How does the Broker’s Price Opinion (BPO) Work?
Feb 23, 2017
In the world of commercial real estate investing, it’s important for both the borrower and the lender to understand the value of the subject property. For that reason, property valuation is an important first step for all commercial mortgages, whether the borrower is seeking a commercial soft money loan or a commercial hard money loan.
Most borrowers are familiar with traditional real estate appraisals, but there are other options you may have never heard of. We’d like to shed light on one in particular: The Broker’s Price Opinion, or BPO. BPOs are very common – so what are they? How do they work, and are they the right option for your property?
What is the Broker’s Price Opinion (BPO)?
There are many types of commercial property valuation out there, such as the use of automated valuation models or comparative market analyses. However, most people have a basic understanding of real estate appraisals, so that’s our best comparison point to understand the BPO. The primary two differences between appraisals and broker price opinions are cost and comprehensiveness.
Real estate appraisals are expensive and require an extensive examination of the property. In contrast, broker’s price opinions are usually a fraction of the cost of an appraisal, and they require a less extensive examination of the commercial property. Commercial mortgage companies and lenders usually lean on BPOs in situations where they don’t feel the time and cost of an appraisal are needed.
Types of Broker’s Price Opinions
Not all BPOs are created equally, but they all serve a purpose. Commercial lenders and mortgage brokers use two major types of Broker’s Price Opinions: Drive-By BPOs and Internal BPOs.
1. Drive-By BPOs
The name “Drive-By BPO” is a mild misnomer; the key characteristic of this type of Broker’s Price Opinion is simply that it’s less intrusive. It’s assumed the borrower is still in the home, and the lender may just not want to alarm the borrower or to unintentionally create an antagonistic situation between the borrower and real estate person.
This BPO can serve as a discovery mission, of sorts: With care not to trespass or to be too nosy, the broker may assess whether it appears the commercial property is actually occupied (furniture, electricity meter turned off, etc.). Drive-By BPOs are very tentative valuations.
2. Internal BPOs
The commercial lender may call for an Internal BPO if they have permission to visit for a BPO or if they know the commercial property is vacant. This version of the BPO is a lot more similar to a traditional commercial real estate appraisal to determine market value. The broker is able to enter the commercial property, and gets a much more detailed valuation based on a collection of factors.
This is an added benefit Drive-By BPOs simply cannot offer. Commercial real estate properties are often much larger than residential properties, and the benefits from a more thorough Broker’s Price Opinion report are magnified. The more detail the BPO report has, the more accurate the valuation.
So which elements are taken into consideration for the Broker’s Price Opinion report?
Factors that Affect the Broker’s Price Opinion
Just like one could expect from a commercial appraisal, many factors affect the value of the property. For example, things like structure type, lot size, parking, and room use are all traditional factors in valuation. Similar properties in the neighborhood can help provide context for the value of the commercial property, as well as how the commercial property sits in as a piece of this surrounding neighborhood.
The value is also determined based on the preparation that would be needed to ready the property for market, such as repairs or cleaning. Photos of the structure are also frequently needed in the Broker’s Price Opinion report to provide a visual confirmation to accompany the report.
There’s a host of factors that can go into an Internal BPO, but as we mentioned, access to these can be limited in a Drive-By BPO.
BPOs and Your Commercial Hard Money Loan
Why are BPOs quickly becoming a go-to for commercial hard money lenders? For many borrowers, the ability to close a loan fast is critical when purchasing or refinancing a commercial property. The value of the property as collateral is what determines the hard money commercial loan amount, but appraisals add extra time and cost. This is completely unnecessary in many cases, when Broker’s Price Opinions will often do.
If you’re looking into a commercial hard money loan, you’ll benefit from a working knowledge of Broker’s Price Opinion. They can help your commercial hard money lender process your commercial loan more quickly – and let you move forward.