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Extraordinary Assumptions, "as-is" or "Subje

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Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Under USPAP we are required to disclose any extraordinary assumptions and Hypothetical situations. On the 2055 form there is a "subject to" box that includes Hypothetical situations. My question is does an appraisal need to be "subject to" when extraordinary assumptions are made or can it be presented "as is" with the extraordinary assumptions disclosed in the addendum or body of the report?
I have been making my reports "subject to" some extraordinary assumptions and am begining to feel the heat from underwriters. :evil:
 

Blue1

Elite Member
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Jan 14, 2002
Professional Status
Certified Residential Appraiser
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California
The way I see it, an appraisal makes many assumptions even if it is made "as is." As an example, we are assuming that all mechanical systems, plumbing systems, etc. are all functional, legal and installed properly. If, at the time of inspection, the power is turned off to a property you are inspecting you might make an EXTRAORDINARY assumption that all electrical systems will function properly when the power is turned on. You could base this assumption on the fact that the observable electrical system and electrical appliances, etc. all appear to be in good condition and therefore make the appraisal "as is" with the EXTRAORDINARY ASSUMPTION caveat.

Conversely if there is anything that looks in need of repair or appears like it may not function when the power is turned on, the appraisal can be made "subject to."

As usual disclaim, disclaim, disclaim.
 

Richard Carlsen

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Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan

Reread the definitions of Extraordinary Assumptions and Hypothetical Condition and you will see that they can be used in either an “As Is” or “Subject To” report. There is nothing in the definition that restricts them to one or the other conditions.

A “Subject To” condition is, in fact an Extraordinary Assumption that something will be done in a certain way and if it is not, it could alter the appraiser’s value; i.e. Subject to completion per plans and specs. There could also be something within the report that also could be an Extraordinary Assumption.

I frequently do acreage parcels where the lender only wants value for 5 acres whereas the actual parcel is 30 acres. I make this a Hypothetical Condition warning that the value contained is not reflective of the actual site as presently constituted.

Here are the definitions direct from the USPAP glossary.


EXTRAORDINARY ASSUMPTION: an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions.

HYPOTHETICAL CONDITION: that which is contrary to what exists but is supposed for the purpose of analysis.
 

jtrotta

Senior Member
Joined
Jan 16, 2002
I know it is not often we read the "Limiting Conditions & Certification" portion of our own reports, but I would suggest you review those every once in a while.

"Subject To" - the reason the UW's don't like those two words, is basically the "Legal Dept" is having a fit every time they see that in a report. Heavy contracts containg those two words, have been won in court rooms time and time again, talk about a grey area :wink:

8)
 

Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Thanks Richard,
That is pretty much how I have approached the problem in the past. If it a Hypo. Sit. it is "subject to" and extraordinary assumptions are a judgement call.
 

Richard Carlsen

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Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
Fred;

Hope you did not read me wrong. I did not say that a Hypothetical Condition had to be "Subject to". In fact, I think most of the time, a Hypothetical Condition will be "As is" but based on a hypothetical condition imposed from somewhere, such as using only 5 acres on a 20 acre site.

Extraordinary Assumptions can be both as in cases of new construction which are "Subject to" completion per plans and spec. But they can also "As is" as when the electricity is off and the well, furnace and lights are not operating. You can make an Extraordinary Assumption that they work and go from there. If they don't, that could effect value. You do not have to call for these things to be turned on and tested in order to give a value.
 

Verne Hebert

Senior Member
Joined
Feb 25, 2002
Professional Status
Certified General Appraiser
State
Montana
I think the reason this form was setup this way was to simply demonstrate, at a glance, that the reconciled value is based upon the current scope of the property, or some "conditioned" form of the property.

"subject to" this condition, is an "as-is" value; of this new condition.
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
When an appraisal is made "subject to", the value estimate is dependent on something actually happening, like a repair, an addition or other improvement, a change in zoning, recording of a plat map, consummation of a lease, etc..

All appraisals are made using assumptions of one type or another. For instance, we assume that an existing building that shows up in public records was actually built with permits or is otherwise legal. We assume that if we don't notice obvious problems with one or more systems in the structure that there are no significant deficiencies.

An Extraordinary Assumption is just exactly that, an assumption that goes beyond the typical assumptions we usually make. For instance, if we assume a room addition that does not show up in public records, but otherwise appears to conform to the original structure in terms of quality and workmanship, as being a legal addition, that assumption goes beyond the types of assumptions we normally make. Therefore, a disclosure to that effect is appropriate so that the reader understands how you are making these decisions and analyses.

In the case of appraisals rendered without the benefit of a complete interior and exterior inspection (2055), we generally assume that the age and size of the improvements as shown in public records or whatever we consider to be our 'reliable source' is reasonably accurate, and further, that the quality and physical condition of the interior is consistent with the exterior as observed. This is a reasonable assumption on our parts. Now if we are informed by the borrower that they performed a complete kitchen remodel, with reciepts for $30k in improvements, we might consider making that appraisal based on the Extraordinary Assumption that those improvements were actually completed. We might (or might not) even consider making the appraisal subject to verification of those improvements.

This is where a well-written description of the Scope of Work is going to come in. When doing an exterior-only inspection (observation for you, Jo Anne) of a property for a 2055, I throw in a caveat that the appraisal is based on the exterior only and an assumption that the interior is consistent in quality and condition as the exterior. No Extraordinary Assumptions because I don't think this type of assumption is out of the ordinary for this type of assignment and within the scope of work, and not "subject to". If the Scope of Work is consistent with the intended users and the intended use, that shouldn't represent a problem for me if things turn out to be different; after all, they're the ones who were dumb enough not to get the full monty. Scope of Work is all about CYA, it's truly not about the USPAP police.

The reason the underwriters aren't going to like 2055 reports made on a "Subject To" basis is that under most lending program guidelines they are going to be prompted to have the appraiser go out and fulfill the terms of the condition. Not only is the appraiser going to be loathe to go back out for this little chore, probably at a minimal or even no fee, but it is probably inappropriate and unneccesarily cautious given the original scope of work. You can avoid this as well as CYA simply by writing a reasonable scope of work that explains why you put a value opinion on a property without benefit of a complete interior/exterior inspection.

Leastwise, that's how I see it.


George Hatch
 

Farm Gal

Elite Member
Joined
Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
Well writ George!

I had on the basis of some class taken eons ago been using 'subject to' in some situations which in the light of your explanation appear inapropriate.
I DO still think it catches the underwriters eye better, but...

I like your take much better, and will most likely use it in the future! Thank you. :D

(clipped and filed under words of wisdom - in which fiel George has a disproportionate, but deserved share :wink: )
 

Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Lee Ann,
You are not far off when you say "I DO still think it catches the underwriters eye better". I have a client (giant in the banking industry) that actually requires the appraiser to use the "Subject to" box to bring any major issues to the attention of the underwriters. Things like health and safety issues, non conforming features, road repairs, and utility upgrades. The underwriters can waive a condition if they want to. I love this client.
 
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