What Is a BPO? Broker Price Opinion: Defined
A broker price opinion, or BPO, can help a buyer get an estimate of the market value of a multifamily or commercial property.
What Is a Broker Price Opinion?
A broker price opinion, or BPO, is a report that can be prepared by a broker, appraiser, or agent to determine the approximate market value of a commercial or multifamily property. This report is also commonly known as a broker opinion of value, or BOV.
Unlike an appraisal, a BPO or BOV cannot be used to get a multifamily loan or for tax purposes, but can generally be obtained for much less money than a traditional appraisal.
How Are BPOs Performed?
A BPO can be done either as a drive-by visit or as a full inspection of a property’s interior. Whether a BPO is a driveby or involves an interior inspection, the broker, appraiser, or agent will typically drive through the neighborhood to get a better understanding of the local area.
Then, they’ll use their MLS to find similar, comparable properties to create an accurate estimate of the subject property’s value. Generally, they will use at least three properties that are currently on the market and three properties that have recently sold to create a reasonable estimate. This is a version of the sales comparison approach that is often used for traditional appraisals.
This is not the only way that the professional performing the BPO can estimate the price of a property. They will also often use other valuation methods, such as the income capitalization approach and the cost analysis approach.
The income capitalization approach values property based on the income it can generate. The calculation can be done by dividing net operating income by the property's cap rate.
The cost analysis approach looks at the cost of replacing the property. It must not simply look at actual, physical depreciation of the property, but must also look at the property’s functional obsolescence. This refers to the fact that some older buildings are no longer a good fit for the needs of modern residents. For instance, tiny bathrooms and closets may have been par for the course for apartments in the 40s and 50s, but are no longer appropriate for today's residents.
Appraisals vs. BPOs
The main reason that multifamily investors like to use BPOs instead of appraisals is the fact that they are significantly faster and less expensive. Commercial appraisals typically begin at $2,000 (and can go up to $25,000 for very large properties) and can take several weeks.
BPOs can cost as little as $250 and rarely more than $2,000. Of course, if an investor needs to get financing, their bank or other lender will still require a formal appraisal, but that's a bit overkill for someone who is merely considering purchasing a property.
The Elements of a Broker Price Opinion
BPOs don’t necessarily follow a standard format, which means that they may look somewhat different based on the individual practices of the broker. Despite that, some elements are pretty standard for most BPOs/BOVs, including:
The location report is an essential component of a BPO as it provides key information about the property's location. This section should include the property's complete address, dimensions, and any relevant information about the buildings on the site. A map and aerial images of the property are also necessary to provide a complete view of the site. A thorough location report helps to understand the property's potential value based on its proximity to amenities such as schools, public transportation, and shopping centers.
Site and Property Information
The site and property information section of a BPO will describe the property's overall condition, accessibility, and visibility. This section should include information about the quality of the roads, parking facilities, and any environmental hazards. The broker or appraiser will also examine the site's visibility from different angles to determine whether it will have an impact on the property's value. This section will provide insight into the overall condition of the property and help to determine any potential costs that may increase its value.
The zoning report is essential in determining whether the property complies with the local zoning laws. It will provide information on the permitted use of the property and any restrictions imposed by the zoning laws. This section should include the zoning classification, permitted uses, and any variances that the property may have. The report will also consider any proposed zoning changes that may impact the value of the property. The zoning report is crucial for any potential buyers or lenders in understanding the property's compliance with the local zoning laws.
The neighborhood analysis section provides insight into the overall neighborhood where the property is located. It should include information on the proximity of the property to nearby amenities such as parks, schools, and shopping centers. This section may also include the broker or appraiser's insights into whether the area property values are increasing or decreasing, which may affect the property's potential value. An analysis of the crime rate in the area and any significant recent developments should also be included in this section.
The comps report will provide information about comparable properties that the broker or appraiser is using to estimate the value of the property. The report should include notes that explain any significant differences between the subject property and the comparison properties. This section should include data on the sale price, size, age, and overall condition of the comparable properties. A thorough comps report provides valuable insight into the property's value and helps to determine the best way to market the property.
The proforma section of a BPO is a set of projected numbers that can help an investor understand the potential profitability of the property for the year or years to come. This section should include projections of the property's GPI (gross potential income), NOI (net operating income), and other essential metrics. The proforma provides an estimate of the property's future cash flows and allows investors to make informed decisions about the property's value.
The tenant data section may include some analysis of the property's rent roll, which could impact the estimated value of the property. This section should include information on the number of units, the occupancy rate, and any arrears. If a large proportion of tenants are behind on their rent, the broker or appraiser may reduce the estimated value of the property. A detailed tenant data section can help investors to assess the potential rental income and make informed decisions about the property.
General Market Report
The general market report section looks at the overall market, incorporating economic, employment, and real estate development data, as well as other significant trends. This section should provide an overview of current trends and expected future changes that may impact the property's value. The report should also include information on supply and demand in the market, any new developments, and changes in regulations or zoning laws that could affect the property's value. Additionally, the general market report section may include data on the rental and vacancy rates in the area, as well as information on recent sales of similar properties.
The BPO Valuation section is the culmination of all the previous sections in the report. In this section, the broker or appraiser combines all of the data and analysis to generate an estimation of the market value of the subject property. This estimate takes into account the aforementioned factors such as the property's location, condition, comparable properties, and overall market trends.
To arrive at an accurate valuation, the broker or appraiser will typically use one or more valuation methods, such as the sales comparison approach, income capitalization approach, or cost approach. The sales comparison approach looks at recent sales of comparable properties to determine a value, while the income capitalization approach estimates a property's future income potential to arrive at a value. The cost approach looks at how much it would cost to replace the property and adjusts for depreciation to determine a value.
The final valuation is presented in the BPO report and may be used by investors, lenders, and other stakeholders to make informed decisions about the subject property. It is important to note that the BPO valuation is an estimate, and actual market conditions and other factors may impact the property's value in the future.