The appraisal industry has its own set of terms that aren’t found in too many other professions. Definition of value, remaining economic life, and comparable adjustments are a few examples of these terms. Two terms that are exclusive to appraisals, and can also be confusing, are extraordinary assumptions and hypothetical conditions. Let’s explore these two terms and when they might be used in an appraisal.
The Uniform Standards of Professional Appraisal Practice (USPAP) defines an extraordinary assumption as: “An assumption, directly related to a specific assignment, as of the effective date of the appraisal results, which, if found to be false, could alter the appraiser’s opinions or conclusions.”
The Uniform Standards of Professional Appraisal Practice (USPAP) defines a hypothetical condition as: “A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.”
An extraordinary assumption is something the appraiser believes to be true. If it is later found to be untrue, it could change the results of the appraisal. A hypothetical condition, on the other hand, is something the appraiser knows to be untrue, but is used in the appraisal. Let’s look at examples of both.
An exterior only, drive-by appraisal, which Larry Franks III completes often, would utilize an extraordinary assumption by assuming the condition of the interior of the appraisal based on what is visible from the exterior. Larry III uses public record data, previous sales information, and his observation of the home from the street to make and extraordinary assumption on what condition the interior is and bases his appraised value on that. If the interior is later found to be in a different condition, the results of the appraisal would change.
Another example might be an interior appraisal that Larry Franks is completing for a lender where one bedroom is unavailable to be viewed because someone is asleep in it. This has happened before. Larry would state in his appraisal that he was not given access to the bedroom and he assumes using an extraordinary assumption that the condition of that room is similar to the other rooms he was able to view. If later it was discovered that room was a wreck and had holes in the floor and ceiling, the results of the appraisal would change.
But why would Larry of Larry III base an appraisal on something they know to be untrue? Why would they use a hypothetical condition? The best example would be an appraisal for a new construction. When Larry Franks completes a new construction appraisal, he is basing it on the completed home. On the day he views the site, it’s usually a vacant parcel of land but the value is based on the move-in ready home that doesn’t yet exist. Larry uses a hypothetical condition to arrive at the appraised value. He relies on the plans and specifications as well as the contracts, sales data, and his knowledge of the market to complete the appraisal. He knows that the house isn’t built yet, but he can give a value to it anyway.
Another example would be when Larry III is completing an FHA appraisal or when Larry is doing a VA appraisal. If Larry III’s FHA has a roof that is past its physical life, missing shingles or severely discolored, he will complete the appraisal based on the home having a roof in average condition. He will state the condition of the roof in the condition section of the appraisal and require anew roof be installed to meet the minimum property requirements set forth in HUD Handbook 4000.1. The appraisal willbe made “subject to” this repair and Larry III will complete the appraisal knowing the contrary to what is known to exist is used for the purpose of the appraisal. The same would be true with Larry’s VA appraisal. If the home has peeling paint, Larry would complete the VA appraisal as if the home didn’t have peeling paint and make a requirement that the paint be scraped and repaired. Larry would complete the appraisal using a hypothetical condition, knowing the peeling paint does exist.
Extraordinary assumptions and hypothetical conditions are just some of the fun terms used in an appraisal. Larry and Larry III use their mastery of the residential appraisal industry to complete appraisal assignments every day.
Larry A. Franks Real Estate Agency LLC is located in Brownsville, PA. Larry Franks and Larry Franks III are Certified Residential Appraisers and Real Estate Brokers licensed in Pennsylvania. They cover appraisals in Fayette, Greene, and Washington Counties.