Hypothetical Condition

[Couch Potato]

You still have to value what exists to not have a hypothetical condition. You can use any combination, but must identify something that legally exists to not have a hypothetical condition. You don't have to value the whole when doing a fractional interest, physical segment or partial holding, but if they do not legally exist a HC is being used.

My wife owns a fractional interest in a few oil wells, they legally exist and no HC is used when valuing them, but if I have someone value my half interest in our lot in California City a HC would be employed because my half interest has no legal existence as an item to be sold at this time. Because it is not legally separable, if I wanted to sell my "half" I would need to go to court to have the entire parcel sold and get half the proceeds.

 

[CANative]

Because it is not legally separable, if I wanted to sell my "half" I would need to go to court to have the entire parcel sold and get half the proceeds.

How can you employ a HC on someting that cannot exist?

 

[Carnivore]

Greg,

Lets get back to the legal description. Where does it say I must have a legal description?

 

[Couch Potato]

Originally posted by Greg Boyd@Sep 11 2005, 06:35 PM

How can you employ a HC on someting that cannot exist?

Its not that my half interest cannot exist, it does exist, but it does not exist apart from the other half. My half has a value. That is the whole point of a HC. It is something that is untrue that is required for a credible analysis.

Andrew, you don't have to have a legal description, but it does have to legally exist. You could just use an address, but that address needs to exist.

 

[CANative]

I should have asked "what is the condition that is hypothetical?"

 

[Carnivore]

greg,

Think of it this way. The address of any property at the whim of the USPS can change tomorrow.

I see the word MAY employed. May to me does not mean must. OK, so how will a legal description change the subject appraisal?

I read this section of USPAP to mean that I must described the subject property in sufficient detail for the reader too understand what I appraised.

We appraise segments, partial interest(your example). Condemation comes to mind. In many cases they dont have a legal, its a partial taking, it does not have an address.

You guys who practice condemnation work, how do you handle this?

 

[Couch Potato]

I said an address could be used, I didn't say it was a good idea. :rofl:

Its not like big bold type has to be used saying HYPOTHETICAL CONDITION USED. Many appraisers barely know what a HC is so why would the phrase convey meaning to an appraisal reader?

I think we agree our job is to clearly describe what we are valuing. If what we are valuing does not legally exist, I believe we need to say so and describe the implications of that fact and the effect it has on our value conclusion. The word hypothetical need not be present anywhere in the report for a hypothetical condition to be used and adequately disclosed and explained. Given the interaction I've had with LO and Underwriters, a case could be made that using big words like hypothetical would result in a misleading report.

I do think it is important for appraisers to recognize when they have used a HC and I would be very hesitant to ever use the "As Is" box when a HC was employed in the report.

 

[Carnivore]

Originally posted by Greg Myers@Sep 11 2005, 07:29 PM
II do think it is important for appraisers to recognize when they have used a HC and I would be very hesitant to ever use the "As Is" box when a HC was employed in the report.

Greg,

If you have a partially constructed new build house on a segment of land you better not forget the 'AS-IS' on the subject structure. The two are not related.

 

[Couch Potato]

Agreed Andrew, it is possible that reasons could exist to use the "As Is" value when a HC is employed. That is why I said hesitant rather than never. Typically I would not put the "As Is" value of a home being constructed in the area where the check box is located, but rather have it in an addendum where I have thoroughly explained its current condition. If a particular house was on a segment of land that that was going to be separated upon completion, it would indeed be an instance of needing an As Is value in a HC situation.

 

[xm72mhd]

Andrew and Greg B,

I'm still trying to get your attention.
If I understand you correctly, your position is that an assignment that includes a direction to appraise a portion of tract of land that has not been given a separate legal description does not require a hypothetical condition because you can physically identify it. Since you are concerned with a piece of land that has no legal description or other legal identity other than what you have given it, how can you call your description anything but a hypothetical?

Here's what I found in USPAP that I think applies.

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.

SR-1 (h) identify any hypothetical conditions necessary in the assignment.

Comment: A hypothetical condition may be used in an assignment only if:
§ 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.

Maybe the difference is that here in CO subdividing land is subject to a process that does not include anything an appraiser does. For five acres it takes a survey and a submission to the government entity in charge in order to get a legal description. Maybe your process is different, but if it is like ours it seems clear to me that you must identify the condition as hypothetical if you use anything other than the full legal description used in the assessor's parcel # and until a new legal description is created. Until that legal decription is created the parcel you are appraising is not a legal fact as I see it.