I recently received a Broker Price Opinion that took the cake. A class C office was compared to a class A retail location in another city. The BPO felt the value of the property was worth over a million … this was off by over 50%. Is your BPO BS? Four tips to spot a bogus BPO and value a property like a private money lender.
What is a BPO
A broker price opinion is a realtor’s opinion of value on a particular property. This is not an appraisal and may or may not be the market value of the property. Many times these are used by brokers to present to prospective clients to gain a listing. For example, I received another BPO in the foothills of Colorado stating the property was worth $ 2 million. There was one glaring issue, there was not deeded access to the property. This access issue made the property worthless. In a nutshell, many broker price opinions are likely not worth the paper they are written on. Can you spot a bogus BPO?
4 tips to spot a BS BPO and value a property like a hard money lender
- Distance: the number one way to spot a bad BPO is the distance to comparables. I recently looked at an appraisal on a warehouse that was in an industrial area surrounded by hundreds of similar industrial properties but all the comparables were 5+ miles away. This was a huge red flag. I immediately pulled some comparables to see what was actually selling in the area. I was not surprised, the comparables near the property were considerably lower. The broker conveniently “forgot” a comparable two doors down that was almost identical to the property. Long and short, have your antennae up when comparables are not close to the subject and/or are in different socio economic areas
- Not using like comps (nicer, higher ceilings, etc…). This is an easy fraud to spot. When you first pick up an BPO or an appraisal go to the back and look at the pictures of the subject and of each of the comparables. Do they actually look similar? If the pictures in the report look suspect or are non existent, go on google street view to see what each comparable looks like Make sure you are looking at construction type (metal vs block), ceiling heights (the higher the better regardless of property type), curb appeal, ratio of space (office vs warehouse, etc..), shape of the building (rectangular more often than not is superior assuming there is ample frontage (for retail)), and area (is one a retail location vs warehouse, traffic counts, ingress/egress, etc…) There are allot of factors to consider when evaluating whether the comparables are truly comparable but a quick smell test can at least get the process started and factor out many of the bogus BPOs.
- Weight given to a lease that isn’t strong (or a Pro Forma that is unrealistic) : All tenants are not created equal. When evaluating a property, it is important to evaluate the credit worthiness of the tenant. Just because a tenant has a great lease rate with a 10-year lease doesn’t necessarily mean the property value is exponentially higher. Weight has to be given on the ability of the tenant to actually perform on their lease. A good example. I recently evaluated a property in Colorado that had a marijuana retailer as the tenant. The lease on paper looked great and the broker simply took the lease, put in a vacancy factor and a cap rate to determine the value. The problem in this case is the performance of the tenant. The tenant is a non credit tenant in a fast changing sector. It is highly likely that the tenant will not be in the space 5 years from now as market forces continue to evolve. Long story short, don’t get enamored by a lease and simply assume that it will correlate to value. Ensure you evaluate the tenant and their ability to perform.
- Do a sanity check: type in the address into google and see what comes up. I just saw a property that had a BPO at 2.3m. This BPO was very high. When I googled the address, I saw that it was listed for 3 years at 1.9m and never sold which means the market is saying that the property is worth less than the 1.9.
Although valuing a property is very subjective, basic rules should be followed to get an accurate assessment of value. By following the 4 tips above, you are much more likely to spot a BPO that is overly “subjective” and protect yourself from making a bad real estate decision. Do you have other tips to spot a BS BPO or appraisal? Please comment below!
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).