Valuation of a portion of a property "as is".

[Terrel L. Shields]

But if you do so by using sales that are stand alone when the 100 acres can not be seperated, then you have employed a hypothetical condition.

wrong. it is NOT CONTRARY TO WHAT EXISTS. You are valuing only a portion of the property. No EA nor HC is necessary. March 2008 Q & A USPAP

 

[Mark K]

A special assumption is an assumption specific to the assignment that is presumed to be true for the appraisal, even though it might not be known to be true as of the appraisal's effective date. Special assumptions are used when certain conditions are likely to be true or expected to occur, but they are not necessarily the current situation. Disclose the potential impact on the valuation conclusions if found to be false. Your Special Assumption for this Appraisal: The 100-acre tract will be able to obtain all necessary subdivision permits and approvals within a typical timeframe and cost without encountering major obstacles.

I have to admit that I like it but also have to admit that I've never heard of a 'special assumption' before. I do mostly R/W work and during the appraisal process I include a HC that the road project will be built. I know that its going to happen but it hasn't happened yet.

A special assumption sure sounds like a subject-to scenario to me.

 

[Raven59]

Special Assumption - An assumption, directly applicable to a specific appraisal or review, which, if found to be false, could alter the opinions or conclusions in an appraisal or review. Standards of Valuation Practice Appraisal Institute. Effective November 12, 2021.

I was thinking - This appraisal provides an 'as is' valuation of the 100-acre tract, which is currently part of a larger 200-acre property. Unfortunately, the tract has not been legally subdivided, and no assumptions have been made about future subdivision or permitting. The market value of the 100-acre tract in its existing condition as of the effective date of this appraisal is estimated to be $zzz,zzz.

Acknowledge that the 100-acre tract is not legally subdivided and is part of a 200-acre parent property. Select comparables that are similarly unimproved and not subdivided to accurately reflect the "as is" condition.

 

[Raven59]

I have to admit that I like it but also have to admit that I've never heard of a 'special assumption' before. I do mostly R/W work and during the appraisal process I include a HC that the road project will be built. I know that its going to happen but it hasn't happened yet.

A special assumption sure sounds like a subject-to scenario to me.

Maybe more like a general assumption.

Extraordinary Assumption: If the appraisal assumed that there were no environmental issues on the 100-acre tract, despite not having an environmental report, it would be an extraordinary assumption. If this assumption proved false, it would affect the property's value.

Special Assumption: A special assumption is that the 100-acre tract will be able to obtain all necessary subdivision permits and approvals within a typical timeframe and cost without encountering major obstacles. This assumption is specific to the tract's appraisal and impacts the valuation directly based on future conditions expected to be true.

Hypothetical conditions assume scenarios contrary to known facts, extraordinary assumptions deal with current uncertainties presumed to be true, and special assumptions relate to specific expected conditions unique to the assignment.

I do R/W work, too. I agree with H/C for highway projects. Maybe I'm confused, but I believe a special assumption can be as is.

 

[sputnam]

It's called a physical segment... or partial appraisal. It may be new to you, but it's not new. It does not require the use of a hypothetical condition. It requires an accurate description of the property to be appraised. (pssst.... read your USPAP document including the AOs and FAQs. It's all there).

 

[Red Flint]

It is painstaking, but I get all of the land sales from the county and go through each one. Sometimes, landowners sell a back 40 to the neighbor, or a back 10 or 20. May have to go 5 years back, or to another county.

 

[BRCJR]

Extraordinary Assumption same as "Special Assumption"?

 

[Raven59]

An extraordinary assumption addresses current uncertainties presumed to be true, while a special assumption relates to specific future conditions expected to be true for the assignment. An extraordinary assumption is used when there is uncertainty about an existing condition, whereas a special assumption is used for assumptions specific to the unique aspects of the assignment. The purpose of an extraordinary assumption is to proceed with the appraisal despite uncertainty, whereas the purpose of a special assumption is to account for expected conditions specific to the appraisal's context.

 

[Mark K]

It's called a physical segment... or partial appraisal. It may be new to you, but it's not new. It does not require the use of a hypothetical condition. It requires an accurate description of the property to be appraised. (pssst.... read your USPAP document including the AOs and FAQs. It's all there).

