Determining Value in Commercial Real Estate
The difference between a BOV, BPO, AVM, Desktop Appraisal, Full Appraisal, and Feasibility Report
Ask two appraisers, get three opinions on property value.
Or two brokers for that matter.
Determining the value of a commercial property is far from simple. There are many different ways to assign a value to a parcel, whether it has been developed yet or not.
I wasn’t able to find a single article describing all of these different types of valuations, so I decided to outline the major types of commercial property valuations here.
Broker Opinion of Value (“BOV” or “BPO”)
A Broker Opinion of Value (“BOV”), otherwise known as a Broker Price Opinion (“BPO”), is just that, an opinion from a broker on the value of a property. The content and quality of a BOV is going to vary between brokerages, and even between different professionals that work at the same brokerage.
The best BOVs take advantage of both hard data, like comparable sales and leases, market demographic trends, and economic conditions, and also soft data that encompasses the broker’s local market knowledge based on prior transactions and conversations. There is a level of intuition on behalf of the broker that a property owner or investor is trusting when relying on a BOV to make decisions.
Note that the BOV is usually one of the first steps in a broker’s process of pitching some service to a property owner, most often the potential sale of their property. The broker usually has a vested interest in signing up a property for sale, which introduces bias into the value presented, as the broker is often trying to entice the property owner to run a sales process.
Automated Valuation Model (“AVM”)
An automated valuation model (“AVM”) is a software-based tool that uses mathematical or statistical modeling with a combination of existing databases to determine the value of a particular property. An AVM can use different methods and data sources to cobble together a property value determination, such as sales comps, cost approach, discounted cash flows (“DCF”), MLS or other listings, aerial or street-level photos, public data like assessments or tax records, or prior appraisal assignment results.
An AVM differs from a broker opinion of value (BOV) in several ways. A BOV is an estimate of property value provided by a professional broker or agent based on their knowledge and experience of the local market. A BOV is usually more subjective and qualitative than an AVM, and it may include factors such as market trends, demand and supply, competition, and potential buyers or tenants. A BOV is typically used for marketing purposes, such as listing a property for sale or lease, or for negotiating a deal, while an AVM is meant to be a quick single-party analysis. The ease of generating an automated valuation lets one person run analysis across many properties to screen eligible investment opportunities. An AVM may also not capture the unique features or characteristics of a property that affect its value.
While several proptech startups have touted AVMs as a tool for real estate professionals, they are really more of a “top funnel” tool today rather than a reliable valuation tool. Human judgment needs to be layered into any decision making process that incorporates AVMs.
Some institutional investors develop their own custom AVMs that run on top of a combination of their own database or data lake, as well as synthesizing third party data with the help of data tools like Cherre or similar data connectors.
An appraisal report is a document prepared by a trained and licensed professional to officially opine on a property’s value. Appraisers are often selected by a lender who is offering financing for the property as a key piece of the due diligence step in their underwriting.
Appraisals use at least one of the following three methods to determine a property’s value, and often more than one in combination as applicable:
- Sales comparison approach
- Discounted Cash Flow (“DCF”) approach, also known as the “Income approach”
- Replacement cost approach
Without going into the details of any given approach, it’s important to understand that the appraiser’s job is to determine a fair value for the property in its current condition without any further incentive from the owner, lender, or any other party with a vested interest in the outcome of the valuation. They have industry standards to follow in regard to incorporating proper market data and following accepted methodologies.
In theory, an appraiser provides a thorough and unbiased report of the property’s value.
Unlike a full appraisal, the “desktop” variety is completed entirely from the appraiser’s desk, without a trip to physically inspect the property. Therefore, this type of appraisal differs in two important ways:
- The appraiser is basing their valuation finding on information supplied to them, often by a deal party, about the property’s physical condition, removing a level of objectivity.
- The appraisal report is usually faster and cheaper.
The report will not entirely rely on information supplied by deal parties, though.
Appraisers still use third party data sources and comps in their assessment of the property’s value. Plus, since the appraiser is still in the position of providing an objective third-party opinion, rather than being incentivized to provide a higher or lower value to please one of the deal parties, desktop appraisals are typically considered to be more trustworthy than a Broker Opinion of Value.
A feasibility report is a document that evaluates the potential success and risks of a proposed project. It focuses on market demand, site suitability for the design concept, and financial viability. A feasibility report helps the developer to make informed decisions and to secure funding (both debt and equity).
A feasibility report differs from an appraisal in several ways. An appraisal is a formal opinion of value of a property based on current conditions, while a feasibility report is primarily a forward-looking analysis. While an appraisal can also include an “As-completed” forward-looking analysis, it must be prepared by a licensed appraiser and adhere to the Uniform Standards of Professional Appraisal Practice (USPAP). A feasibility report, on the other hand, is usually prepared by the developer or a third-party, non-appraiser consultant.
The only “true” method?
While all of the above attach a value to the commercial property with varying degrees of accuracy and subjectivity, ultimately the sale of a property would be the truest way to determine its value to the highest bidder. This goes back to the definition of value - how can you determine that a value is true and fair if no one is willing to transact at that price?
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