Before making any lending decisions, financial institutions must obtain appraisals of the property. Professional, commercial real estate appraisals are highly structured by many factors, including what type of information must be included and disclosed within the report.
But if both the appraisers themselves and appraisal reports are also highly regulated, why is a formal appraisal review processes put in place? And how does the term “exposure time” fit into this equation?
The experts at Oxford Appraisal Management Company are here to break down the appraisal review process and how exposure time plays an essential role in the development of the appraisal.
The Importance of Appraisal Review
When it comes to commercial real estate and the obtaining of commercial property, there are certain protocols that have been established for creating and enforcing Uniform Standards of Professional Appraisal Practice (USPAP). Those protocols include aspects such as the “Appraisal Review, Development and Reporting” stage. Adherence to these review process guidelines are highly suggested and may be enforced upon examination especially with respect to safe and sound banking practices.
The appraisal review process ensures that the appraisal meets 100 percent compliance with the USPAP standards.
For example, at Oxford AMC, our expert appraisers monitor the appraisal throughout the entire process. Our clients receive automated email updates notifying them of progress each step of the way. Once completed, Oxford thoroughly reviews and certifies the appraisal for compliance in order to keep our customers – and their regulators – satisfied.
What Is Appraisal Exposure Time?
When it comes to the review process, it’s important to understand that the overarching purpose of an appraisal review is to ensure that the USPAP required concept of “exposure time” is addressed and supported, and stands alone next to the estimated marketing time of the appraisal.
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. 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 an appraisal report, to “identify the type and definition of value…” of the property in question. When it is found that exposure time is a prime component of the value opinion being developed, the appraiser must also develop an opinion of reasonable exposure time linked to that value opinion.
Reasonable Exposure & Market Differences
In order to estimate a reasonable exposure time, appraisers must analyze the property’s associated market and industry. “Reasonable exposure” (RE) should be addressed whenever a sale is confirmed.
The length of time a property is on the market before negotiating its sale could affect the original sales price. Adjustments to the comparable sales may be necessary if insufficient time is allowed for their exposure to prospective purchasers.
Reasonable exposure time comes into play in situations where a seller might be compelled to sell in a shortened period for less than might otherwise be realized.
The Appraisal Institute’s Guide Note 14: Concept of Exposure Time notes that reasonable exposure time can differ for various types of property and under diverse market conditions. It is a function of price, market conditions and property characteristics, and the basis for an opinion of exposure time should include one or more of the following:
- Statistical information about days on market for similar types of property
- Information gathered through verification
- Interviews of market participants
- Market information from data collection services
Exposure Time Vs Marketing Time
The terms exposure time and marketing time are often confused.
According to the Appraisals Standard Board, “Marketing time is a forecast that is made looking forward from the effective date. Marketing time differs from exposure time in the sense that it precedes the effective date of an appraisal.”
If and when it is stated in an appraisal report that exposure time is relative to future events or forecasts, an appropriate analysis of past events should also be presented to support the idea.
Too often, in the appraisal review process, the reviewer will read a statement such as: “based on the premise that present market conditions are the best indicator of the future, the subject will require a marketing time and exposure time of approximately (x) months.” This is an unclear and potentially misleading reference that equates both marketing time and exposure time.
Instead, 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.”
Putting Exposure Time to Good Use
Once reasonable exposure time is estimated, appraisers should not simply use the estimate of reasonable exposure time as their forecast of the marketing period. When it comes to the analysis of marketing time, 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
- 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.
Turning Words into Action
Once value of an appraisal is estimated, it is important for the reader to understand the marketability of the real estate and the estimated time required to negotiate its sale.
As important as it is to distinguish between marketing time and exposure time, it’s also essential to communicate the independent analyses of past and future events that lead to the estimated marketing times.
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. With that being said, the experts at Oxford AMC are always on hand to help! From the beginning, Oxford has been committed to three core principles – expertise, service, and independence. Contact Oxford AMC today to learn more.