I think most of us understand that appraising a physical segment is not the problem. The problem is with the as-is for this particular scenario.

 

[bsilver]

I think most of us understand that appraising a physical segment is not the problem. The problem is with the as-is for this particular scenario.

Exactly right Mark. I would also like to point out that the USPAP exemption of the HC use for physical segment appraisals, as discussed in FAQ 188 and 189, uses very particular language. FAQ 188 refers to the valuation building component of an improved property, 189 the land component of an improved property. In both comments it is stated that use of an HC or EA is not necessary "...in the specific case of appraising the..." (building/land) "...component of an improved property...", but that there are specific cases where HC / EA use is needed nonetheless. FAQ 189 continues, adding that this is true when appraising any other portion of the property. Firstly, the text does not indicate just exactly which HC / EA are unnecessary. Since the comments both relate that the exemption is in regard to the specific cases of the appraisal of land or building components of an improved property, it suggests that there is no need to assume or hypothesize either that the buildings are owned separate from the land, or that they do not exist. The comments strongly suggest that the HC / EA exemption is in regard to land and improvement relationship; that there is no requirement to assume or hypothesize a separation of the two property segments. And there is a clear indication that this specific exemption does not exempt the use of all HC / EA requirements, and in fact suggests that the appraiser must be aware that there are reasons that would indeed require their use.

The next FAQ, FAQ 190 addresses the issue of appraising a physical segment which is a portion of the total land holding. It is interesting to note that the language regarding an exemption from the use of HC / EA is not mentioned at all under this question, and further the answer comments are quite clear that non-compliance with associated rules, regulations, guidelines, and / or assignment conditions would result in violation of Ethics or Competency Rules, which as we all know are the most serious of USPAP violations.

The three FAQ comment / responses suggest that the HC / EA exemption is in regard only to the relation of the physical segment which is being valued to the remainder improved parent tract; that there is no reason to "assume away" or hypothesize that the parent tract improvements are a separate property, that the buildings are not there, etc. There is no indication that I can see in this language that suggests that there is no HC / EA requirement regarding the legally permissible uses of an appraisal subject property which is a portion (physical segment) of a larger parent tract. I will add that this interpretation is the position of the Appraisal Institute. Guide Note 15, which discusses the use of HC / EA, very clearly and definitively indicates that the valuation of a non-legal lot portion of a larger tract as if it were a legal tract is premised on a hypothetical condition. So, if you're an Institute member, or if you believe in conforming to the body of knowledge, you may want to reconsider the legal lot / HC / EA requirement issue. Normally, big deal, just throw in the appropriate HC / EA language depending on your assignment conditions.

Except for one assignment condition. An "as is" premise is not consistent with hypothetical conditions. Appraisal results which are predicated on any HC are not "as is", they are "as if" the HC were true valuations. The fore noted Guide Note 15 goes into great length about this issue. The use of an EA that assumes the subject portion could be attain legal lot status within a typical contract and closing date period is a possible solution. However, use of an EA requires a reasonable basis for the assumption. In a valuation scenario where the subject portion is under no contemplation for actual subdivision, the basis that this assumption becoming factual dissolves. This interpretation of the use of an EA is actually a discussed topic in the latest official Appraisal Foundation USPAP update course.

So, the easy answers from here are along the lines of talk to your client, don't take the assignment, there's no market for a non-legal lot, there isn't going to be any difference in the values, etc. These are answers to the appraiser's problem, but not to the appraisal problem. The question is not what do I do as an appraiser, it is what is a solution to the problem? Can the market value of a portion of a larger tract that is not a legal lot be ascertained under an "as is" valuation premise? I concur that the answer may be a flat out no. But as I have thought about this, it would seem to me that a market value per acre indication from sales of parcels the size of the subject portion minus the per acre indicated contribution to market value of the 100 acres to a 200 acre holding, reconciled appropriately, would be equivalent to the adjustment factor for the subject being a non-legal lot portion of a larger holding. Would this remove the HC and hence allow for the "as is" valuation? You might find no adjustment is required, but simply by investigating the difference you have avoided an analysis which is predicated on a scenario which is not an existing condition. Comments?