Definition in Detail
An Extraordinary Assumption refers to a key presumption made during the process of property appraisal. This assumption underlies the appraiser’s opinion of value and is so critical that if proven false, the entire appraisal result would be materially inaccurate. This is essential in scenarios where certain hypothetical or uncertain conditions are assumed to be true for the purpose of valuation.
Examples
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Subdivision Absorption Rate:
In the appraisal of a proposed housing subdivision, an extraordinary assumption might be that 100 developed lots will be sold per year. If the actual absorption rate (rate at which properties are sold) differs significantly from this assumption, the value opinion provided by the appraisal would be invalid.
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Environmental Conditions:
An extraordinary assumption might involve the condition of soil or land in development appraisals. For example, an appraiser might assume that a contaminated site is remediated and suitable for construction. If this proves invalid, the appraised value would also be erroneous.
Frequently Asked Questions
Q: What differentiates an extraordinary assumption from a hypothetical condition?
A: While an extraordinary assumption presumes uncertain conditions to be true, making the appraisal contingent upon this assumption, a hypothetical condition relies entirely on a scenario contrary to known facts for valuation purposes.
Q: When is an extraordinary assumption most commonly used?
A: Extraordinary assumptions are frequently used in scenarios with uncertainties about future events, such as anticipated changes in zoning laws, market conditions, environmental clearances, or absorption rates in developing areas.
Q: How does an appraiser communicate the use of an extraordinary assumption in the report?
A: The appraiser must clearly state the extraordinary assumption in the report, including the rationale behind it and its impact on the value opinion. This is often found in a dedicated section or within the scope of the appraisal assumptions.
- Appraisal: The process of estimating the value of a property based on systematic research and analysis.
- Hypothetical Condition: Assumption that which is contrary to known facts but is assumed true for the sake of effective appraisal.
- Absorption Rate: The rate at which available properties are sold in a specific real estate market during a given time period.
- Subdivision: A tract of land divided into smaller lots which can be sold or developed.
Online Resources
References
- The Appraisal of Real Estate, 14th Edition by Appraisal Institute.
- Uniform Standards of Professional Appraisal Practice (USPAP) https://www.uspap.org/
Suggested Books for Further Studies
- Real Estate Appraisal: From Value to Worth by Mark Rattermann.
- Appraising the Plains: The Professional Approach by Wayne Etter and David S. Lashnits.
- The Appraisal of Real Estate, 14th Edition by The Appraisal Institute.
### What is an extraordinary assumption primarily used for in real estate appraisals?
- [ ] As a guarantee from the appraiser
- [ ] To double the value estimation
- [x] To address uncertainties in the appraisal
- [ ] To include future projections without a basis
> **Explanation:** An extraordinary assumption is used to address uncertainties in the appraisal by assuming certain conditions to be true, which otherwise are uncertain or unknown.
### What is more critical to be true in case of an extraordinary assumption failing?
- [ ] The hypothetical condition used
- [x] The entire value opinion
- [ ] The zoning report
- [ ] The sales comparison approach
> **Explanation:** If an extraordinary assumption proves false, the entire value opinion provided by the appraisal would be materially inaccurate.
### Which scenario is most likely to employ an extraordinary assumption?
- [ ] Buying groceries
- [ ] Daily commuting
- [x] Appraisal of land with potential environmental issues
- [ ] Property maintenance scheduling
> **Explanation:** An extraordinary assumption is often used in the appraisal of land with potential environmental issues or other uncertainties that could impact the value.
### How should an appraiser handle uncertain market conditions in an appraisal?
- [x] Use an extraordinary assumption about the market
- [ ] Ignore the market conditions
- [ ] Use consistently higher value estimates
- [ ] Limit the appraisal scope
> **Explanation:** The appraiser should handle uncertain market conditions by using an extraordinary assumption about the market, ensuring this is clearly communicated in the report.
### What is the result if the presumption made by an extraordinary assumption is proven false?
- [x] The appraisal's value opinion is invalid
- [ ] The hypothesis becomes a fact
- [ ] New assumptions must be created
- [ ] No impact at all
> **Explanation:** If the presumption of an extraordinary assumption is proven false, the appraisal's value opinion becomes invalid and inaccurate.
### Is an extraordinary assumption the same as a hypothetical condition in appraisals?
- [ ] Yes, they are the same
- [x] No, an extraordinary assumption will affect only uncertain conditions projected to be true
- [ ] Yes, but only in limited cases
- [ ] No, because extraordinary assumptions rely on factual evidence
> **Explanation:** An extraordinary assumption differs from a hypothetical condition as it assumes uncertain conditions to be true, while a hypothetical condition assumes scenarios contrary to known facts.
### Which of the following would NOT likely be an extraordinary assumption?
- [ ] Changes in zoning laws might happen
- [ ] The contaminated site is remediated
- [ ] The property will be sold within a year
- [x] Existing building meets code requirements
> **Explanation:** Assuming an existing building meets current code requirements would not typically be an extraordinary assumption as it relates to existing factual conditions.
### In what type of real estate analysis might the absorption rate be assumed under extraordinary assumptions?
- [ ] Simple residential sales
- [x] Subdivision planning and development
- [ ] Routine rental property valuation
- [ ] Commercial interior design
> **Explanation:** The absorption rate is assumed under extraordinary assumptions typically in subdivision planning and development due to uncertainties regarding the speed at which lots will sell.
### To whom does the appraiser report the extraordinary assumptions made?
- [x] Clearly stated to all audiences interested in the appraisal
- [ ] Only to government officials
- [ ] Limited to internal stakeholders
- [ ] Shared privately with potential buyers
> **Explanation:** The appraiser must clearly state the extraordinary assumptions in the report available to all audiences interested in the appraisal.
### Is an extraordinary assumption made for common property appraisals or specific uncertain conditions?
- [ ] Common property appraisals
- [x] Specific uncertain conditions affecting value
- [ ] Routine maintenance
- [ ] Building renovations only
> **Explanation:** Extraordinary assumptions are made for specific uncertain conditions that might significantly impact the property value if proven inaccurate.
