One of the most common, recurring questions for a commercial property owner is “what is the value of my property?” The answer to this question is particularly important during purchase and sale transactions because property owners want to be sure they are getting fair market value for their properties.
There are two commonly accepted valuation methods for a commercial property: an appraisal, and a Broker Opinion of Value (BOV)—sometimes called a Broker Price Opinion (BPO).
What is a Broker Opinion of Value?
A Broker Opinion of Value is an estimate of a property’s value that is completed by a commercial real estate broker. Why would they do this?
There are many reasons why brokers could be asked to provide their opinion of a property’s value, but the most common use case is when an owner wants to sell a property. In this case, the owner may seek to retain the services of a CRE Broker to assist in the sale of the property. In their meetings, one of the first questions that the owner is likely to ask the broker is “how much do you think I can sell this property for?” To answer this question, brokers will use their experience and expertise to offer their own opinion about what the property is worth.
The resulting opinion is documented and provided to the potential seller, and it can range from just a few pages to dozens of pages, depending on the size and complexity of the property.
Broker Opinion of Value vs. Appraisal
An easy way to think about the difference between a broker opinion of value and an appraisal is that the first is more informal, while the latter is more formal.
A broker opinion of value is requested by a property owner and it is often performed free of charge by a broker in the hope of earning the owner’s business. The resulting value is just the broker’s opinion only, and typically does not carry weight with lenders and investors.
An appraisal is a formal document completed by a certified appraiser, who must go through a lengthy training and certification process for this role. In addition, the methods used to value the property in appraisal are more rigorous and must meet standards set forth by an oversight body. The appraisal is usually ordered by a bank or lender, and the resulting value is considered to be “official” for the purposes of obtaining a loan.
Despite their differences, one way that the broker’s price opinion and an appraisal is similar is in the data used to arrive at a determination of value. In both cases, they will create a stabilized pro forma for the property and use the resulting Net Operating Income (NOI) as a basis for value. They will also look at NOI for comparable properties, prices achieved in comparable sales, and market based cap rates. Finally, they may both use one of the major valuation approaches—the income approach, sales comparison approach, or cost approach—to arrive at a final value of the property.
What to Look for in a Broker Price Opinion
Again, a broker price opinion is more of an informal approach to value, so the output can vary widely depending on the broker, brokerage firm, or real estate professional who prepared it. However, there are several items that investors should look for in the resulting documentation:
- Property Type: What is the type of property that is being valued, and is the value consistent with similar properties of the same type on a per-square-foot or per-unit basis?
- Property Condition: Is the condition of the property being valued similarly to the condition of the comparable properties used as a basis for value? If not, were the appropriate adjustments made?
- Market Conditions: What are the assumptions behind how market conditions impact value?
- Sale Prices of Similar Properties: What are the sales prices of comparable properties on a per-unit and per-square-foot basis? How do they relate to the property being valued?
- Final Value: Based on the above factors and others considered by the broker, what is the final value of the property? Is it clearly supported by market data?
For those that choose to solicit a broker price opinion, there are benefits and risks to doing so.
Benefits and Risks of Obtaining a Broker Price Opinion
The primary benefit of getting a broker price opinion is that it can provide a property owner with a reliable opinion of value. This value can be used to solicit investment capital, and can guide an asking price in a sale transaction.
But, it is not necessarily considered “official.” The value is based on one broker’s opinion only. It will not be accepted by a lender and it may or may not be accepted by investors. The broker is not required to follow the same strict protocol that appraisers must adhere to, so the value is considered to be slightly less reliable.
The ultimate arbiter of a property’s value is the market.
Why a Broker Price Opinion Matters in a Shopping Center Investment
For an individual seeking to make a shopping center investment, there are two stages in which they may wish to advocate for a broker opinion of value.
Upon the purchase of the property, it may be advantageous to ask the transaction sponsor if they have obtained a broker opinion of value to see if it corresponds to the investor’s own independent conclusion. This effort may ultimately prove to be unnecessary because a purchase transaction will also come with an official appraisal.
When it comes time to sell the property, or if another investor is looking to sell shares in the property, this is another time when a broker opinion of value could potentially be obtained. It could be used to establish the price at which shares trade hands, or the price at which a property will be listed for sale. The investment’s offering documents will detail exactly what valuation method will be used, and investors should look for it to ensure they are comfortable with it.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.