Which statement is true regarding extraordinary assumptions and hypothetical conditions?
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by Staff AppraisalMarch 2015These 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.“Intended to deceive” is the definition of: A garage building has an effective age of 5 years and a total economic life of 25 years. What is the percentage of accrued depreciation by the age-life method? 20%. 5 divided by 25 = 20%. (Ch 1, Cost Approach) A home has an outdated kitchen, which can be remedied at a cost of $10,000. After the kitchen is updated, the value of the home will increase from $124,000 to $129,000. What type of depreciation is this? Functional, incurable. Outdated fixtures and cabinetry, and poor floor plans are examples of functional obsolescence. The cost to cure ($10,000) is more than the resulting increase in value ($5,000) so this depreciation is considered incurable. (Ch 1, Cost Approach: Depreciation) A party who receives a copy of an appraisal report in order to satisfy disclosure requirements ____________________. does not become an intended user A party who receives a copy of an appraisal report in order to satisfy disclosure requirements becomes an intended user. A retrospective appraisal involves an effective date that is___________. According to Standards Rule 2-1, how much information is an appraiser required to put in an appraisal report? Enough information so that the report may be understood by client and intended users An appraisal report must be written so that _____ can understand it. the client and intended users An appraisal report must be written so that anyone can understand it. An appraiser is preparing an Appraisal Report. What is the operative word regarding the level of detail she must provide in the report? Summarize. The differences come down to two words: summarize and state. For an Appraisal Report, the operative word is summarize. (Ch 2, Differences Between Reporting Options)
An appraiser may provide more information and detail in the report than what is required by USPAP STANDARD 2. An appraiser may use another label in place of the report option label required by USPAP Standards Rule 2-2. An appraiser prepares an Appraisal Report which does not contain all 14 of the minimum content requirements required by Standards Rule 2-2. Which statement is TRUE regarding the report? It does not comply with USPAP. It is possible that the content of the report may meet none of the reporting options specified by SR 2-2, which means the report is not compliant with USPAP. (Ch 2, Appraisal Report?) An appraiser’s assumption that the subject property has clear and marketable title is an example of: Assumption. Ordinary assumptions, such as those regarding clear and marketable title, are made in virtually every appraisal assignment. (Ch 2, Assumptions) An appraiser’s assumption that the subject property has no hidden or unapparent conditions of the soil or subsoil is an example of: Assumption. Ordinary assumptions, such as those regarding clear and marketable title, are made in virtually every appraisal assignment. (Ch 2, Assumptions) As part of an appraisal assignment, Kara has completed a subject property sales history and current listing and agreement analysis. In her Restricted Appraisal Report, she must _________ this information. Summarize. One exception to “summarize”, and “state” is that a Restricted Appraisal Report of a market value appraisal assignment must contain a summary of the analysis of the subject’s sales, options, and listings. (Ch 2, Example of "State" from AO-11) Bart accidentally neglects to mention a significant subject property defect in his appraisal report. Bart’s report would most likely be considered: Brett prepares a written report labeled “Appraisal Report;” however, the level of information is not consistent with the requirements of such a report. He sends the report to his client. Which statement is TRUE regarding this situation? He has violated USPAP by communicating a misleading report. A report will be misleading if it is labeled as an Appraisal Report when it really is not, and the appraiser may be giving the client and intended users less than enough information for their proper understanding of the appraisal and assignment results. (Ch 2, Differences between Reporting Options) Communication with the client is NOT important during the problem identification phase of an assignment. Earl is appraising a parcel of real property for a mortgage loan. What is the best source to obtain the information he needs for problem identification? Electronically-transmitted reports are considered to be: Eve is appraising a single-family home for a mortgage loan. Where should she go for information regarding what form or format to use in her appraisal report? The client/intended users. USPAP does not dictate the form, format, or style of appraisal reports. Instead, the form, format, and style of an appraisal report depend on the intended use and the needs of intended users. (Ch 1, What is the Reason for this Appraisal?) For today's residential real property appraiser, the appraisal development and reporting processes: Sometimes seem to overlap due to reliance on form software Highest and best use analysis is mandatory in all real property appraisal assignments. Highest and best use analysis is required in all market value appraisal assignments. If a property is appraised contrary to known fact, this would be a(n) _________. Hypothetical condition. A hypothetical condition is something that is contrary to what is known by the appraiser to exist on the effective date of the assignment results. (Ch 2, Hypothetical Conditions) If unknown information is presumed to be fact in a specific appraisal assignment, this is an example of a(n) _________. In a written real property appraisal report, USPAP requires that a statement of the reporting option must be ___________. In order to solve the client's problem, appraisers must find answers to some basic questions at the time of engagement. In the development of a real property appraisal, the value opinion must be: In the development of an appraisal on a two-unit residential property, Jared completes the income approach. Which statement is TRUE regarding his reporting obligations? He must report the results of the income approach. If a particular factor or issue is crucial to the appraisal development process, it makes sense that it would be necessary to inform the client of this important factor or issue in the appraisal report. If an issue or approach is essential in the development of an opinion of value, omitting that issue or approach from the appraisal report would likely be considered misleading. (Ch 1, Making the Distinction) In the reporting of a real property appraisal, it is important that the report is NOT: Irving is appraising a proposed new home, based on plans and specifications. He is appraising the property as though the new home has been completed as of a current effective date; however, it is actually a vacant lot. This is an example of: James is preparing an appraisal report for a federally-regulated mortgage