What is the Difference Between a Broker Opinion of Value and an Appraisal?
Both a Broker Opinion of Value (BOV) and an appraisal utilize the same approaches to determining the value of properties, however, there are some key differences.
To begin, an appraisal is performed by a state-licensed third party and performed at a cost. Specifically, in terms of commercial real estate, the cost may be significant. Often, a BOV is at little or no cost, as many brokers provide this service as a means of earning representation for the property. There are specific guidelines stipulating what uses a BOV may or may not have.
Another key differentiator between a BOV and an appraisal is the detail provided. There are variations in depth of the BOV analysis, but most consider the property condition, size, location, age, tenant data, and a number of other attributes of the physical structure/property. Appraisals tend to include external factors, including area demographics, topography, drainage and soil conditions, and flood and environmental hazards. That is not to say that the analysis of a BOV isn’t comprehensive. Brokers performing these opinions are skilled at market research and analysis. The guidelines, however, for the details necessary to include in an appraisal are more stringent.
Three Approaches to Determining Value
There are three approaches to providing a Broker Opinion of Value, the income approach, the replacement cost approach, and the sales comp or direct comparison approach. The approach used is dependent on the property type and the frequency in which similar types of property transactions occur on the open market.
The income approach to value is estimated by a property’s income-producing capability. Utilizing the principle of anticipation, this method evaluates the property’s income and expenses to determine a lease rate, which is the amount of income the property is expected to generate over a specified period of time. This approach is most commonly used for investment or income-producing properties.
The replacement cost approach is determined by calculating the cost to build new, taking into consideration, taxes, construction, land and any other associated costs, and then depreciating that value based on age, or functional or economic conditions that may impact the value. This approach is used for properties that are unique or no comparable sales exist.
The most common approach, the sales comp approach, evaluates similar properties that have recently sold, based on relevant, market-derived elements of comparison. This approach to value is based on the principle of substitution, essentially stating that the value of a property can be determined by the price a potential buyer would pay to acquire a substitute property of equal desirability. However, since no two properties are alike, adjustments are then made in the determination of value to account for other considerations that may impact the value.
Other Considerations that Impact Value
There are a number of factors that affect property value aside from the physical attributes of the property itself. For instance, properties within close proximity to a mixed-use development are of higher value because it is desirable to be among a walkable area offering a number of amenities, even when the physical attributes of the property are comparable.
Additionally, whether properties are sold individually or listed as a portfolio also has an impact on the value. Properties sold as a portfolio typically garner less than properties sold individually – unless it is determined that there is a specific value by assemblage, such as to support a larger development.
Value is also impacted by supply and demand. The fewer properties available that are similar to the subject property, the more likely the price will be higher.
Other considerations include the age of the buildings and the desirability of the area.
How Do I Know If I Need a Broker Opinion of Value or an Appraisal?
A Broker Opinion of Value is generally solicited when there is a desire to sell. However, obtaining a BOV can inform business decisions by providing owners with valuable market insight. For instance, BOVs are sometimes needed to inform Boards of Directors or Investors. Appraisals may be required for financing and tax purposes.
About NAI Ohio Equities
Operating as Central Ohio’s largest, locally-owned commercial real estate company; NAI Ohio Equities has been serving the Columbus real estate market for 50 years. Our mission is to provide the highest quality real estate service by adding value to our client’s assets and real estate needs through expert analysis, market knowledge, and personalized service.
As Central Ohio’s local leader in commercial real estate, NAI Ohio Equities employs more than 25 experienced agents that together make up our qualified Brokerage Department. We also have an experienced Property Management Division managing more than 12 million square feet of property including various home-owner associations, multi-tenant office building, medical office buildings, industrial facilities, and retail buildings throughout Central Ohio.
For more information, please visit www.ohioequities.com