The first thing to acknowledge with regard to an extraordinary assumption is that it is something we do not know, but we take it to be true. Second, while an ordinary assumption may be made in virtually every appraisal assignment, an extraordinary assumption is directly related to a specific assignment.
We acknowledge that if we find that the extraordinary assumption is actually not true, then our value opinion could be impacted or changed as a result. This is what makes it extraordinary because it is directly relevant to our appraisal or value opinion. Therefore, Standards Rule 2-1(c) requires that all extraordinary assumptions be disclosed clearly and accurately so that the intended users know that the value opinion depends upon the extraordinary assumption being true.
An extraordinary assumption might be used, for instance, if we were to appraise a home with a small crack in the foundation. An appraiser is not expected to render an opinion about the structural integrity of the home and is generally not qualified to do so. Simply, we do not know if the home is structurally sound. By implementing an extraordinary assumption that the home is structurally sound, we can value the property without knowing (or paying someone else to investigate) whether the home is structurally sound. If we have a reasonable basis for this assumption, and if its use is necessary to develop a credible opinion of value, then we may utilize it in the appraisal process. If there is no reasonable basis for the extraordinary assumption, then it cannot be used to develop a credible appraisal.
Having used this uncertain information in the appraisal process, USPAP requires that we disclose the extraordinary assumption in the appraisal report. This disclosure gives notice to the client and intended users that our knowledge of the property only goes so far, and other information has been relied on, which if found to be false, could have an impact on our value opinion. If this degree of risk is not acceptable, the client might prefer to engage an expert to perform additional investigation and analysis. When we disclose the use of the extraordinary assumption, we are also required to state that its use may have affected the assignment results.
So you see, when we properly disclose extraordinary assumptions, as required by USPAP, there really is no reason to be uncomfortable. However, failure to disclose the extraordinary assumption is a significant omission in the appraisal report, because the intended users are not made aware of the appraiser’s reliance upon the information that is believed to be true but which is, to some degree, uncertain.
This USPAP FAQ provides detailed guidance in the use of extraordinary assumptions.
- EXTRAORDINARY ASSUMPTIONS COMPARED TO HYPOTHETICAL CONDITIONS
Question: How does an extraordinary assumption differ from a hypothetical condition? Can you give some examples of extraordinary assumptions that might apply in a real property appraisal?
Response: An extraordinary assumption is defined as:
an assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser’s opinions or conclusions.
Comment: Extraordinary assumptions presume as fact otherwise uncertain information 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.
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.
Appraisers may need to use extraordinary assumptions or hypothetical conditions in performing an assignment. When used in an assignment they become part of the givens in that assignment and have a significant effect on the appraiser’s opinions and conclusions.
The difference between whether a condition is an extraordinary assumption or a hypothetical condition rests on what the appraiser knows about the condition in question.
If an appraiser cannot verify a certain condition that is critical to the valuation, but which the appraiser has a reasonable basis to accept as true, then the condition is an extraordinary assumption. The appraiser must comply with appropriate Standards having to do with both the development and reporting of the condition as an extraordinary assumption.
If, on the other hand, an appraiser is asked to use a condition he knows to be false, but which is necessary for the analysis, a hypothetical condition can be used. Appraisers must clearly distinguish false conditions from those other assumptions or conditions that are believed or taken to be true. To properly distinguish these two, the false conditions are called hypothetical conditions. The best way to distinguish the two is to determine whether the condition in question is known to be false. If, as of the effective date of the appraisal, the condition is known to be false, then it is a hypothetical condition. If, as of the effective date of the appraisal, the fact of the condition is unknown and it is reasonable to believe that the condition is true, then the condition is an extraordinary assumption.
The following assumptions would be extraordinary if their use had a significant effect on the appraiser’s opinions and conclusions:
- Appraising proposed improvements, such as new construction or additions, as of the date of completion (a prospective date of value).
- Appraising a property as if it were free of environmental contamination when it is not known to be contaminated.
- Appraising a site as if sewer were available when the fact is unknown and there is no apparent evidence that the sewer is not available.
- Appraising a site under an assumed zoning when the zoning is not known and there is no evidence that the assumed zoning is not possible.
- Appraising irrigated farmland on the premise that the water supply is adequate for irrigated crop production, absent any evidence that the supply is not adequate.