and estimated financials after improvements or increased occupancy. In this section, you will see the property’s NOI, expenses, gross potential income, projected internal rate of return, and cash-on-cash return. These figures can be shown with or without loan impacts.
- Market Report – This report summarizes the supply and demand dynamics that may be affecting the property. This may include local demographic data, job market insights, comparable rental prices, and even traffic patterns near the property.
- Property Condition – This section covers the property’s age and core elements like roofing and plumbing. It may also include deferred maintenance or future repairs that are likely to be required. Note that in some reports, the property’s condition details may be integrated with other sections such as the site description.
- Site Description – This section analyzes the CRE property’s accessibility and visibility, as well as details about surrounding properties or the general neighborhood. The point is to provide you with a full picture of the property’s location.
Why BPOs/BOVs Are Valuable for Investors
If you’re planning to buy or invest in a CRE asset, then you need an accurate price estimate, and the fastest and most cost-effective way to get that estimate is to ask a broker for a BPO or BOV. These reports may not be as formal as traditional appraisals, but they are very useful nonetheless — you can expect a detailed BPO or BOV prepared by an experienced broker to deliver comparable accuracy.
Because appraisals are more expensive and take much longer to complete, they’re often better suited for the later stages of the transaction such as when a property is under contract. But in the meantime, you can use BPOs and BOVs to start the other parts of the process, like securing pre-approval for a loan or getting an insurance quote. These reports are practical and extremely useful starting points for CRE investors who want to make sure that they’re making the right moves, especially as the sector’s fundamentals continue to shift.