lender, as part of a federally-related transaction. His report must be: Kate notes an underground storage tank on a property she is appraising. The property owner gives her a copy of an environmental expert’s report stating that the tank had leaked diesel fuel into the ground, and there was significant contamination which was never remediated. In appraising this property, can Kate employ an extraordinary assumption that the property is free of contamination? Kristin develops an opinion of value, prepares it in a written format, and mails it to her client. What has she mailed to the client? Maxine has developed a credible opinion of value on a vacant lot she is appraising. What is her next responsibility? Properly communicate this opinion to the client Most appraisals require _________ effective date. Most mortgage lending appraisal assignments require an opinion of ______ value. Most residential appraisers use the unit-in-place method of estimating cost new. Nancy is completing an appraisal for a client and two additional intended users. Which of these is NOT a permissible option for her when preparing her report? Restricted Use Appraisal Report Once the scope of work decision has been made by the appraiser, it cannot later be modified. Reconciliation is the process of averaging the indications of the approaches to value into a final value indication. Ricky has been asked to appraise a property for an out-of-state client, who has very little knowledge of the property. The intended use would necessitate a high level of information in the report; however, since there are no other intended users, Ricky wonders if he should use a Restricted Report format. What does USPAP state about this situation? A Restricted Report is not permissible because the client and intended use would dictate a higher level of content and detail Sandy is appraising an income property for a very knowledgeable client. Which statement is TRUE regarding how much information Sandy must insert in her appraisal report? Because the client is knowledgeable, Sandy may put less information in the report. Scope of work is _______________ in the assignment. Standards Rule 2-1 applies to both written and oral real property appraisal reports. Standards Rule 2-1 states that assumptions, extraordinary assumptions, and hypothetical conditions must be___________. Clearly and accurately disclosed Step 3 of the appraisal process, Collection and Analysis of data, usually includes_______. Inspecting the subject property The appraisal development process: Is an intellectual process The form or format of an appraisal report: The income approach is based on the principle of ________. The report content and level of information requirements established by USPAP STANDARD 2 are minimums, and may be exceeded. The reporting of a real property appraisal is the subject of: The sales comparison approach is considered to be the most relevant approach for valuing residential properties. The same amount of information must appear in every written appraisal report. The second step in the appraisal process was formerly called preliminary survey. What is this step now called? The terms appraisal and report: There is no difference between the meanings of the terms appraisal and appraisal report. Under USPAP, disclosure of extraordinary assumptions and hypothetical conditions must be clear and ___________ . conspicuous. For extraordinary assumptions and hypothetical conditions, Standards Rule 2-2 states their disclosure must also be clear and conspicuous. (Ch 2, (Disclosing Assumptions and Hypothetical Conditions) Under USPAP, disclosure of extraordinary assumptions and hypothetical conditions must be clear and conspicuous. USPAP STANDARD 2 establishes ________ requirements for real property appraisal reports. What are the operative words that establish the differences between the two USPAP written report options? Summarize, state. The differences come down to three words: summarize, and state. (Ch 2, Differences between Reporting Options) What distinguishes an extraordinary assumption from an “ordinary” assumption? An extraordinary assumption is directly related to a specific assignment. What is defined as the act or process of developing an opinion of value? What is one of the pitfalls of using pre-printed standardized forms to report an Appraisal Report? It is difficult to provide a summary of information by checking boxes and filling blanks. What is the essential difference between the two reporting options specified in USPAP Standards Rule 2-2? The level of detail in the report What is the final step in development of an appraisal? What is the final step in the overall appraisal process? Reporting the appraisal. The final step in the overall appraisal process is reporting the appraisal. Reconciliation is the final step in the appraisal development process. (Ch 1, Reporting the Appraisal) What is the role of Advisory Opinion 38 with regard to appraisal reporting? Provides guidance and advice What may happen if the client provides the appraiser with incorrect or incomplete property information? A non-credible value opinion may result What type of depreciation is always incurable? What type of income approach is typically used for small residential properties? When a property is appraised with an effective date that is some time in the future, this is a(n): When an appraiser asks a client what type of value is needed in an appraisal assignment, what is he or she asking the client? What definition of value is to be used in the appraisal? When reporting, USPAP states that an appraiser must clearly and accurately set forth the appraisal in a manner that will not be misleading. Which of these are criteria for highest and best use? Legally permissible, Physically possible, Financially feasible Written appraisal reports must contain sufficient information so that _______ can properly understand them. What is the difference between a hypothetical condition and an extraordinary assumption?A hypothetical condition assumes a condition which is known to be contrary to fact whereas an extraordinary assumption assumes a condition or a fact which is merely unknown or uncertain.
Where would you find a statement dealing with any extraordinary assumptions or hypothetical conditions?In conclusion, each extraordinary assumption and hypothetical condition should be included in the General Assumptions and Limiting Conditions section of the appraisal report.
What is the meaning of extraordinary assumption?An extraordinary assumption is related to a specific assignment, and takes information that is unknown as of the effective date of the assignment results and assumes it to be true. If this assumption were found to be false, it could affect the appraiser's opinions and conclusions.
What is the difference between an assumption and an extraordinary assumption quizlet?What distinguishes an extraordinary assumption from an "ordinary" assumption? An extraordinary assumption is something that is known not to be true. An extraordinary assumption is directly related to a specific assignment.
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