Why Do Appraisers Use Extraordinary Assumptions
And Hypothetical Conditions?
by Jesse Lochman, State Certified Trainee
These two long-winded, tongue-twisting, and often misunderstood terms are responsible for many debates among appraisers and even more questions from the general public. The most common questions are probably, “why did you use an extraordinary assumption here?” or “how can accurate results come from an appraisal assignment where a hypothetical condition was used?” To best answer those questions, we must first examine each concept briefly.
An extraordinary assumption can be best explained as an assumption that is taken to the next level. A normal, or general assumption that I use regularly would be that there is not any nuclear waste buried in the backyard of the home that I am appraising. While there might be nuclear waste buried there, it is not likely, as most people don’t bury toxic substances in their backyard.
The difference between general and extraordinary assumptions is that, with extraordinary assumptions, the appraiser is assuming that a statement is true, but whether or not it is actually true is unknown. These are often used in complex commercial appraisals, such as convenience stores that have underground fuel storage tanks. Since it would be impractical (and perhaps even impossible) for the appraiser to inspect each tank for leaks, the appraiser makes an extraordinary assumption that none of the tanks are leaking. It should be noted that if this type of assumption is found to be wrong, it can affect the appraised value.
On the other hand, a hypothetical condition assumes that a condition is true which is known to be untrue. An example of the hypothetical condition would be a businesswoman who purchases an old convenience store with plans to convert it into a used car dealership. As part of that process, the fuel tanks would naturally be removed. In this case, an appraisal will be completed subject to the hypothetical condition that the tanks are gone, even though the appraiser knows that they are still there.
Individuals planning either to remodel or build a new home often have an appraisal performed subject to a hypothetical condition, so that they know the market value after the renovation or construction is complete. Values derived through the use of hypothetical conditions are often called “as complete” appraisals. The accuracy of an appraisal report completed subject to a hypothetical condition is as accurate as the plans that are provided to the appraiser, since the appraiser will use comparable sales that are similar to the planned building.
Both extraordinary assumptions and hypothetical conditions are useful for determining value of real estate in instances where a variety of factors are at play. When used correctly, they can provide accurate assignment results in accordance with the Uniform Standards of Professional Appraisal Practice.
Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.
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