As the market leader in Las Vegas Commercial Property Management and Brokerage, we are committed to not just meeting, but to surpassing the expectations of our clients. One of the contributing factors to that success is transparency.
We believe in being open and honest with our clients and will never play the stereotypical “broker game”—for example, telling you we have hidden buyers then having you drop the price later. To that end, we have compiled a list of our clients’ commonly asked questions and will publish the answers as a series of blogs.
In this blog, we will answer the commonly asked question: What is my property worth?
How We Determine the Value of Your Commercial Real Estate Property
We are often asked to help our clients determine what their commercial real estate properties are worth. You can determine property values with as little as a “gut check,” or “back of the envelope” approach, to a full blown appraisal completed by an MAI appraiser.
Typically, when we are engaged to sell or lease your property, we go to work to determine what your property is worth in the current market using a Brokers Price Opinion (BPO). These are also sometimes referred to as a Broker Opinion of Value (BOV).
It is important to note that our determination of your property’s value is different than an appraisal. A BPO/BOV is used for less formal purposes like listing a property. Appraisals are more comprehensive and are typically required for lending or other more formal financial purposes.
If you are just curious or doing some planning but not ready to sell your property, it is always better just to say this to your broker up front. This will save you and them a lot of time and possibly misunderstanding if they think you’re asking to know the value because you are ready to sell.
A “gut check” or “back of the envelope” value, is arrived at with more anecdotal comparisons vs. an opinion that is validated by comparables (comps). This is meant to give you a quick ballpark figure which the broker can give you on the phone or within a day or two with just a little research.
Brokers Price Opinion (BPO):
A BPO is a 3–5-page report that includes an executive summary, property information, site/area description, tenant information and financial analysis (if applicable), supporting comps and concludes with an opinion of value. BPOs can be used for estate planning, establishing how much to bid on a property, and/or in preparation for a sale. It can take a broker as little as 2 days or up to 2 weeks to complete depending on how complex the property is and their current workload.
We take the following steps to develop the BPO.
- Study your property to make sure we know all its characteristics, particularly those that contribute to value.
- Research the area to understand the submarket. Some submarkets perform better than others and can contribute to property value.
- Establish a competitive set of comparable properties that have sold.
- Compare your property to available properties currently for sale that are comparable to yours.
- Analyze the current market—is it rising or declining?
When it comes to methodology, there are three approaches to determine property value. Each of these approaches has its own strengths and weaknesses. The method(s) most appropriate for the valuation of your property depends on the type of property, its location, and other market factors.
- Comparative Approach (also known as Sales Comparison Approach or Market Approach): This is an estimate of a property’s value based on similar properties (comparables or “comps”) in the same market area. Adjustments are made for differences in the size, condition, location, and other factors that might affect the property’s value. This method is commonly used in non-income producing commercial properties, which are also called “owner-user” properties.
- Income Approach: This method is often used for commercial real estate that generates income. A property is valued based on the net income that it produces divided by the capitalization rate, or cap rate, which is the rate of return desired by the potential purchaser. The market determines going cap rates. They vary based on several factors such as property type, tenant mix, lease terms, etc. There is a lot of work that goes into this type of analysis.
- Replacement Cost Approach: This method assesses the cost to replace the structure if it were destroyed. The replacement cost includes material costs, labor costs, land value and other costs associated with building a structure of similar size and utility.
In a market where properties are selling below replacement, this approach is often omitted.
The Conclusion section of the BPO is where you will find the broker’s opinion of your property’s value. You can see how much effort goes into the process from the steps the broker follows, the differing methodologies used to value and taking into account your motivations and objectives. We always try to provide the opinion of value in a range like $5 million to $5.6 million, citing the low, mid, and high points of our research. That gives you a sense of the highest you can expect (if, for example, you can be patient for a higher figure) or the lowest you might expect (if, for example, you wanted to liquidate and use the proceeds for other purposes).
It’s helpful to know that if you are considering listing your property for sale, a good broker will include the BPO process in their Listing Proposal. The listing proposal will also include details on the broker’s marketing process and listing terms (like commission and the duration of the listing agreement) and the implementation schedule which explains what happens after you sign a Listing Agreement.
For more answers to your commercial real estate questions, check back to the MDL Group Learning Center for the next blog in our series of “Answering Our Brokerage Clients’ Most Commonly Asked Questions” – Once I Sign the Listing Agreement, What Happens Next?