A broker’s price opinion (BPO or sometimes referred to as a broker’s opinion of value, BOV) is an analysis performed by a commercial real estate broker that provides an estimate of value or price for real estate.
A BPO is the commercial version of a competitive market analysis (CMA), which is used in residential real estate to determine property value by a residential real estate agent. A BPO should not be confused with an appraisal, which is performed by a neutral third party, typically hired by the lender, and comes with different certifications than a broker/agent.
BPOs are used to determine a property’s estimated value and help owners determine the best course of action for their property – typically either to hold, refinance, or sell.
Often, a BPO coincides with a listing pitch, where a broker is selling their services to an owner if they want to realize the full property value estimate by listing the property.
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Why Are BPOs Important?
Simply put, owners want to know the value of their property. But, they don’t want to hire an appraiser if they have not decided to sell or refinance yet. They can task a broker to perform a BPO, providing them with an estimated value for their property while avoiding fees any other service provider would charge.
As a broker, you understand property values, key market drivers, and what it takes to sell a building for the highest ROI. Brokers can leverage a BPO to provide value to owners without burdening them with costs or commitments.
What information should be in a BPO?
A Broker’s Price Opinion should include the following sections:
- Property Overview
- Lease Abstract / Rent Roll
- Operating Statement
- Lease comparables
- Sales comparables
- Broker’s Price Opinion / suggested listing price
- Range of market value
- Projected timeline
- Listing process (if you’re working to win a listing)
Before presenting a BPO, check with your managing broker on any firm requirements or review required.
This section should include key components of the property. These property details set the stage for further analysis. The owner should feel comfortable that you know a great deal about their property from this section. This should include:
- Property Type / Subtype
- # units / suites
- Square Footage
- Year Built
- Transaction Type (i.e. refinance, investment sale, owner/user, sale-leaseback)
- Property Photos
- Property Description
- Location Description
- Transaction Description
The information should be displayed in a clean, digestible format for any owner to understand. Most of this information the owner will already be aware of, but you are using this information to craft a story about the property when presenting the BPO.
Leverage the property, location, and transaction description to make comments on market descriptions, neighboring property owners, and key drivers of price. Set the stage for the remaining portions of the BPO here.
Lease Abstract / Rent Roll
For commercial properties, a lease abstract is a summary of all the key components of any leases on the property. The more tenants a property has, the more complex this abstract becomes.
For multi-family properties, the rent roll is a summary of each tenant’s lease details.
The lease abstract and rent roll provide you the high-level gross potential income of the property, which you will leverage in both the operating statement and proforma.
A typical lease abstract should include the following details about the leases:
- Lease Type (NNN, Modified Gross, Gross)
- Commencement date
- Square feet
- Renewal options
- CAM Charges
A typical rent roll should include the following detail about each residential unit:
- Unit Type (beds, baths)
- Square feet
- Move-in date
- Lease end date
- Pet fees
- Security deposits
The most critical components of this section are the rent, rent type, and square footage. You may not discover additional details until further down the road with a property owner. However, the more information you have, the better your BPO will be.
Sometimes referred to as a Profit & Loss Statement or a Trailing 12 Month (T-12) statement, this is a detailed outline of all the income, expenses, capital expenditures, and sometimes debt service on a given property.
The operating statement is the first building block of determining a property’s value since commercial property’s value is derived from the net operating income and a market rate called a cap rate. The main components of an operating statement include:
- Base Rents provided by Rent Roll/Lease Abstract
- Additional income from utility reimbursement, pet fees, late fees, etc.
- Management Fees
- Advertising & Marketing
- Property/Liability Insurance
- Legal/Accounting & other Professional Fees
- On-site Management – Salaries, Taxes, Benefits
- Interior Cleaning & Maintenance
- General Repairs & Maintenance
- Real Estate Taxes
- Capital Expenditures
- Repairs and Reserves
- Major improvements made such as roofs, appliances, flooring, windows, etc.
This operating statement is most accurate when provided directly by the property owner or the professional property manager, and is up-to-date with financials through the latest complete month.
If you don’t receive this directly from the owner, you can often estimate income and expenses by performing online research, calling the property and requesting rental rates, estimating expenses based on your market experience, and collecting publicly available expense information like taxes and utility charges.
When completing this section, note any opportunities with the property that may contribute to a decrease or potential increase in value.
The proforma is your perspective on the best possible scenario for property operations. This means rents are at market rates, expenses are managed accordingly, professional property management fills vacancies quickly and decreases bad debt or collection losses wherever possible.
