Exposure Time and Marketing Time

(by Dave Maloney) Exposure time. Marketing time. What are they? How do they differ? Why care?

One of several conditions implicit in the definition of market value is that consideration be given to the “conditions of sale”— one of which is that a reasonable amount of time be allowed for the property to be exposed and marketed to the open market. Note that this discussion focuses on reasonable exposure time and marketing time as they apply only to types of market value and not to non-market-value types (such as forced liquidation value and replacement value).

A subject property, if hypothetically sold, would sell for its market value only as a consequence of having been exposed in an open and competitive market for a “reasonable time” prior to the actual sale taking place. (It is assumed that in addition to being exposed to the market that an adequate marketing effort would have been made as well.) In other words, the property would have had “reasonable exposure time” without which it theoretically would have achieved less than its market value when sold.

Exposure time plays a more significant role in the appraisal process than does marketing time. The former must always be considered (and at times an opinion of exposure time must even be developed and disclosed) while the need for developing an opinion of the marketing time may seldom arise.

USPAP’s DEFINITIONS section defines exposure time:

EXPOSURE TIME: estimated length of time 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.

Comment: Exposure time is a retrospective opinion based on an analysis of past events assuming a competitive and open market. (USPAP)

Exposure time occurs prior to the effective date of the appraisal and mirrors the marketing time required to sell the comparable properties (at their market value) that are being used as a basis for the opinion of market value being developed for the subject property.

Developing an Opinion of Exposure Time

For market value appraisals, USPAP’s SR 7-2(c) requires the development of an opinion of reasonable exposure time if exposure time is a component of the definition of the type of value being developed:

Comment: When 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. (Comment to 2012-2013 USPAP SR 7-2(c))

And SR 8-2(a,b,c)(v) requires that that opinion of exposure time be disclosed in the report if it is required to be developed by the above SR 7-2(c) in the first place. It states:

When an opinion of reasonable exposure time has been developed in compliance with Standards Rule 7-2(c), the opinion must be stated in the report. (2012-2013 USPAP SR 8-2(a,b,c)(v))

Note that SR 7-2(c) and SR 8-2(a,b,c)(v) apply only when developing an opinion of a type of market value—not if you are developing a non-market type of value, and the above Comment applies only if exposure time is a component of the value definition being used. Sometimes it could be (such as with orderly liquidation value) and sometimes it is not (such as with fair market value in which case, by definition, exposure time is “reasonable”.)

We’ll begin with a real property example.

Let’s assume that a homeowner puts his house on the market with an asking price of $500K; however, the market value of the home (as determined by a real estate appraiser) is only $450K. That $450K market value of the subject home is a “reasonable” price for the subject home, and it is based on past sales of comparable homes which the appraiser notes were on the market for an average of 90 days before selling.

This 90 days, then, is reflective of a reasonable exposure time for the subject home if the home was priced at $450K. Why? Because (based on comparable market data) 90 days is the probable amount of time that the subject home will have to remain on the market before it would sell for its market value of $450K. Like Goldilocks and the Three Bears, exposure time can be long, short or just right. When exposure time is just right and reflects the length of time the property will likely be on the market prior to selling for a reasonable price (i.e., its “market value”), we refer to that amount of time as “reasonable” exposure time.

The appraisal of the subject home, therefore, incorporates and reflects a (reasonable) “exposure time” of 90 days if selling for $450K. In other words, in order to achieve its “market value” of $450K the owner of the property should expect the home to be exposed to the market for a period of 90 days. Had the seller been asking $450K and if the home had features comparable to those other homes in the area on which the appraiser based his market value opinion, the agent would have told the seller, “Make plans to close in 90 days! It probably will not sell within a week, and it probably will sell much sooner than 6 months. Based on market data, in all likelihood, it will sell in about 90 days which is its reasonable exposure time.”

Remember, however, that the owner does not want to sell for $450K. He wants an “unreasonable” $500K! In that case, his agent explains that the necessary exposure time (which can now no longer be considered “reasonable” because the seller is asking more than market value) to consummate a sale will probably be greater than 90 days. Maybe a lot more than 90 days if many other comparable homes are on the market at the time. Recall that reasonable exposure time is the amount of time for which the property is expected to be on the market before selling for its “market value.” If the goal is to sell for more or less than “market value,” then the exposure time will be more or less than “reasonable” exposure time.

