Appraisals vs. Broker Opinion of Values (BOVs) - YouTube

Welcome to CRE Fast Five and today’s discussion  on property valuations. I’m Karly Iacono.  

If you are like most investors you are likely  wondering what the true market value of your  

property is today given the wild ride the last few  years has been. Maybe you’ve considered getting  

an appraisal for your own information or perhaps  you’ve thought about giving in to one of the oh so  

helpful brokers that calls you every single day.  Today’s episode is on understanding the difference  

between appraisals and broker opinions of value  or BOVs and knowing when to use each. Let’s go. 

A broker opinion of value is typically put  together by commercial real estate brokers  

on behalf of a property owner. It could be a  simple report outlining an expected trade range,  

or a lengthy 30+ page document with in depth  market information. Appraisals are put together  

by licensed third-party professionals and are  often directed by lenders. Appraisers go through  

a lengthy training and certification  process and have strict criteria to follow. 

Appraisers will always charge a fee for  conducting an appraisal and the cost can  

range from $2,000 to $25,000 dollars. The  lead time for an appraisal is typically 3+ weeks.

Now on the other hand, BOV’s are almost always put together by brokers for free and are usually turned around  

in about a week. Although that timeframe   for either can get pushed out if  

the assignment is a portfolio of assets. Aside from varying in turn around time and  

costs there are some significant differences  in how both reports are put together.  

Appraisers rely on three valuation methods, the  sales comparison approach, income based approach  

and the cost approach. With the sales comparison  approach the value of the subject property is  

dependent on the price that buyers have  historically paid for similar properties.  

This is a very common approach to valuations but  is not forward looking. The second method is the  

income based approach which could be a discounted  cash flow model or a direct capitalization rate.  

The discounted cash flow model is most often  used if future income streams are uneven. The  

direct capitalization rate or the cap rate method  that we all know and love in net lease works well  

if the income is consistent. The third  method that appraisers often rely on is  

the cost approach. The cost approach looks at the  replacement cost of the subject property less any  

accrued depreciation. Accrued depreciation could  be physical wear and tear, functional obsolesce,  

for example ceiling heights that are too low to  meet current demand, or situational depreciation  

such as loss of value due to permanent road  closures etc. Once completed the appraiser then  

tries to reconcile all three valuation methods  to come to a recommendation of market value. 

In contrast, broker opinions of value most often  rely on the sales comparison approach and/or the  

income based approach. Aside from being cumbersome  to determine, the cost approach is almost never  

used in net lease because it does not contemplate  the value of the tenant or income stream which  

are both very significant factors. One noteworthy  benefit to BOVs are their forward-looking nature.  

Active brokers know the market inside and out  and understand that where something traded 12  

months ago may be vastly different  than where it would price out today.  

In addition, appraisers often cover a wide  variety of types of commercial properties and many  

markets. Because of this they cannot possibly be  experts in everything they review. If you were  

to ask me to value an apartment building I would  immediately refer you to an expert in that space  

because although I am very capable of using  any of the above methods to value a property,  

nothing replaces the knowledge of  someone who is in that niche day in  

and day out whether that be apartments, medical  office, or net lease. No one will know the true  

market value of your asset better than someone  who is selling similar properties every day. 

There are obviously pros and cons to both  appraisals and BOV’s but there are certain  

times you will need one versus the other.  Appraisals are usually required by lenders  

and the resulting value is considered “official”  for the purposes of securing your loan. BOV’s are  

usually the first step to understand market value  when you are considering selling your property. 

However I think requesting a BOV only when you  are contemplating an asset sale is a huge mistake.

I would strongly suggest having a BOV done on  your property every single year during your  

hold period. Aside from keeping tabs on the value  of what is likely one of your most significant  

financial holdings annual BOV’s can provide an  update on the real estate fundamentals of your  

property such as the demos – is the population  in that market increasing or decreasing?  

Have competing properties been built recently?  What is the current market vacancy, etc. These  

are all factors that will impact the value of your  property over time but are likely not data points  

you are looking at frequently. With appraisals  you don’t typically have control over which  

professional provides the analysis as more often  then not they are hired directly by the lender.  

Even if you reach out to a firm for an  independent appraisal you may not have  

clarity on which professional within the firm will  be completing the work. In contrast you can choose  

which commercial real estate broker you want  to build a relationship with. Make this choice  

carefully. The aggressive brokers that call you  weekly or more prospecting for a listing may not  

be the right choice because its unlikely they have  the experience to advise you at the highest level.  

Do some homework first and find a broker that  is actively closing properties in your space  

and shows that they have a depth of knowledge of  the market. If you are an owner of net lease and  

would like to have a meaningful conversation  about the value of your assets and overall  

strategy in the market, even if you are in  your hold period, feel free to give me a call,  

I would love to speak with you. That was CRE Fast  Five. I’m Karly Iacono. I’ll see you next week.