BPOs are typically done because they don’t require the same expense and time delay of hiring a third-party to do an appraisal. If you want an accurate picture of what a property is worth in order to buy or sell right now then you or your client(s) will want to obtain a BPO. Appraisals take much longer to complete and cost three times as much.
When I do BPOs, not only do I do a sales comparison approach but I also do an income approach. So, what’s the difference?
A sales comparison approach is probably the most common. It focuses on the particular features of a property, uses them to determine a total value, and compares them to other local properties with similar features.
This is a fairly basic analysis but no two properties are exactly alike. The real technique comes in knowing the local market in order to adjust for these contingencies. This is a great way to get a sense of the local market, especially if you or your client(s) are seeking to sell.
The income approach to a broker’s professional opinion determines a property’s value by how much income it produces. I am the only one in my market with the skills and software to do this. The income approach can be done in two ways. Method one is called the Discounted Cash Flow and can basically be broken down into three steps:
The second method is known as the Direct Capitalization Method. We can break it down this way:
The capitalization rate in step two is based on recently sold, comparable properties. The net operating income of the comparable property is divided by its value which gives us the Cap Rate.
As a CCIM, I love the numbers. You can see how both the sales comparison and income approaches work hand in glove to provide real clarity about you or your client(s) investment.
By analyzing the market value you can project future earnings in a very real way.
Have you ever used a broker’s professional opinion before deciding to move on an investment, either to purchase or sale? What other methods do you use?