Why this article is important: Learn the due diligence obligations required from a broker to a client when performing, drafting, delivering and maintaining records for a broker price opinion (BPO).
Diligence as the effort owed the client
When a broker agrees with a client to provide a broker price opinion (BPO) on a property, the broker is obligated to undertake a diligent effort to complete, submit and advise on the BPO evaluation. This level of effort — diligence — is the same duty of diligence owed a client under any type of exclusive representation agreement.
Diligence is achieved as a continuous effort by the broker and their agents to meet the objective of their employment with the client.
The promise to use diligence in the preparation and advice given with submitting a BPO is the consideration a broker and their agents owe their client when rendering services in expectation of earning a fee. When the promise to use diligence in the employment is not stated in a written or oral representation (consultant) agreement, it is nonetheless implied as existing.
The steps a broker takes to comprise a diligent effort under a representation agreement for a BPO, or as an exclusive seller broker or buyer broker, include:
- promptly gathering all material facts about the subject property which are readily available to the broker and the broker’s agent.
After gathering factual information about conditions affecting use and value of the subject property, the broker or their agent proceeds to reasonably pursue the purpose of the employment.
A BPO service and the broker provider
When a broker or their agent determines a prospective client wants a BPO on a property for any purpose, the agent prepares a representation form employing and authorizing them to work up and present a BPO evaluation. The service here addressed involves the delivery of a BPO report and advice on the current fair market value (FMV) of the subject property.
Other services, such as the sale or acquisition of the property, may also be contemplated, concurrently or in the future. [See RPI Form 200-2]
The subject property’s basic facts are entered in the client representation form, including the:
- property address; [RPI Form 200-2 §1]
- client’s name; [RPI Form 200-2 §1.1]
- intended purpose for the BPO; [RPI Form 200-2 §1.2] and
- property type. [RPI Form 200-2 §2]
The form also details the duties the broker will perform while completing the BPO. In the agreement, and implicit when it is not, the broker agrees to use diligence in their efforts to perform as employed. [RPI Form 200-2 §3.1]
Further, the form clarifies the BPO is a service offered by a broker licensed to provide the service by the California Department of Real Estate (DRE) — not the Bureau of Real Estate Appraisers (BREA).
The broker and client agree to an expected delivery date for the BPO report and review. Completion of the BPO report is contingent upon the client granting timely access to information and documentation the broker requests to prepare the BPO. [RPI Form 200-2 §6]
Related article:
The work undertaken to produce a BPO
On entering into an agreement (be it a BPO consultant agreement or a buyer or seller representation agreement), the broker preparing a BPO interviews the client so everyone understands the use for the BPO evaluation. Also gathered is the information needed to complete the BPO which the client has access to (e.g. APOD income and expense worksheets, TDS information on material facts as affecting value).
Next, the broker selects the evaluation method best for the property and the client’s uses.
Once the evaluation method is selected, the broker knows the types of property information to gather for analysis and evaluation.
Regardless of the valuation method, the broker conducts an investigation of the property conditions, including:
- a property profile, including title condition to confirm ownership, CC&Rs, easements and liens;
- transfer disclosure statement (TDS) prepared by the seller to include environmental issues, together with a natural hazard disclosure (NHD) statement;
- the broker’s inspection to observe any physical conditions with an adverse effect on the property’s value, noting all are disclosed in the seller prepared TDS; and
- zoning search to ensure the property is serving its highest and best use for evaluation.
Further, for income-producing property, the broker includes an annual property operating data (APOD) worksheet or profit and loss (P&L) statement — both a trailing and forward APOD analysis of 12-month operating numbers.