The concept of exposure time is the same for personal property such as a period table having a fair market value of $7K. Assume that a reasonable exposure time that would help ensure a sale for its fair market value of $7K if sold at a reputable auction gallery is 60 days. If the client needs an opinion of the table’s fair market value, no mention of exposure time need be made in the report by the appraiser since, by definition, FMV is a hypothetical value for a hypothetical sale that assumes a reasonable exposure time. So, no opinion of exposure time needs to be developed (SR 7-2(c)) or disclosed (SR 8-2(a,b,c)(v)) for this assignment. Having said that, the appraiser can put whatever information into the report that he feels necessary to make the report understandable, so he can opine as to exposure time if he feels it necessary, or if he feels that doing so would help make the report more understandable. For instance, when offering an opinion of the orderly liquidation value of a 19th century chair, you may wish to note that your market value opinion of $1500 assumes a reasonable exposure time of 30 days which, in your opinion, is the marketing time commonly needed to sell similar items at their orderly liquidation values by means of a local auction or estate sale.

Disclosure of Reasonable Exposure Time

The Comment to SR 8-2(a,b,c)(v) requires the reporting of the appraiser’s opinion of reasonable exposure time, but only if exposure time was a component of the value definition being used for a type of market value, i.e., in accordance with the above Comment to SR 7-2(c):

Comment: When an opinion of reasonable exposure time has been developed in compliance with Standards Rule 7-2(c), the opinion must be stated in the report. (Comment to USPAP SR 8-2(a,b,c)(v))

As noted, while it is not always necessary for the appraiser to disclose his or her opinion of exposure time in the report, it is probably good practice to do so if it would help clarify the appraisal results and make the report more understandable.

For a market value assignment in which an opinion of exposure time was a component of the value definition, the appraisal report might contain the following statement:

All comparable sales used in this report as a basis for my opinion of orderly liquidation value were assumed to have been exposed to their relevant markets for a period of thirty days.

By the way, though not required, for a market value assignment in which exposure time was reasonable and adequate, the appraisal report might contain the following statement if such a disclosure would make the report more understandable:

All comparable sales used in this report as a basis for my opinion of value were assumed to have been exposed to their relevant markets for a sufficient length of time prior to sale and that adequate marketing efforts were undertaken to affect said sales.

Note that exposure time should also be analyzed and disclosed even in non-market types of value if doing so is necessary for clarity. USPAP states:

Stating the definition of value also requires any comments needed to clearly indicate to the intended users how the definition is being applied. (USPAP SR 8-2(a,b)(v))

For instance, the appraiser should develop and disclose an opinion of exposure time when developing an opinion of forced liquidation value, which, because it is a sale under duress, is not representative of a type of market value. In such a scenario, the appraiser might state:

All comparable sales used in this report as a basis for my opinion of value were assumed to have been exposed to their relevant markets for only seven days prior to sale and that minimal marketing efforts were undertaken to affect said sales.

Another example would be the above-mentioned chair. If the client needs an opinion of the table’s forced liquidation value for a sale that must be consummated within 14 days (which is much less that the optimum time required to realize a sale at its market value of $7K), then the appraiser should develop and disclose an opinion of exposure time since a reduced exposure time is, indeed, a component of the definition of “forced liquidation value” and such disclosure would help to “…clearly indicate to the intended users how the definition is being applied.” The appraiser might state in the report something to the effect:

Based on your stated need to liquidate the subject property within 14 days (which is less than a reasonable exposure time of 60 days required to achieve market value), in my opinion the table has a forced liquidation value of $3,200.

Again, an opinion of exposure time is required to be developed and disclosed only if it is a component of the definition of the type of market value being developed, but the appraiser may wish to discuss exposure time for other types of value as well if doing so would add clarity to the report.

