One of the questions both Borrowers and Lenders of Commercial Real Estate often ask is: what is my property or properties worth? A BOV in real estate stands for a “broker’s opinion of value.” BOVs can be conducted by either a CRE broker or a commercial real estate asset management company.
There are numerous reasons why Lenders and Borrowers would ask a real estate asset management company such as Armada to conduct a BOV. Borrowers want to know what their property or properties are worth. They may be thinking about selling their property or looking to refinance at some point in the near future. On the financing side, Lenders may have an internal requirement for BOVs on their property portfolios.
Looking at recent sales comps and other data, asset management companies offer an informed opinion of the value of a particular property.
As we will touch on in greater detail below, BOVs in commercial real estate are especially important in our current economic environment. With inflation, and the rise in cap rates seemingly destined to go up, BOVs will play an integral role in making sure the Loan-to-Value ratio on CRE remains in compliance with the original underwriting metrics.
The Difference Between a BOV in Real Estate and an Appraisal
The most important difference between a broker’s opinion of value and an appraisal is that the former is less involved and less formal than the latter.
Appraisals are longer documents delivered by a certified appraiser. The process of appraisals is more rigorous than a broker’s opinion of value, and they are typically considered a property’s official value for the purpose of obtaining a loan. Appraisals are often ordered by the Lender or Bank underwriting the property.
That said, Lenders and Borrowers in CRE often seek out commercial real estate asset management companies in order to monitor properties postclose. Part of post closing portfolio monitoring is ensuring that the Loan-to-Value ratio on the properties in your portfolio meets certain requirements.
But there are other reasons why both Lenders and Borrowers would want a BOV rather than a full appraisal.
- Turnaround Time – Appraisals can take months to complete. Many Lenders and Borrowers do not have the time or inclination to wait for an Appraiser to visit their property or properties to give them a formal appraisal.
- Cost – While appraisals are more encompassing than BOVs, many Lenders need a quick and cost-effective assessment of potentially thousands of properties in their portfolio for the purposes of meeting internal reporting requirements. A Broker’s Opinion of Value conducted by a knowledgeable commercial asset management company provides enough information to satisfy internal requirements without costing Lenders an arm and a leg.
- Triggering Events – Unlike full appraisals, a broker’s opinion of value does not come with triggering events. For instance, if the appraisal on your property or properties reflects a decline in value, Borrowers may be required to raise equity to pay down a part of their loan. With a BOV, Borrowers can estimate their cap rate without having to raise money in order to satisfy loan requirements.
- Confirming Your Suspicions as to the Value of a Property – Often Borrowers want to know what their property or properties are worth without the hassle of going through a full appraisal.
Broker’s Opinion of Value in a High-Interest Rate Environment
When inflation began rising in 2021, many market experts believed that it was temporary. The conclusion that most drew was that pent-up demand combined with a mixture of low unemployment and government stimulus would eventually settle in some equilibrium. While we still remain optimistic about the long-term prospects of CRE assets such as multifamily, even with the Fed rate creeping up 3.25%, there is no denying that sellers of CRE will need to work harder to entice buyers seeking low-risk returns.
In short, sellers will need to lower prices on CRE properties, which will push cap rates up further. The cap rate is the estimated yield on a property. To arrive at this figure, you divide the net operating income (NOI) by the property’s value. The NOI is the asset owner’s income after accounting for operating expenses.
With inflation continuing unabated and the Fed committed to rising rates to combat it, cap rates will likely rise, which could spell a decline in CRE transactions.
The proverbial house is not on fire yet, but BOVs in commercial real estate will play an important role in assessing the fair market value for properties in our current inflationary environment. Even a 25 basis point rise in the Fed Rate—forget the 75 basis point hikes we’re now seeing every time Jerome Powell and the Fed meet—could translate into millions of dollars in valuation when it comes to CRE properties. It is critical that both Borrowers and Lenders monitor their portfolios consistently as the Fed continues to raise rates so that they have a clear and accurate picture of current cap rates.
Why Use Armada Analytics as Your Commercial Real Estate Asset Manager for Broker’s Opinions of Value
When it comes to commercial asset analytics, Armada produces accurate BOVs due to our longstanding relationships with well-known market data providers.
Our commercial real estate asset management division is led by an individual who cut his teeth working for one of the major banks doing risk assessments and commercial asset management on their CRE property portfolio.
With so much uncertainty in commercial real estate investment today, you need a firm you can trust when it comes to producing accurate brokers’ opinions of value for your real estate portfolio.