As part of Valuation Management Group’s appraisal review process, the quality assurance reviewer is ensuring that the USPAP required concept of exposure time is addressed and supported, and differentiated from the estimated marketing time.
USPAP defines Exposure Time as the “estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal.” USPAP further comments, “Exposure time is a retrospective opinion based on an analysis of past events assuming a competitive and open market.” USPAP Standards Rule 1-2(c) requires the appraiser, when developing a real property appraisal, to “identify the type and definition of value…” USPAP further comments, “when reasonable exposure time is a component of the definition for the value opinion being developed, the appraiser must also develop an opinion of reasonable exposure time linked to that value opinion.” Interagency Appraisal and Evaluation Guidelines state the appraisal must, “be based upon the definition of market value set forth in the appraisal regulation” which includes the statement that “a reasonable time is allowed for exposure in the open market.” So, it is important for appraisers to analyze the market and estimate the reasonable exposure time associated with the value opinion reported.
Reasonable exposure is a concept that should be addressed whenever an improved sale is confirmed. The length of time a property is exposed to the market prior to negotiating its sale could affect the sales price. Adjustments to the comparable sales could be needed if insufficient time is allowed for their exposure to prospective purchasers. An example of this might be the forced liquidation of a property in lieu of foreclosure, where a seller would be compelled to sell in a shortened period for less than might otherwise be realized.
The Appraisal Standards Board advises that exposure time and marketing time are often confused. “Marketing time is a forecast that is made looking forward from the effective date. Marketing time differs from exposure time, which is always presumed to precede the effective date of an appraisal.” Whenever it is stated in an appraisal report that exposure time is relative to future events or forecasts, the reader should be cautioned whether an appropriate analysis of past events is being presented.
Too often, in the appraisal review process, the reviewer will read a statement like this in an appraisal: “based on the premise that present market conditions are the best indicator of future performance, a prudent real estate participant will forecast that, assuming competitive pricing and aggressive promotion, the subject will require a marketing time and exposure time of approximately (x) months.” This is an unclear and potentially misleading reference that equates the two terms (marketing time and exposure time). An appropriate statement might be: “based upon review of the average length of time required to successfully negotiate the sales presented for comparison, it is estimated that the subject would have required (x) months exposure prior to achieving a sale at the value opinion reported herein.”
Once reasonable exposure time is estimated, USPAP Advisory Opinion 7 states, “Appraisers should not simply use the estimate of reasonable exposure time as their forecast of the marketing period. A key difference in the analysis of marketing time is that the appraiser must also research and consider anticipated changes in market conditions. For example, while conducting research, the appraiser observes signs of strengthening in the marketplace. Signs could include shortening exposure periods, rising prices, lowering interest rates, increases in the ratio of listing price to sale price or reductions in inventory. An improving market place suggests property may be selling faster than it has in the past. The opposite could also be true.”
Subsequent to the recent recession, as investor demand increased and lender financing became more readily available, prospective sellers and brokers experienced increased interest and numerous offers for their listings, which fueled anticipation that the time required to market a property for sale was declining. At that time, it was commonly stated in appraisal reports that the exposure time prior to the effective date of value was longer than the marketing period looking forward.
Trend Analysis is a requisite for compliance with the Commercial Engagement Letters issued by Valuation Management Group on behalf of its clients. Once value is estimated, it is important for the reader to understand the marketability of the real estate and the likely marketing time required to negotiate its sale. As important as distinguishing between marketing time and exposure time is clearly communicating to the reader the independent analyses of past and future events that lead to their estimates. By improving the clarity of the analyses performed by the appraiser in estimating value, the appraisal report becomes a more useful tool to its intended audience.
Valuation Management Group is a national, full service appraisal management service company that manages the appraisal process for community banks, mortgage bankers and credit unions. We offer the full array of commercial and residential appraisal products and services. We take the appraisal process from ordinary to extraordinary.