The CMA
A broker applying the comparative method to evaluate the property gathers facts on the subject property and the selected comparable properties and enters them on a Comparative Marketing Analysis (CMA) form. [See RPI Forms 200-1; 318]
The CMA worksheet is used when establishing the subject property’s value based on prices recently paid for comparable properties selected as similar to the subject property by the agent. In the CMA, the agent notes their observations during a visual inspection of the comparable properties in each property’s column, reflecting:
- the itemized features which distinguish the comparable property from the subject property; and
- the dollar adjustment needed to correct the price paid for each comparable property’s greater or lesser value than the subject property. [See RPI Forms 200-1; 318]
Related article:
The cost approach
When the subject property is a new building or a single-purpose or unique structure, such as a church, theater or factory, no comparables might be available. Other times, recent comparable sales are insufficient or unreliable to determine the subject property’s value.
For evaluations of single purpose properties, the broker uses the cost approach to arrive at a value for the subject property when no sales of comparable properties are available or sufficient.
Calculating today’s cost to replace improvements as well as the loss in value due to the depreciated improvements — ageing — is essential for valuing property using the cost approach.
Also, the broker developing a BPO for a buyer- or tenant-client discloses and advises on any adverse material facts they are aware of relating to value or desirability of the subject property.
The income approach
When the income approach to evaluation is best, the broker preparing a BPO first works up two sets of Annual Property Operating Data (APOD) Sheets. One is based on the owner’s past 12 months of operations, called a trailing APOD; the other is a forward APOD forecasting the income and expenses anticipated for the next 12 months.
The APOD form is used to aggregate rent and expense data and calculate the property’s net operating income (NOI) — or loss. [See RPI Form 352]
Accurate and complete APODs are the broker’s work product based on their investigation into the property’s conditions. The APODs set out the net operating income (NOI) the subject property is likely to produce, one based on trailing data, the other one a forward forecast. To use the NOI to evaluate a property, a capitalization rate appropriate for the property is applied to the NOI figure to set a value.
A proper capitalization rate reflects all the returns and risks a prudent buyer considers as necessary for ownership of the subject property. Cap rates are set separately for every property as unique to issues presented by the subject property, not properties generally.
Further, a buyer broker locating an income-producing property owes a duty to a buyer-client to advise whether the property produces adequate income to meet the buyer’s investment objectives.
Submitting and reviewing the BPO
The broker and client agree to the format for the BPO when entering into a representation agreement in anticipation of preparing a BPO, before starting the process of collecting data needed to establish a BPO evaluation. [RPI Form 200-2 §4]
The BPO for presentation to the client may be formatted as:
- a written narrative report;
- a comparative market analysis;
- a property rental income profile;
- a property operating expense report; or
- a combination of any of the above. [RPI Form 200-2 §4]
On completion of the BPO report for submission, the broker needs to schedule a time for delivery and review of the BPO report with the client. A verbal review by the broker affords the client time to ask questions and an opportunity for the broker to explain their opinion of value.
Advising the client on review of a PBO
Consider an agent who, on behalf of their broker, solicits an owner of a rundown (deteriorated) single-family residence to provide a BPO of the property as the owner wants to dispose of it. The agent intends to develop a working relationship with the owner in anticipation of employment to market the property for sale.
After gathering and analyzing data on comparable sales, the agent advises the owner that the present condition of the property justifies a value and asking price of no more than $600,000.
However, the agent has determined the property will sell for $700,000, an additional $100,000 in price, if the seller is willing to spend $25,000 to $30,000 to correct deferred maintenance and eliminate some obsolescence. Importantly, the agent determined the seller has the funds needed to correct the defects and appearance of the property.
The agent is aware the current demand by buyers of a residence in this price range consists mostly of individuals who as prior tenants are looking for a ready-to-occupy home. Few buyers presently are speculator types looking for “fixer-uppers” in that price range to restore and resell at a profit.
Based on market demands and housing prices, the agent advises the seller to invest the time, effort and money to fix up the property. However, the seller is not now willing to invest the funds to do so.
Rejecting the agent’s advice regarding upgrading improvements, the seller agrees to initially offer the property for sale at an asking price of $610,000, just above market value. The property will be offered in its present condition, based on disclosure of the property’s physical condition — supported by a home inspection report.
