Whereas we believe an extraordinary assumption to be true, a hypothetical condition is something that we know is not true, yet we appraise the property as though it were true.

HYPOTHETICAL CONDITION: 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.

Comment: Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.6

A good example of utilizing a hypothetical condition in the appraisal process is the appraisal of a property with proposed improvements, using a current effective date. Whenever we appraise a home that is not yet built, for instance, we know with full certainty that the improvements simply do not exist as of the effective date of the appraisal, and yet the appraised value of the property reflects the completed improvements.

Typically (and correctly), the appraiser will disclose that the appraised value is “subject to completion per plans and specifications.” This is good, but not good enough. Additional language is required to clearly disclose the hypothetical condition. For example, we might state, “the appraised value is subject to completion of the improvements per plans and specifications, based upon the hypothetical condition that the improvements were completed as of the effective date.” In this example, the USPAP requirement for a clear disclosure of the hypothetical condition is met. One other thing for USPAP compliance — we must also state that the use of the hypothetical condition may have affected the assignment results.

When the Fannie Mae 1004 form was revised in 2005, the following language was added on page 2 of the form, in the section which indicates the conditions of the appraisal (“as is” or “subject to”): “Subject to completion per plans and specifications based on the hypothetical condition that the improvements have been completed.” (emphasis added)

This is another USPAP FAQ explaining hypothetical conditions.

  1. HYPOTHETICAL CONDITIONS DESCRIBED

Question: What is a hypothetical condition? Can you give me some examples that might apply in a real property appraisal?

Response:  A hypothetical condition is defined 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.

Comment: Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

Examples of hypothetical conditions that might be necessary in a real property appraisal assignment

include:

  1. Appraising proposed improvements such as new construction or additions, as if they existed as of a current date when they do not.
  2. Appraising a property as if it were free of any contamination when it is known to be contaminated.
  3. Appraising a site as if sewer were available when the sewer is not available.
  4. Appraising a site as if the zoning were different.
  5. Appraising irrigated farmland on the premise that the water supply is adequate for irrigated crop production, knowing that the existing supply is not adequate.