Reasonable Exposure Time Examples

Reasonable exposure time should answer the question, “How reasonably long would the property have had to be exposed to the market in order to sell at its estimated market value shown in the report?” An estimate of the reasonable exposure time for the subject property is based on the actual times it took (i.e., the marketing time) to sell the comparable properties in the past at their market values. Opinions of reasonable exposure time can also be based on interviews with market participants such as other buyers and sellers of similar properties.

As you might expect, what one might consider to be a reasonable exposure time will vary according to the type of property, the market conditions, and the expected price range. As examples:

A reasonable exposure time for a type of property commonly sold at a local auction would be less than the reasonable exposure time for a type of property commonly sold through international auction houses.
Reasonable exposure time will be lengthier within a buyers’ market where similar properties are plentiful as opposed to a sellers’ market in which properties are scarce.
Property that is priced at a level which informed market participants feel unreasonably high will require a longer exposure time to sell (if, indeed, it ever does sell) than property participants feel is fairly priced.

Example 1: Lenders contemplating a collateral-based machinery and equipment loan in a market where liquidations require a long six or nine month exposure time may decide to adjust their underwriting requirements (e.g., allow a reduced loan amount or charge a higher interest rate) in the face of the possibility of the lengthy time frame associated with getting their money back should the collateral need to be liquidated. Optionally, the lender might not fund the loan request at all due to the difficulty in liquidating the asset (if it became necessary to do so) or because of the high risk of not being able to recover the lender’s invested capital for whatever reason.

Example 2: A client requests a market value appraisal for a sales advisory purpose. A careless appraiser fails to properly identify the appraisal problem and, consequently, mistakenly researches the retail market (instead of the orderly liquidation market). In doing so, the appraiser determines the value at the retail store market level and reports back to the client. The client subsequently hires an estate sale agent to sell the property and presents the agent with the appraisal and the expectation that the agent will achieve the appraised retail values. The agent, who was contracted to conduct an orderly liquidation, quickly realizes that the property will not achieve the retail value reflected in the appraisal (as expected it will by the client) within the relatively short exposure time available to conduct the estate sale. In the retail market it typically requires months (and sometimes years in the antiques business) to achieve a sale at the retail price level. The stated retail values in the appraisal report will not likely be achieved within the few days available for an estate sale, even at an estate sale that is well-advertised. A consideration and discussion of reasonable exposure time would clarify these related issues that are relevant to the two conflicting intended uses. Proper discussion of exposure time in the appraiser’s report would have helped eliminate confusion and would have prevented unrealistic expectations of the probable selling price. (Adapted from Launching Your Appraisal with USPAP, Novotny, 2007.)

Marketing Time

USPAP’s Advisory Opinion 7 Marketing Time Opinions defines marketing time as:

An opinion of the amount of time it might take to sell a real or personal property interest at the concluded market value level during the period immediately after the effective date of an appraisal. (USPAP AO-7)

Marketing time occurs after the effective date of the appraisal, and is the anticipated time required to “get the word out” to an adequately large number of prospective purchasers, to allow appropriate time for advertising and inspection, for conducting a negotiated or an auction sale, for the exercise of due diligence, and, in general, for the consummation of a sale at the property’s market value. An opinion of marketing time might be stated: “It will take 30 days to sell your antique table for its market value of $1500.”

The above-mentioned house seller might ask, “OK, market value of my home is $450K and if I wanted $450K I understand it will probably take 90 days to market and sell my home, but I want $500K. How long will I have to market this property in order to sell for $500K?” The appraiser might reply, “While a reasonable marketing time to sell for market value of $450K is 90 days, the marketing time to sell for $500K might be as long as five to six months.”

An opinion of marketing time is not required by USPAP. Since marketing time occurs after the effective date of the appraisal’s market value opinion, a marketing time opinion it is not part of the appraisal process, though it is related to it. Accordingly, should an assignment require an opinion of marketing time, it would be appropriate for that opinion of marketing time to appear towards the end of the appraisal report.

Requests for the appraiser to provide an opinion of marketing time originate from the client. It is important for the appraiser to discuss the relationship an asking price that is based on market value has on marketing time. Different potential asking prices will each have their own associated marketing time. Such options may result in the appraiser generating a multi-market, multi-value appraisal. (See the Chapter 4 section entitled “Multi-Market, Multi-Value Appraisals” for a related discussion.)