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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2013

Reaching Out for Value

Using brokers’ opinions of value can increase margins and lending viability

Reaching Out for Value

As recovery takes hold across various property types in the commercial real estate market, commercial mortgage brokers may notice how lending institutions are striving to avoid errors of the past and ensure that their lending is not only profitable, but also viable. Toward this goal, lenders have recognized the importance of seeking the opinion of a commercial real estate broker — aka a broker’s opinion of value (BOV) — regarding the value of properties that are part of their deals.

BOVs allow lenders to have a preliminary look into a property’s value before getting involved deeply in origination or a workout. Because lenders have to balance risk management with cost effectiveness to preserve their margins, the BOV can be a good tool for the job. Commercial mortgage brokers should be aware that the use of BOVs is on the rise, as lenders are seeking to understand the most appropriate times to use them and the best practices to capitalize on their intrinsic value.

Making a choice

Lenders should take several factors into consideration when deciding on whether to use a BOV or an appraisal. For example, because of the detailed level of skill and knowledge that goes into producing a commercial appraisal, it is typically an expensive commodity. Nonetheless, many lenders are aware that an appraisal can be much more reliable than a BOV in determining the true value of a property because of the formal set of rules that appraisers must follow, including client-underwriting guidelines.

With that in mind, BOVs offer a more cost-effective alternative in many occasions when the higher cost of producing an appraisal isn’t justified. Here are some examples of these situations.

  • Bids and short sales: Lenders can use a BOV to come up with a bid price in the default market or when determining an appropriate discount for a short sale.
  • Due-diligence purposes: When a lender must establish its loan- reserve requirements, it uses BOVs on all of its loans to determine the equity position. With this knowledge, the lender can write up or write down its loan-loss reserves. BOVs also can be used as a due-diligence tool when a lender is establishing pricing for portfolio transactions. For example, if the lender wants to sell some of those loans, it can use BOVs to establish its floor price for the loans.
  • Real estate owned (REO) properties: Lenders can seek a BOV when establishing a suitable list price for an REO property.

Best practices

To get the most value and to streamline the lending process, there are certain best practices that should be followed in producing a BOV. Although lenders and BOV agents are likely to be the ones directly involved in this process, commercial mortgage brokers also should keep a close watch on its procedures and effects on the lending decision. These best practices include the following:

  • Timing: It is best to issue and assign orders within 24 hours of placement. Lenders should take into account the distance of the property to the broker, as well as the broker’s record of quality and turnaround times.
  • Data: Lenders should gather and analyze data to ensure that the broker has everything needed to meet deadlines.
  • Communication: Open communication between the lender and the broker is a must to avoid surprises and ensure that every order is on track.
  • Due diligence: Lenders should do proper due diligence on every BOV agent, gathering all of the necessary background information to ensure that the agents are experienced, knowledgeable and qualified.
  • Complete delivery: All requirements should be met before delivery. If any revisions are necessary after the completion of the file, BOV agents should handle those revisions within 24 hours of request.
  • Tools: BOV agents should have access to tools that enable them to verify the accuracy of their data in key areas. For example, the subject property must be bracketed accurately in a size-and-value matrix that tracks price per square foot, unit, acre, etc.
  • Responsiveness: BOV agents should answer and respond to all inquiries on either the same day they’re received or the next day if the inquiries are received after normal business hours. Responding to partners in a timely manner keeps everyone informed about the current status of the file. They also should find valuation technology that allows for growth in production levels with minimal growth in staffing levels.
  • Feedback: BOV agents should keep lenders constantly informed throughout the process. This can be achieved by scheduling monthly calls in which they provide a detailed performance report on the previous month’s completed activities and specify all of the pending activities slated for completion in the coming month.

• • •

Although the practice of seeking BOVs is gaining popularity for good reason, it is risky to take a BOV at face value without interpreting and validating its results. Commercial lenders and mortgage brokers must confirm that the comparisons are represented correctly and that they are comparable to the subject property.

When used appropriately, BOVs can deliver strong benefits to everyone involved. As the market stabilizes, lenders who understand the full scope of BOV capabilities and limitations will be able to take advantage of them to improve margins and fund viable transactions.  


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