Extraordinary Assumptions and When to Use Them

Mature appraiser working in the office, reviewing documents to determine if extraordinary assumptions are appropriate

An extraordinary assumption is something that the appraiser assumes to be true but has no way of knowing. An extraordinary assumption involves uncertainty, as it may or may not be true. If the assumption were found to be false, it could affect the appraiser’s opinions and conclusions. Read on to learn about the definition of an extraordinary assumption and when it should be used, as well as the overuse of extraordinary assumptions.

Extraordinary assumptions defined

USPAP defines an 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.” In USPAP’s comment, it states that “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.”

When is an assumption extraordinary?

Most appraisals involve assumptions. For example, an appraiser completes her observations on a residential dwelling and finds that there is no readily observable construction defects. The appraisal report includes a scope of work that describes the level of observation and states that the appraiser is not a home inspector. The appraisal is based on a general assumption that the property is void of any unobservable construction defects. For example, an appraiser is not expected to remove drywall to determine that the framing was properly constructed.

An extraordinary assumption differs from a general assumption in that the appraiser is aware that there is a possible condition that could impact value. Typically, it involves an area in which the appraiser is not an expert. If an appraiser observes minor settlement in a dwelling, then the appraiser will disclose the observed minor settlement in the report and include an extraordinary assumption that the appraisal is based on no structural defect (i.e., the observed settlement is not a result of a structural integrity failure). However, the appraiser does not have the expertise to make a determination if the settlement is a structural integrity defect. Therefore, the assumption could impact value if the assumption is wrong and there is in fact a structural defect.

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. However, the appraiser is not required, with the exception of FHA and VA appraisal assignments, to recommend an inspection. The reviewer (or underwriter) for the lender will need to make that decision.

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Overuse of extraordinary assumptions

Some appraisers routinely use several extraordinary assumptions in their reports as a means of limiting liability. For example, an appraiser may base the appraisal on an extraordinary assumption that the subject property is in compliance with the local zoning ordinance. As previously covered, an extraordinary assumption should only be used because 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.

The appraiser may disclose this extraordinary assumption on zoning in every appraisal completed because she does not want to be liable for any zoning violations, such as an existing property that is not compliant with the minimum setback requirements. However, an appraiser’s scope of work does not include surveying a property to confirm that the property meets the zoning’s setback requirements. Thus, it is not necessary for the appraisal report to include an extraordinary assumption about the property’s zoning compliance, unless the appraiser observed a potential concern when completing her observations of the property or identified a potential concern when completing her research on the subject property.

An appraiser should only use an extraordinary assumption when it is necessary, not as a means to cover liability, or worse, to cover the failure to do the proper research and due diligence for the appraisal assignment.

Example: Three-unit apartment building with small site area

Appraiser Melissa Towne 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 located 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 since it is “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. It could be that the building and zoning department cannot (or will not) give a definitive answer on continued use, but indicates that “most likely” the zoning would allow the grandfathered use to continue. In any event, in this case, the appraiser assumes the present nonconforming use will be allowed to continue. To do so, she must write an extraordinary assumption in the report, stating the value opinion in the appraisal report is based on the assumption that this nonconforming use will be allowed to continue.

A sample extraordinary assumption comment might be similar to this:

“The subject’s current use is considered 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 imposition of 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

Further reading: Disclosure Example: Extraordinary Assumption

Reference

  1. Hondros Learning, Basic Appraisal Procedures, 4th Ed. 2020.

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