Hypothetical Condition or not

[George Hatch]

As I say, NOBODY wants to do future value, including me. The only reason we do it is because the client and users are asking, and the only reason they're asking is because they're required to ask.

 

[Terrel L. Shields]

But with a proposed use it's all hypothetical.

But that is not what the "Good Book" says is it? FAQ 150

 

[George Hatch]

I already said that I have the minority opinion on that. Which is why I don't use that explanation in my reports.

 

[Terrel L. Shields]

I already said that I have the minority opinion on that. Which is why I don't use that explanation in my reports.

So you violate USPAP?

 

[George Hatch]

So you violate USPAP?

I use their explanation in my reports. Not my own.

 

[Ricky LaFleur]

I hold the minority opinion on that scenario. With an existing use you have reason to believe that it exists in the future. But with a proposed use it's all hypothetical.

I see the logic behind your stance. But to me, the other view makes the most sense for several reasons. A proposed use for prospective value (or FV) will supposedly not be hypothetical as of some specified future date. If the criteria of the appraisal is met (building/improvements completed by the future date) then it will not be a hypothetical anymore.

This is particularly true when considering that we know for a fact that some proposed projects never do get built, or if they do then that completion date is nowhere near the date that was originally proposed.

It is, however, a considerable assumption to make, as you pointed out. That is a different problem, though (IMO). I used to get hung up on DCF for the same reason, until I saw some seasoned appraisers explaining on here and in person how they could be properly completed even if the future turned out differently than how they forecasted.

For that reason, I believe DCF analysis and FV are not fortune telling, rather, it's simply working with the data available and making assumptions today about the future. A future sale (or different rate of increase/decrease in rents, going-out cap, etc) may well turn out to be (and often are) different than forecasted, however, just because the future turns out differently doesn't make a past DCF or FV appraisal invalid for it's intended use, because at the time, they were (supposed to be) made with credible data and reasonable assumptions to make. I believe that's why an EA about certain improvements being made can hold water in an appraisal with a FV date. Fun to think through.

 

[andrew81]

Many assignments for FRTs involving proposed construction or remodels or other major hypotheticals require the future value opinion.

Interagency Appraisal and Evaluation Guidelines

The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value. For a transaction financing construction or renovation of a building, an institution would generally request an appraiser to provide the property’s current market value in its “as is” condition, and, as applicable, its prospective market value upon completion and/or prospective market value upon stabilization. Prospective market value opinions should be based upon current and reasonably expected market conditions. When an appraisal includes prospective market value opinions, there should be a point of reference to the market conditions and time frame on which the appraiser based the analysis. An institution should understand the real property’s “as is” market value and should consider the prospective market value that corresponds to the credit decision and the phase of the project being funded, if applicable.

 

[J Grant]

Whether the opinion of value is a current eff date or a past eff date ( retrospective, a year ago ), or a future eff date ( prospective, a year from now ), they are all hypothetical.

Most often we do a current effective date - it is still a hypothetical value because the subject does not "sell/close title" as of the current date, but we assume it has in the SCA. Every value opinion is a hypothetical opinion as a valuation model- which is different than making it subject to an additional HC (hypothetical condition), such as subject to completion or repair or a pool added, etc.

 

[J Grant]

Regardless of the effective date, every value opinion is hypothetical - that is what makes it an appraisal.

The value being hypothetical by nature is not the same as any additional hyopethical condition ( some condition of X about the property which could affect the value )

USPAP provides the following definition for “hypothetical condition”: “A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis

Applies whether the effective value date is current, retrospective, or prospective.

 

[sputnam]

Regardless of the effective date, every value opinion is hypothetical - that is what makes it an appraisal.

The value being hypothetical by nature is not the same as any additional hyopethical condition ( some condition of X about the property which could affect the value )

That may be true if 'hypothetical' is given its common definition. As an appraiser, doing and reporting an appraisal, the definition that matters is the one that you will find in USPAP. Opinions are opinions. They aren't hypothetical. They are to subjective to a greater or lesser degree. As you know... in appraising... a hypothetical condition means that I know it's not true but, for the purposes of analysis, I will pretend that it is.