Commercial BPOs-fascinating

[Caligirl]

I keep getting these BPO calls for pre-foreclosure and foreclosure properties here in California. It seems that there are brokers completing commercial BPOs without any lease analysis or market rent forecasting. No zoning info, no cap rates, no DCF... I kid you not.

This is just weird, weird stuff. I guess the banks don't care because they just want to unload the dead weight properties.

Doesn't this seem like an extremely risky endeavour? *What if*, for example, there were undisclosed problems with the property involving existing leases, subleases, zoning issues or environmental factors. Once I appraised an office building which was located ON the Hayward Fault, I kid you not-don't you think a buyer would want to know this!? I'm assuming the buyer will get a decent appraisal to protect themselves?

Just marveling out loud. Comments very welcome.

 

[The Warrior Monk]

Speaking only for my marketplace:

The vast majority (I'm talking 99%) of real estate agents have no clue on how to price a commercial property...hence they have no idea what is is worth. They price commercial properties like residential properties....the sky is the limit.

The problem is, not all commercial properties are fee simple. Sure, you can ask $4M for the property, but doesn't common sense dictate that it probably isn't worth anywhere near that amount when the contract rent is $90K and there are 10-years remaining on the lease?

 

[Caligirl]

Exactly, David! And I still can't believe they aren't considering income and performing lease analysis. No investor in their right mind only looks at $/SF on a commercial property.

Perhaps it is just me-it seems like only yesterday I was worried about Supplemental Standards.

 

[JSmith43]

Cali, what kind of information do they send you? Do they outline a proposed SOW? Instructions about contacting/not contacting tenants? Permission to contact the fee or leased fee owner?

 

[Kali the Boston Terrier]

A buddy of mine who is a long time CCIM, gets 5-10 BPO requests a day...because of his CCIM. $150 a shot, keep in mind he makes $500k a year in comissions. Only sales, nothing else for the BPO

 

[PL1957]

Two points:

First, from what I've seen, the BPO is usually used as an initial triage for distressed real estate. Before an actual decision (foreclose, deed-in-lieu, etc.) is made, an appraisal is obtained. Asking an appraiser to "double-check" the BPO sounds like it's just an added step in due diligence.

Second, price per square foot does come in to play, even with significant commercial assets. It often serves as a floor, with investors figuring that, if they can get it at a low enough price, they can make it work. It harkens back to the early 1990's, when buyers of empty buildings were eschewing DCFs and going with "gut feel", even on Class A, CBD office assets.

 

[Caligirl]

Second, price per square foot does come in to play, even with significant commercial assets. It often serves as a floor, with investors figuring that, if they can get it at a low enough price, they can make it work. It harkens back to the early 1990's, when buyers of empty buildings were eschewing DCFs and going with "gut feel", even on Class A, CBD office assets.

Interesting point, PL. This is the first down cycle I've worked so that makes sense. I'd be interested to know what parameters they are looking at; real estate $/SF here is extremely expensive despite recent declines and rental rates/vacancies are increasing. Certainly the risk factor plays a significant role in their decision making.

 

[Caligirl]

Cali, what kind of information do they send you? Do they outline a proposed SOW? Instructions about contacting/not contacting tenants? Permission to contact the fee or leased fee owner?

I only know that the bank wants three sales, three listings, and a turn-time of a couple hours. I can't imagine any appraiser is taking these jobs, it makes sense for a broker to do them in attempts to try to get the listing.

PL brought up an interesting point, about investors using the indicated $/SF as a floor. There are so many savvy investors in my area, that I'm assuming these foreclosures must be owner/user properties which are now vacant. I was seeing cap rates in the 3-4% range for these a few years ago, and wouldn't be surprised if this is the first wave. Therefore no leasehold issues, and I am sure these are being sold cash only, 'as is', no warranties, buyer beware.

 

[JSmith43]

I only know that the bank wants three sales, three listings, and a turn-time of a couple hours.

That confirms PL's analysis & is what I suspected. They want a MV point value or just a range? I wonder if George Hatch has a USPAP compliant solution in mind for such an intended use?

Best left to the BPO crowd or appraisers that don't mind retiring without much notice:icon_mrgreen:

 

[PropertyEconomics]

Sad to say, many of the large commercial firms probably know value better than most appraisers. Now these large firms wouldnt be doing BPOs I dont think, but I certainly know they have the skill set to do it .. they analytical skills are pretty impressive.