Hypothetical Condition Vs. Extraordinaryassumption

[KYLECODY]

Can someone please briefly give me an overview of each of these???

For example, Im doing an external REO in an older section of Denver where the value for the same size home ranges from $180-400k depending on if its a fix up or if its been completely renovated. The lender stated it has to be exterior only/pfcl and asked to do as if it is in average and typical condition(which is where I was going anyways/low end). Im guessing this is a hypothetical?? Clue me in. Thanks.

 

[Pamela Crowley (Florida)]

EXTRAORDINARY ASSUMPTION:

An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions.

Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis



HYPOTHETICAL CONDITION:

That which is contrary to what exists but is supposed for the purpose of analysis.

Comment: Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

 

[JSmith43]

So, if the part you observe (the exterior) isn't average you would have to hypothesize that it was. Naaa. You meant they wanted you to assume the inside is in avg condition, I bet. Now, that is an extroadinary assumption for a REO in more ways than one.

 

[Mike Garrett RAA]

An extraordinary assumption is what you need

 

[Robert Anderson]

Kylecody,

If, based on available data, you conclude that the subject property is in average condition, and you appraise the subject property as if in average condition, then you would use an extraordinary assumption.

If, based on available data, you conclude that the subject property is in OTHER THAN AVERAGE CONDITION, and you appraise the subject property as if in average condition, then you would use a hypothetical condition.

It is important to note that USPAP allows the use of a hypothetical condition only under the following circumstances:

* Use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison;

* use of the hypothetical condition results in a credible analysis; and

* the appraiser complies with the disclosure requirements set forth in USPAP for hypothetical conditions.

As an aside, I would probably decline the use of a hypothetical condition that pertains to a property's condition when doing an exterior-only inspection.

Bob Anderson

 

[KYLECODY]

good answers all. Thank you.

 

[Lee Lansford]

Kyle,

Look at your current (2005) copy of the USPAP.

The definition for each (EA and HC) is found there.

When in doubt, turn to the source.

 

[Alvin Michael Cooper]

Kyle,

I've done literally hundreds of REO properties. A very few were "average" condition, the vast majority were trashed. Even if the outside looks OK, trust me, there is no telling what is going on inside. The place could be completely gutted, or worse.....and there is worse. Personally, I'd tell the person who wanted me to do an exterior REO to take a cue from Ben Franklin and fly that kite somewhere else. Ask yourself this, is one property (or even one client) worth losing your license when the lender takes this to the state because they can't get 10 cents on the dollar on the value of the drive-by?

 

[Lee Lansford]

"Exterior-only" appraisals are completed every day on properties that are in pre-foreclosure.
For that matter, appraisals are completed every day where there is no viewing of the interior of the improvements.
As long as the client is in agreement with the scope of work and is aware of the extraordinary assumptions that are a integral part of such an assignment, I'm not certain as to why an appraiser has to worry about losing his or her license regarding completing such an assignment.

 

[JSmith43]

I'm not certain as to why an appraiser has to worry about losing his or her license regarding completing such an assignment.

Agreed.

However, I can see a trial attorney showing enhanced photos of the gutted interior & asking why the expert appraiser didn't talk his client into an interior inspection or to assume fair-poor interior condition, or look in the windows (from the exterior) as "any conciencious appraiser looking after the best interests of their lender client should have done." Attorney spin, perhaps, but lots of material to work with on an exterior only REO report. Civil liability potential is higher than average, IMO, especially, if the market implodes.

So, the appraiser's license may remain in good standing, but the E & O policy limits may be reached and breached. It's a good argument to charge more for such assignments, considering the potential for a nightmare scenario.