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Extraordinary Assumption? Hypothetical Condition?

Discussion in 'Appraisal Education' started by JoeB, Aug 24, 2006.

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  1. JoeB

    JoeB Member

    1
    Jun 1, 2006
    Professional Status:
    Certified Residential Appraiser
    State:
    New York
    Can someone tell me in layman's terms What is a Hypothetical Condition and What is a Extraordinary Assumption?
    I read, but there has been no understandable explaination that i could really understand. Thanks for your help!
    Joe
     
  2. Jamie L Day

    Jamie L Day New Member

    0
    Jul 13, 2006
    Professional Status:
    General Public
    Extraordinary assumptions presume uncertain information to be factual.

    i.e. Assuming something you are unsure of is true.

    Hypothetical conditions are contrary to what exists, but the conditions are asserted by the appraiser for the purpose of analysis.

    i.e. Assuming something is true even though you know it to be false.
     
  3. leelansford

    leelansford Elite Member

    45
    Mar 29, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    Joe, are you an appraiser?

    If "yes", do you have your current copy of the USPAP handy?

    If "yes", review the definitions and see if that helps a bit more.

    Lee
     
  4. JoeB

    JoeB Member

    1
    Jun 1, 2006
    Professional Status:
    Certified Residential Appraiser
    State:
    New York
    I am an appraiser assistant at the moment. I had some understanding of what i had read, in USPAP, but wanted some experts to comment. Thanks
     
    Last edited: Aug 24, 2006
  5. George Hatch

    George Hatch Elite Member

    126
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    California
    Extraordinary Assumption can be explained like this: All appraisals employ certain assumptions and limiting conditions. They're so common that we refer to those as being standard assumptions. Examples of those assumptions are listed on pg 5 of the URAR forms.

    An Extraordinary Assumption is, as it's name implies, an assumption that's out of the ordinary. These assumptions usually arise as the result of uncertainty on the appraiser's part about the attributes of the subject property or its market conditions. An example of an EA is the permit status of a structural addition that doesn't show up in the appraiser's databases. If the structure appears to be of reasonable quality and workmanship and the property owner is making statements about having permits, an appraiser may elect to assume that the addition is permitted for valuation purposes. Now if this assumption proves to be unfounded it could have an effect on the appraisers workproduct. That's why we are required to note those extra assumptions in our reports and provide notice about how it affects our value opinion.

    ----------------
    A Hypothetical Condition is different in that we're not making any assumptions about what is; we know for a fact that it isn't, but are treating it as if it were for valuation purposes. The most common example of this is when we're appraising a property subject to something - like completion of construction per plans and specs, or completion of a lot split. We know the construction isn't yet complete but we are treating it as if it were for valuation purposes. This is in answer to the intended user's questions of "what would it be worth if it were completed".

    Again, an HC is usually of effect on the valuation, so it has to be identified along with how it affects the valuation in the report.

    -------------

    So in a nutshell that's it. An EA is a non-standard assumption, and an HC involves treating a known "isn't" as if it "is".
     
  6. Robert Dunkle

    Robert Dunkle Senior Member

    0
    Jan 17, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Oklahoma
    I just spent a week of review for my CGA exam and HC and EA came up on every practice exam I took. I can tell you for sure that the above posts are absolutely and without any EA's...correct. BTW, it was even on the exam!
     
  7. Kimberly Biedenharn

    Kimberly Biedenharn New Member

    0
    Sep 20, 2006
    Responce to your question

    Okay, I just started the classes last night, maybe this will help you to remember.

    Extraordinary assumption-look at it this way, the appraiser does a desk review or a drive by, never really even sees all aspects of the property, he just uses the MLS or other means of searching the information he is looking for, his extraordinary assumption doing it this way would be that it is his "opinion" that the property is in average condition with his search and the value would also appear average to the community.

    Hypothetical Condition-Lets say you have 3 acres of land and there is 1 cow on that land, surrounding that land are office buildings. The property (3 acres) is zoned agricultural, yet you want to have it zoned Commercial to build an office building on it, this is considered a hypothetical condition where as they may be willing to change the zoning per your request as it makes sense with the surrounding environment, if it were contrary to what is zoned, they would be less likely to change the zoning.

    Hopefully this will help you. Kim :)
     
  8. Denis DeSaix

    Denis DeSaix Elite Member

    173
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    Hypothetical Condition:
    Using a "make-believe" condition that results in a "make-believe" value. I.e., "Let's pretend the subject has "X"; if it does, then what is the value?"
    (nothing fraudulent or illegal if properly disclosed; in "layman's terms, that is essentially what it is. I read the "let's pretend" analogy on this forum, and thought it was perfect).

    Extraordinary Assumption:
    Not being able to verify an item, but being reasonably confident of its veracity. This test needs (IMO) to be applied twice, to the individual appraiser and to a "knowledgeable appraisers" filter.
    So, in other words, even though I'm confident the item is true or accurate, would another knowledgeable appraiser conclude the same? I think it is fair that my "standard" can be higher than the general knowledgeable appraiser base, but my standard shouldn't be lower.
     
  9. Mike Garrett RAA

    Mike Garrett RAA Elite Member

    15
    Jan 14, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Very good question, comes up quite often. Here is how I explain it in very few words.

    Extraordinary Assumption. Believed to be true but if found not to be true could cause you to change your value opinion.

    Hypothetical Condition. Know to be False... but assumed for the purpose of the appraisal. Classic example is new construction. You are appraising something that ISN'T THERE. Another time it is used quite often is when you are appraising an apartment building that isn't occupied but you are going to pretend it has income at full occupancy.


    EO...thought to be true

    HC...known to be false
     
  10. Marcia Langley

    Marcia Langley Senior Member

    0
    Aug 26, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    Missouri
    Joe,

    It may help you to remember that the "subject to" phrase means that it is your opinion of value that is subject to the condition.

    Example:

    You describe a subject:

    There is a big hole in the roof.
    It is unknown whether rain has caused structural damage.

    Fannie check boxes:

    As is: Your opinion of value reflects what the market will pay for a house with a big hole and uncertain structural condition. Your comps will also have a big hole and uncertain structural integrity. This option does not address liability (the client's or yours) regarding whether the structural damage exists.

    Subject to the Hypothetical Condition that the hole has been repaired: This addresses the hole. Your opinion of value is subject to repair of the hole and reflects what the market will pay for houses with no hole. Your comps will not have roof holes. This option does not address liability (the client's or yours) regarding whether the structural damage exists.

    Subject to the Extraordinary Assumption that no structural damage exists: This addresses the unknown condition of the structural integrity. Your opinion of value is subject to a qualified inspection that determines no structural problems exist. Your comps will have no structural problems. If the subsequent inspection does discover structural problems, then your opinion of value is no longer appropriate for the subject until and unless the structural problem is repaired.

    If there is a hole in the roof, you would need both an HC and an EA. That will make your opinion of value appropriate and protect the interests of your client and yourself.
     
    Last edited: Sep 24, 2006
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