Why Do Appraisers Use Extraordinary Assumptions and Hypothetical Conditions?
By Staff Appraiser, Spurgeon Appraisals
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.
Appraisal Assumptions
3 Ways Appraisers Assume
The difference comes down to what the appraiser knows about the statement.
General Assumption
No nuclear waste is buried in the backyard. Possible, but not likely.
Extraordinary Assumption
Assumed true, but whether it is actually true is unknown. If wrong, it can affect the value.
Hypothetical Condition
Assumes something is true that is known to be untrue, such as a planned change.
Farm · Commercial · Home appraisals | Missouri · Illinois · Iowa
What Is an Extraordinary Assumption?
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.
What Is a Hypothetical Condition?
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.
One Property, Two Approaches
The Fuel Tank Example
How an old convenience store with underground fuel tanks might be appraised.
Extraordinary
Assumption
Assume none of the tanks are leaking
Inspecting each tank for leaks would be impractical, perhaps impossible.
Hypothetical
Condition
Appraise as if the tanks are gone
The tanks will be removed, even though the appraiser knows they’re still there.
Farm · Commercial · Home appraisals | Missouri · Illinois · Iowa
"As Complete" Appraisals for Remodels and New Construction
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.
Hypothetical Conditions
“As Complete” Appraisals
For anyone planning to remodel or build: know the value before the work is done.
Your Plans
Building or remodeling plans go to the appraiser.
Matching Sales
Comparable sales similar to the planned building are used.
Value as Complete
Market value after the construction or renovation is finished.
Farm · Commercial · Home appraisals | Missouri · Illinois · Iowa
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 (USPAP).
Appraisals for Every Property Type
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.
