There are many reasons why you would need to estimate the value of a property. Typical reasons include estimating the value before purchase or sale, getting the accurate collateral value in the case of a loan application, for buying out a partner’s interest and so on.
For commercial investment purposes, both the borrower and the lender would protect their interests by understanding the value of the subject property. That value is the basis or foundation on which the loan amount will be calculated. For this reason, property valuation remains a vital first step for any commercial mortgage whether a soft money or hard money loan.
You may already be familiar with the more common traditional real estate appraisal. Estate appraisals are carried out by a third party. They are very comprehensive and are not biased in their estimate of market value.
The Brokers Price Opinion or BPO is another well-known option for estimating property value with some distinct characteristics to the Real Estate Appraisal.
What is the Brokers Price Opinion(BPO)?
Though many instruments for accurate commercial property valuation exist, for illustration purposes, we’ll compare the BPO with Real Estate Appraisal as many people already have a good understanding of how the appraisal work.
The major differences between BPO and appraisals are the cost of execution and the comprehensiveness of the finished report. BPOs are a fraction of the cost of appraisals because they are far less comprehensive. Appraisals require detailed and extensive examination of the target property.
Mortgage companies and lenders will use BPOs where they feel the complexity of an appraisal are unnecessary.
BPOs are also typically performed for divorce proceedings, foreclosure proceedings, short sale approvals, private estate valuations or where the broker has an intention to buy the property so the motives are quite different from that of a full appraisal.
Note that BPOs may be inadmissible in some instances like for making a tax appeal. The regulations regarding BPOs vary from state to state so check with a lawyer before ordering a BPO.
Types Of Brokers Price Opinions
There are two major types of BPOs: the Drive-By BPO and Internal BPO.
1. The Drive-By BPO
In a Drive-By BPO, the aim is not to alarm or disturb the residents of the house (usually the borrower). It is less intrusive. Typically, the house is still occupied by the borrower but the lender wants to have a good idea of the condition of the property if they need to foreclose in the near future.
hard money loan borrowersThe Drive-By BPO allows the appointed broker estimate the value without entering into an antagonistic situation with the borrower. But don’t be fooled by the name, the information collected in this type of BPO is not casual at all and will include things like; visual condition of the exterior, estimated room count, estimated square feet, conformity to neighborhood and zoning, etc. It’s a very tentative kind of valuation and a sort of discovery mission for the lender.
2. Internal BPOs
An internal BPO can happen when the lender has permission to enter the building or they know for a fact that the commercial property is vacant. A key prerequisite for an Internal BPO is that the building must be unoccupied or if occupied, they have been given permission for the visit.
This kind of BPO is a more similar to an appraisal since the broker is able to enter the property in question. In addition to the information collected in the Drive-By BPO, an Internal BPO will ask for accurate figures in things like room count and square footage rather than an estimate. The broker will also have to take pictures of the interior spaces and rooms in the house especially in an impending foreclosure situation. The risk is high that they will be some internal damage because of borrower’s tearing out fixtures since they know they are losing the property.
Since commercial real estate units are usually much larger than residential units, a more thorough BPO is desirable and beneficial and will give a more accurate property valuation figure. Though they cost more than the Drive-By BPO, the benefits are tipped in favor of using the Internal BPO.
How Does The Broker Arrive At A Final Opinion?
Many variables will affect the final estimated value of the property. The broker will consider things like the type and condition of the structure, wear and tear, parking space, room sizes and uses. He may also make a comparison with similar properties in the same neighborhood as a kind of benchmark when fixing the value. Any foreseen renovation costs are calculated and noted.
As you can see, except for the most experienced brokers, a Drive-By BPO may just be comparable to shooting in the dark when you consider all the information that is lost.
Using BPOs To Get Commercial Hard Money Loans
BPOs are becoming a popular choice for commercial hard money lenders and it’s easy to see why. The major attraction to borrowers is the benefit of closing the loan fast especially when they’re purchasing or refinancing a commercial property. Appraisals cost money and time but a fast BPO assessment will give the value of the property on which the loan figure will be based all within a shorter timeframe.
If you’re shopping for a commercial hard money loan, you can reduce the stress involved in the process by opting for a Brokers Price Opinion as it will do just fine in most instances. Your loan will be ready in record time making it possible for you to move on to other things.