To build the proforma, you will need to research lease comparables for the market rate rents, and this is where your experience in the business comes into play for how a property can perform at peak operating efficiency.
Put yourself in the shoes of an investor and say, “If I was buying this property, how would I maximize net income and property values?”
On many expense line items, you may take the current operating statement and trend the expenses upward by 2-3%. For example, on water billing, you could assume that the rates increase slightly year over year, at a 2% increase to current operating.
An evaluation of the subject property’s competition in the market will tell the property’s potential, which is a key input into your proforma.
When looking at a lease or rent comparables, you should look for similar properties to the subject property. This typically means:
- Nearby geographic location
- Same property type. For example, if you’re running a BPO on retail property, you should only look at nearby retail properties, not office properties.
- Similar property makeup – layout, access points, signage, etc.
- Recently leased property, ideally within the last 6-12 months
- Similar property age, year built or renovated
The lease details you should gather are:
- Actual lease rate, not marketed or advertised lease rates
- Lease type (NNN, gross, modified gross)
- Square feet leased
- Calculate the rent per square foot as an equalizer among varying sized properties
- Year the property was built
- Any amenities offered
- Other lease terms negotiated if you can find them: TI allowance, term, escalation
Once you find a few properties you will have an understanding of the potential income the property could achieve. You may find that current rents are below, at, or above market rents, which will help you craft the proforma story.
Similar to lease comparables mentioned above, but this time you’re looking for property sales. This is a more critical component of a BPO as it is a key indicator of property value.
When gathering sales comps, take note of how closely the property matches the subject property. The closer the match, the better the comparable.
The sale details you should gather are:
- Final Purchase Price
- Sale date
- Cap rate
- Rentable square feet
- Land acres
- Year the property was built
- Any amenities offered
- Sale price per square foot or per unit
If you can’t find any sales or leases that look similar across most aspects to the subject property then you may have to make adjustments to the sale price amount. This is a more complex process which is detailed in a different article here.
Broker’s Price Opinion
This is where you pull the entire analysis together into one final number. Note the title, this is just an estimate, and in the next section, you’ll provide a range of market value.
In making your final estimate of the price you will pull together your current operating statement and apply the market cap rate to the NOI (cap rate from sales comparables you gathered).
Then take a look at the sales comparables you gathered, either at the price per square foot or the price per unit. Apply a comparable metric to the existing property. Evaluate where these two calculations take you, and make adjustments to land at your price opinion.
Your estimate will need to be grounded in reality, but as a broker, you are practicing both an art and a science. While the sales comparables, NOI, and operating statements may tell you one thing, you have managed transactions, sold similar buildings, and know what buyers would pay for this property.
This is where you apply the art of pricing a property. Think about the proforma NOI and apply the market cap rate, maybe you meet somewhere between current and proforma value for your final estimate.
Experience, practicing the BPO, and learning from others will help you refine the skill of pulling all the pieces together.
Range of market value
When you are brokering a deal or working with an owner in your market, there are lots of unknowns. Your broker’s price opinion today could change drastically in a week or a month if the market changes.
Additionally, you may not know what the property owner thinks her property is worth and you want to land at a price they would be happy with, that you also feel confident you could sell.
Providing a range of market value helps you have a discussion with the owner about what the property is worth without pinning yourself in a corner. When establishing a range of market value, leverage both the income and sales comps approach and highlight the low, middle, and high end of the market.
Place your broker’s price opinion on the scale and explain why. Look at the total price of their property, the price per unit, or price per square foot, and discuss what they think their property is worth.
If you are using a BPO to pitch for a sale or refinance of a property, there will certainly be a timeline involved in that process. Based on your price opinion and your pulse on the market, provide an estimate of how many days will pass from listing to a signed contract, and how many days will pass from listing to a closed deal. This will help set expectations and gives a sense of how the market is moving at the time of your BPO.
As part of my BPOs, I always include information about myself and the listing process. My goal is to win listings and take on clients who are ready to sell. I leverage my market expertise showcased in the BPO to move into talking about how I would achieve the broker’s price opinion if I sold the property for them.
From there, I highlight my value proposition, what makes me unique, how that benefits them, and how I would manage the transaction process for them.
In the end, always ask for the business! Make it clear you want to represent them and you would love to work with them on this property.
BPOs are a great tool for owners to request from brokers so that they have a better understanding of the value of their property and are well-informed on what is happening in the marketplace.
In addition, BPOs are a tool that can be leveraged by brokers to win business, establish relationships, and keep a pulse on the market they operate in. The more BPOs you give, the more you will win business.