Hypothetical Or Extraordinary Assumption?

[Walter Kirk]

I just got a fun assignment from a lawyer. His client, a real estate broker, filed bankrupcy. Just before the bankrupcy about 9 months ago the client sold a house in poor (shell) condition for $25,000. The bankrupcy trustee has questioned the sale since houses in good condition on the street have sold recently for up to $100,000.

The lawyer has asked me to do a retrospective appraisal as of the sales date, the problem is that the new owner has completely renovated the property and I have no way of proving that the property was a shell.

I don't know whether the proper way to do this is to make the extrodinary assumption that the subject was a shell on the valuation date or to use a hypothetical of a shell as of that date. I assume that the trustee will order his own appraisal and that there will be a hearing on value so I want to be on firm ground. Any suggestions?

 

[Pamela Crowley (Florida)]

I would do everything I could to talk to the current owners, if they are the ones that bought it at that time, to find out exactly what condition it really was in. Hopefully, they will have photos from when they bought it and plenty of receipts for what they have done.

 

[CANative]

If the house was in poor condition as of the effective date (retrospective) then it's not a HC. As to th EA, why don't you interview some of the neighbors, ask the client's client if he showed the house to other people and get those phone numbers. I probably would not reference these people by name in the report, just that I talked to them. Keep their contact information in your work file in case you get dragged into the fray.

 

[Tawfik Ahdab]

Yes. Walk away.

The lawyer has asked me to do a retrospective appraisal as of the sales date, the problem is that the new owner has completely renovated the property and I have no way of proving that the property was a shell.

If you truly have no way of proving that the property was purchased as a shell, then your extraordinary assumption is about the least supportable that I can think of.

USPAP Standard 1

Comment: An extraordinary assumption may be used in an assignment only if:

it is required to properly develop credible opinions and conclusions;

the appraiser has a reasonable basis for the extraordinary assumption;

use of the extraordinary assumption results in a credible analysis.




The way I see it, the credibility of the appraisal could readily be questioned.

That stated, I suggest you interview the current owner to find out if he has any "before" photos. Many remodelers revel in keeping albums with "before and after" photos. Find out from the bankrupt broker if he/she has any photos of the place. If the property was exposed in the open market, there may be a listing with a description. Interview the neighbors. Ask the broker who else looked at the property when it was available for sale, and talk to them.

In short, you need to be really sure that you have no way of knowing before deciding how to proceed.

 

[JSmith43]

Tawfik has a good USPAP point. Would not the solution be to literally ask for a judicial exception if the retrospective condition evidence is flimsy? If the judge clears the Extraordinary assumption hurdle, I don't see the problem. An appraiser by day, a private investigator by night. The report should characterize the level of proof upon which it rests.

 

[Fred]

So what does the public in legitimate need of an appraisal do - suck eggs? I'd say these are the exact type assignment conditions that led to putting guidelines for using assumptions in standards. Otherwise, they would say - no assumptions.

 

[Walter Kirk]

The evidence is clear enough to me, I am quite familiar with the neighborhood and shells have been common there for quite a few years. I believe my client the attorney since he is the owner of a house on the street. I simply want my report to be USPAP compliant and to be able to withstand a review.

 

[John SRA]

Walter,

I agree with Steven. This kind of assignment is the reason that EA and HC are addressed in USPAP.

To answer your question - Is it a HC or an EA?

- it does not matter because the reporting requirements are exactly the same. Just say what you are assuming and why, and include a clear warning label (SR 2-2(B)(viii)).

There is no requirement to use the term "Hypothetical Condition" or "Extraordinary Assumption."

Have a good day

JC

 

[Tawfik Ahdab]

I understand your points Steve & John. But invoking an EA or a HC at the drop of a hat can be very dangerous, and lead to severe misrepresentation, not to mention ludicrous conclusions.

My quotation of USPAP is only intended to emphasize the standard of reasonableness and credibility that must applied under EA or HC.

Ultimately, if the court is an intended user of the appraisal, it would be smart to clear the HC or EA in advance, as Roger suggested.

 

[Ben Vukicevich SRA]

Walt,

In addition to the other comments, wander down to the borough hall and see what if any permits were issued. Not that it is any reliable indication of what condition the home was in but the number of permits issued may reinforce what you already have been told..that it was a shell in need of rehabilitation...then there would be evidence of township/borough inspections for insulation, electrical, plumbing, maybe even a final CO, etc

The assessor may also have..I forget what it is legally called, that 5 year tax abatement if the home has been remodeled, whatever. That would also be evidence that it was remodeled.

Ben