Hypothetical Condition

[hastalavista]

A few days ago, there was an active discussion regarding the use of a Hypothetical Condition to value 10+-acre lot as a 5-acre property.

One of the questions was, "When making an HC, should the report be made 'subject to' the HC?". There were opinions for both "yes" and "no".

I emailed the ASB with that question- here is the original question and the response:

The question-
Dear Mr. Brenan,
I have a question regarding the use of Hypothetical Conditions (HC) in completing an appraisal report to be USPAP compliant.
Assuming that the HC used:
1. Results in a reliable and credible value for its intended use/user
2. Is reported in a manner that is not misleading and clearly states an HC was employed in the analysis, and that subsequent reported value may not reflect the actual market value of the subject
3. Its inclusion in the analysis does not violate any Supplemental Standards
Is the value reported made “subject to” (conditioned upon) the HC? Or is, by definition, the inclusion of the HC a basic underlying fact in the valuation analysis, and therefore a “subject to” condition is redundant, or worse, misleading?
I have this discussion with numerous colleagues and have read the Standards and Advisory Opinions, but I cannot conclude a definitive answer to this specific question.
Thank you for your consideration

The answer-
Hello Denis,

“As-is” and “subject to” appraisals are not defined by USPAP and as such, we cannot say whether or not it is possible to perform an “as is” appraisal when using a hypothetical condition. We suggest you check for any supplemental standards requirements (i.e. Fannie Mae guidelines) to determine under what conditions appraisals should be made “as is” versus “subject to.”



So I guess the debate goes on.

 

[Randolph Kinney]

"as is" seems reasonable. The report is either accepted or rejected because of the HC, as is and the value it is based upon.

 

[hastalavista]

When we were discussing this in the original post, I was of the opinion that the report should be made “subject to” the HC. My concern was that without the “subject to” condition, the client could miss the HYPOTHETICAL premise of the report. However, there is a logical inconsistency in doing it this way.

I think now I’d make it “subject to” underwriter review of the HC. Logically consistent and clearly brings the HC to their attention.

 

[Randolph Kinney]

Denis:

I think now I’d make it “subject to” underwriter review of the HC. Logically consistent and clearly brings the HC to their attention.

I guess you are saying the UW does not pay close attention to the addendum to catch the HC. I don't see any harm either way although you make the point it is checked subject to box and see below.

 

[Jim Onderisin]

No matter which way you look at it, if you are making an appraisal of a property which identifies the property to be something it is not, then you have to make the appraisal subject to some kind of hypothetical condition. And you CANNOT say that the appraisal is made of the subject property "as is", because it is not. The 'subject site' section of an appraisal form will demand that you provide factual answers.

If you want to play the 5-acre game, fine. But, you are setting yourself up unless you know that division of the property is legally permissable, economically feasible, and physically possible, and you have in some accurate and reproducable way identified the lot lines of the hypothetical site. To me, that seems like way too much work to appease a client that probably does not want to pay for it.

 

[Randolph Kinney]

Jim:

And you CANNOT say that the appraisal is made of the subject property "as is", because it is not.

Suit yourself. As long as you make it clear in the addendum that the HC is being used and the value opinion is dependent on it, USPAP does not say "subject to" or "as-is" but the 1004 form does.

What about appraising raw land that is a mining claim. There is no "subject to" box to check on the land form. You are presented a title report that shows a boundary dispute. Your client wants to know what the value is with out the boundary dispute. That is a hypothetical condition that clear title can be delivered. Is this appraisal report being made "subject to" a clear title and a final resolution of the boundary dispute? No. That may never happen in your lifetime.

All your client wants to know is what is the value absent a known condition. It is not an underwriting condition for a loan so there is no "subject to". The value is "as-is" with the HC.

 

[Frank McKee]

Originally posted by Randolph Kinney@Sep 10 2005, 05:13 PM
All your client wants to know is what is the value absent a known condition. It is not an underwriting condition for a loan so there is no "subject to". The value is "as-is" with the HC.

I'm confused by these statements. Isn't it the very definition of an "appraisal with HC" that it is an estimate of value absent a known condition? Also, what does underwriting or any part of a loan have to do with it? Finally, to say "The value "as-is" with the HC" is just another way of saying 'the value as-is but as it isn't'. They're kind of mutually-negating modifiers.

 

[CANative]

No matter which way you look at it, if you are making an appraisal of a property which identifies the property to be something it is not, then you have to make the appraisal subject to some kind of hypothetical condition.

Why?

If you have identified the segment of the parcel, or just the improvements on a parcel, or some other configuration, why is a hypothetical conditon needed. It's not hypothetical. It's real and it's really there. Theere would be no need to employ a HC and thus no need for a "subject to" qualifier. This would apply to the "house an 5" critter, I believe.

In the case of proposed improvements, you're a appraising something that is not there and you need to use an HC to "make it be there" and thus the "subject to" qualifier.

Maybe I'm confused. Can someone explain it to me so my pea brain can take it in?

 

[xm39hnu]

Originally posted by Randolph Kinney said...
What about appraising raw land that is a mining claim. There is no "subject to" box to check on the land form. You are presented a title report that shows a boundary dispute. Your client wants to know what the value is with out the boundary dispute. That is a hypothetical condition that clear title can be delivered. Is this appraisal report being made "subject to" a clear title and a final resolution of the boundary dispute? No. That may never happen in your lifetime.

Egad, Randolph, don't let the form dictate the contents of the report. Yes, it *is* being made subject to a clear title being deliverable, if that's what you stated in the HC. Here's what I'd say in the reconciliation:
"The appraiser signing the certification on page X of this report concludes that the market value of the fee simple interest in the subject property as of {date}, subject to the hypothetical condition that clear title can be delivered, is $zzz,zzz."
Other reconciliations might include...
"..., subject to the extraordinary assumption that the observed termite damage does not compromise the structural integrity of the floor system."
"..., subject to the hypothetical condition that the subject's site size is the five acre site described in this report instead of the eighteen acres recorded."

If you use an HC or an EA, the opinion is "subject to" them. Client agreement to this condition should be of record in advance of the report being delivered, otherwise you can't use'em anyway.

 

[Otis Key]

Originally posted by Jim Onderisin@Sep 10 2005, 04:30 PM
No matter which way you look at it, if you are making an appraisal of a property which identifies the property to be something it is not, then you have to make the appraisal subject to some kind of hypothetical condition. And you CANNOT say that the appraisal is made of the subject property "as is", because it is not. The 'subject site' section of an appraisal form will demand that you provide factual answers.

That makes the most sense to me. HC's are placed upon property appraisal reports, especially in this case, as an assumption of something that is not currently real and may or may not be legal, so it must, in that case, be "subject to". Not only to draw attention to "anyone" reading the report (including the UW who doesn't read the addenda), but to also present a report that has the appearance of being credible and reliable.

I can see where you might not need to indicate an appraisal is "subject to" when you invoke an EA. But with the HC I would wonder when you can, outside of the already incorporated into the form aspect, reasonably, feasibly and honestly not make the report "subject to".