Since the client rejected the agent’s advice regarding improvements on a review of the BPO evaluation report, does the agent need to explain the reasoning behind their advice?
Yes! Brokers are responsible for a client’s losses for their failure to explain the rationale behind their advice and the likely consequences for not acting on the advice. Here, the agent advises the seller (and confirms in a memo with a copy placed in the client’s file) that the resale value of the property after the property is fixed up for sale will increase.
So later, when a buyer who on acquisition fixes and resells the property at a far greater price, the broker and their agent have evidence they advised the client about the consequences of the opportunity lost by their choice of action. [Calif. Business & Professions Code §10148]
Related article:
Maintaining records for BPO advice
The agent who advises a client on their evaluation of a property does so on behalf of their broker. As is typical, the agent is assigned the responsibility to care for and maintain the office file on the client. The type of representation agreement is not of concern, be it solely for providing a BPO or a BPO rendered under a buyer or seller representation agreement.
Consider the axiom: everything in real estate is documented. How else do you provide evidence of what transpired?
On entering into a representation agreement, a physical file is set up to enter or place information on all activity and documents arising within the scope of representing the client. For example, the file on a client, be they owner or user, is to contain:
- the representation agreement authorizing the employment, be it for a BPO, or a disposition or acquisition of an interest in real estate;
- any addenda to the agreement;
- the BPO report forms;
- any worksheets, comparative market analysis, APOD NOI analysis and property information reports;
- notes from the agent’s visual inspection of the property;
- receipt and disbursement records for the BPO; and
- all communications with the client and transactional providers regarding the BPO, including emails, texts and notes about meetings and phone calls.
What is kept in the file includes any paperwork, notes, messages, billings, correspondence, email printouts, fax transmissions, agent’s property inspection notes, disclosure sheets, worksheets, and all other related documentation. Everything that occurs as a result of the client employment is placed in and retained in the file.
The file belongs to the broker, not their agent, although it will likely remain with the agent through the:
- close of a sale;
- acquisition of a property; or
- nonrenewed expiration of the representation agreement.
The agent hands the broker the entire file on completion of the services, usually a condition for payment of the agent’s share of the fee received by the broker.
All records of an agent’s activities on behalf of a client in connection with any employment requiring a broker license are retained by the agent’s broker for three years. [Bus & P C §10148]
The three-year period for retaining the buyer’s or seller’s activity file for DRE review begins to run on the closing date of a sale or from the date of the representation/consultant agreement when a sale does not occur.
The broker makes the records available for inspection by the Commissioner of Real Estate or their representative, or for an audit the Commissioner may order.
Related article:
While the BPO conducted by the broker or their agent may not always be directly related to or in expectation of a fee-related transaction, the broker follows the three-year rule for retaining files.
For example, a broker is hired by a homeowner to conduct a BPO on their property for insurance purposes or estate planning. The broker senses the owner might be considering the sale of the property and suggests the BPO fee can be applied as a credit toward a fee on a sales transaction. The broker and client sign a BPO consultant agreement. [See RPI Form 200-2]
Since the client’s purposes for obtaining the BPO are not related to a transaction, the broker opts not to maintain their usual strict record-keeping protocols.
The broker completes a CMA for the property. The BPO is submitted and reviewed with the homeowner. The owner, pleased with the BPO result, now decides to employ the broker to market their home for sale. The broker now uses the BPO evaluation to help the seller arrive at an appropriate asking price.
They enter into an exclusive seller representation agreement, all the pre-marketing paperwork is gathered, and the property is marketed as available for sale. [See RPI Form 102]
At what point did the broker’s record-keeping responsibilities begin?
a) When the broker and client signed the exclusive representation agreement.
b) When the broker and client signed the BPO consultant agreement.
c) When the home is posted for sale on an MLS.
The answer is b). Since the BPO is related to the transaction, the broker’s record-keeping responsibilities begin when they agree to perform a BPO, even though a transaction was not contemplated at the time the broker completed the BPO activities.
Related article:
