Measuring the Effect of Limited Exposure Time On Value

Real Estate Appraiser with Preferred Appraisers, Inc. (NJ) 42RG00094600

Limited Exposure Time and Value

 I was recently asked by an intern how to determine value when the client has specified the requirement for a 90 day market exposure limitation. That value may under some circumstances be defined as follows:

 Liquidation Value: the most probable price that a specified interest in real property is likely to bring under all of the following conditions:

  1. Consummation of a sale will occur within a severely limited future marketing period specified by the client.

  2. The actual market conditions currently prevailing are those to which the appraised property interest is subject.

  3. The buyer is acting prudently and knowledgeably.

  4. The seller is under extreme compulsion to sell.

  5. The buyer is typically motivated.

  6. The buyer is acting in what he or she considers his or her best interest.

  7. A limited marketing effort and time will be allowed for the completion of a sale.

  8. Payment will be made in cash in U.S. dollars or in terms of financial

arrangements comparable thereto.

  9. The price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale."

 This definition clearly differs from that of market value due to the motivation of the seller and the limited marketing period factors. 

The first task is to study the entire volume of sales within your delineated neighborhood and determine the median and average days on market.

If that is greater than 90 days then look at a smaller but significant sample of homes that are nominally comparable to your subject and determine the average and median days on market.

If those Days On Market are still greater than 90 then select three nominally comparable sales and compare them to sales that are most similar to each of them that sold in less than 90 days. Grid the three pairs make adjustments for the incremental value contributions of the variables that they do not have in common.

 Adjust "to" the sale that is the less than 90 day sale. Look at the difference in adjusted sales prices between the three paired sets and determine using your judgment which is the most credible isolated difference and either use the one from the paired set that is most similar to our subject, or an average, or a median and then apply that as an adjustment to all your comparable sales which sold in more than 90 days.

                Sale 1A      Sale 2A      Sale 1B     Sale 2B      Sale 1C      Sale 2C
Sales Price 100K          110K        110K         115K         100K           110K
DOM           90             120           90            130            89              126
Garage       No             Yes -5K      No          Yes -5K        No           Yes -5K
2ndBth       No             No             No          Yes -5K        No               No
__________________________________________________ _________

              100K        -105K      100K       -105K     100K       -105K
AdjVal Diff         5K                         5K                         5K

5K / 105k = 4.76%

Subtract 4.76% from each of the Comparable Sales you cited in the appraisal which had been exposed for more than 90 days.

With the current trend toward forensic appraisals the more explanation the better. Today my appraisals are ending up containing almost as much data and analysis as my workfile. If you do all that work to isolate the incremental adjustment attributable to limited exposure time then you might as well cut and paste your analysis into the addendum to illustrate the methodology you used and to enhance the credibility of your conclusions to your client.

 For appraisers the limitation should be added as a "Supplementary Requirement" of the client. It should be included just after the Scope of Work in your addenda.

 If you are an agent or if this is an appraisal for listing purposes then your job is not done. An analysis of offering prices and their relationship with limited exposure sales prices is necessary to determine the market supported offering price.


Comments (0)