Most of the information in your appraisal reports is based on either physical observation, like square footage and property amenities, or factual data, like comparable property information, surveys, and deeds. But you can’t know everything, so you have to make certain assumptions. In fact, assumptions are used in every appraisal. So how does an extraordinary assumption differ from a general assumption?
To help you better understand this important topic, we’re looking at the definition of extraordinary assumption, when to use them, and how to avoid overusing them.
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Summary
General assumptions are commonly used while extraordinary assumptions are assignment-specific assumptions that could impact value. The distinction is critical for understanding how certain factors, if assumed to be true but uncertain, can impact the appraiser’s conclusions. while most appraisals involve some assumptions, extraordinary assumptions should only be made when necessary and should not be used excessively to limit liability. They are meant to address specific assignment-related uncertainties that could materially impact the appraisal’s conclusions, such as assumptions related to zoning compliance or environmental conditions. Proper documentation and disclosure of these assumptions are essential for clarity and transparency in the appraisal process.
Extraordinary Assumptions Defined
An extraordinary assumption refers to something that the appraiser assumes to be true but cannot definitively determine. This means there’s some uncertainty involved, as the assumption may or may not be true. If the assumption were found to be false, it could affect the appraiser’s opinions and conclusions.
USPAP defines extraordinary assumption as, “an assignment-specific assumption as of the effective date regarding uncertain information used in an analysis which, if found to be false, could alter the appraiser’s opinions or conclusions.”
The Comment to the definition states, “Uncertain information might include physical, legal, or economic characteristics of the subject property; or conditions external to the property, such as market conditions or trends; or the integrity of data used in an analysis.”
General Assumptions vs. Extraordinary Assumptions
The truth is most appraisals involve assumptions, but not all assumptions are extraordinary. Let’s look at a general assumption first.
Example one: Suzy is an appraiser who has an assignment at a residential dwelling. Once she has completed her observations, she makes note that there are no readily observable construction defects.
Her appraisal is based on a general assumption that the property is void of any unobservable construction defects. Suzy can’t be expected to remove drywall to determine if the framing was properly constructed. This is a “general” or “ordinary” assumption, not an extraordinary assumption. This assumption is made in virtually all appraisals involving improvements.
When is an assumption extraordinary?
An extraordinary assumption differs from a general assumption in that the appraiser is aware that there is a possible condition, specific to the assignment, that could impact value.
This is an assignment-specific factor or issue, not one that is found in every appraisal assignment.
Example two: Suzy observes a filler neck and a vent pipe in the yard of a house she is appraising. The owners state the house was formerly heated with oil but was converted to an electric heat pump 15 years ago and the oil tank was not removed. Suzy does not know how old the tank is, what its contents might be, and if it is leaking. She is not an environmental expert and is not responsible for soil testing. She uses an extraordinary assumption to value the property assuming the tank is not leaking and is posing no threat of environmental contamination.
Let’s dive a little deeper:
If an appraiser observes minor settlement in a dwelling, they will often disclose the observed minor settlement in the report and include an extraordinary assumption. This will say that the appraisal is based on the assumption that there is no structural defect (meaning the observed settlement is not believed to be a result of a structural integrity failure).
It’s important to remember the appraiser does not have the expertise to determine if the settlement is a structural integrity defect. The assumption could impact value if the assumption is incorrect and there is indeed a structural defect.
How does an appraiser document extraordinary assumptions?
On standardized GSE appraisal reports, the appraiser may check the box that the appraisal is subject to the following required inspection based on the extraordinary assumption that the condition or deficiency does not require alteration or repair. The appraiser indicates that an inspection should be completed on the observed settlement by a home inspector, a structural engineer, or other qualified professional.
It’s important to note that the appraiser is not required to recommend an inspection, except with FHA appraisal assignments. The reviewer or lending underwriter will need to make that decision.
Overuse of Extraordinary Assumptions
Some appraisers routinely use several extraordinary assumptions in their reports as a means of limiting liability.
Example three: Suzy bases all her appraisals on an extraordinary assumption that the subject property complies with the local zoning ordinance.
As we stated earlier, an extraordinary assumption should only be used when the appraiser is alerted to, or aware of, a potential concern. Otherwise, it is a general assumption and most likely covered in the statement of limiting conditions and assumptions or the appraisal’s scope of work.
Suzy does not want to be liable for any zoning violations, such as an existing property not being compliant with minimum setback requirements. However, this is not an extraordinary assumption because she applies it to all appraisals.
Now, if Suzy had observed a potential compliance concern when completing her observations of the property or identified a potential concern when completing her research on the subject property, that’s a different story. In that case, the extraordinary assumption would be appropriate. An appraiser should only use an extraordinary assumption, when necessary, not to cover liability or as a substitute for proper research and due diligence.
We’ve got extraordinary assumptions sorted and understand how they’re used. Let’s use a fourth and final example to put everything together!
Old vs. New Zoning Laws
Example four: Three-unit apartment building with small site area
Suzy is appraising a three-unit apartment building under contract to sell. The building is nearly eighty years old and was converted to three living units in the mid-1960s, long before zoning was imposed for the city in 1974.
- The property is in an R-6, medium-density residential district, which allows up to four units per lot.
- The subject site contains 9,000 square feet.
- The current zoning site regulations require 3,500 square feet of site area for each living unit.
How does this regulation affect the property and its value?
The current use of the property is acceptable having been “grandfathered in” under the old zoning laws. There may be concern over the ability to rebuild the structure if destroyed by fire, but the degree of this concern will vary by jurisdiction.
The building and zoning department refuse to give a definitive answer on continued use but indicates that “most likely” the zoning would allow the grandfathered use to continue. In this appraisal assignment, Suzy assumes the present nonconforming use will be allowed to continue.
To do so, she must write an extraordinary assumption in the report, stating that the value opinion in the appraisal report assumes that the current nonconforming use will be allowed to continue.
Suzy’s extraordinary assumption comment might go like this:
“The subject’s current use is believed to be a grandfathered nonconforming use under local zoning regulations. The site requirement for the subject’s R-6 zoning designation is 3,500 square feet of site area for each living unit, or in the case of the subject, 10,500 square feet. The subject’s site area is 9,000 square feet. The current use as a three-unit residential property existed prior to the zoning regulations. Thus, the use is allowed, under the zoning regulation, to continue until such time the use has been vacated for [period specified within the zoning regulations].
This appraisal and the resulting value opinion are based on the extraordinary assumption the grandfathered nonconforming use will be permitted to continue. The use of this extraordinary assumption might have affected the assignment results. The appraiser reserves the right to reconsider the value conclusion should the assumption be found to be false.”1
Take the next step with CE courses
We’ve covered just about everything we can in a blog. If you want to further your education on extraordinary assumptions and related topics, check out our continuing appraisal education courses like:
- Residential Report Writing: More Than Forms
- 2024-2025 7-hour National USPAP Update Course
- Evaluating Today’s Residential Appraisal: Reliable Review
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Reference
- Hondros Learning, Basic Appraisal Procedures, 4th Ed. 2020.
