September 25, 2022
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Extraordinary Assumption

Disclosure Example: Extraordinary Assumption

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In a valuation engagement, an extraordinary assumption is used to assume that certain unknown information is fact. An extraordinary assumption is related to a specific engagement and takes information unknown at the effective date of the engagement results and assumes that it is true. If this assumption turns out to be wrong, it could affect the opinions and conclusions of the commercial real estate appraiser.

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Example scenario

Jim is appraising a single-family home for a mortgage refinance loan. When he inspects the property, he finds a crack in the foundation. He doesn’t know if this crack is structural or cosmetic, and he doesn’t have the expertise to make that determination. When appraising the property, it may be appropriate for Jim to use the extraordinary assumption that the house is structurally sound and in no need of repairs.

Taking this scenario even further, let’s say the lender then hires a structural engineer, who determines that the house needs $50,000 in repairs to be structurally sound. Jim’s extraordinary assumption then turns out to be wrong, rendering his opinion of value invalid.

Uses of Extraordinary Assumptions

Extraordinary assumptions can only be used in situations where the information is unknown or uncertain. For example, if the borrower had given Jim a copy of the engineer’s report at the time of the appraisal inspection indicating that the house is not structurally sound, this factor would not be unknown. If that were the case, Jim would have no basis for the extraordinary assumption that the house is structurally sound.

However, let’s continue with the scenario where the structural engineer is not hired to inspect the foundation until Jim completes his assessment assignment. Since the structural soundness of the house is unknown or uncertain as of the effective date of the assignment results, Jim can use an extraordinary assumption. Of course, he must disclose the extraordinary hypothesis in his report.

USPAP Disclosure Requirements

Jim is appraising a single-family home for a mortgage refinance loan. When he inspects the property, he finds a crack in the foundation. He doesn’t know if this crack is structural or cosmetic, and he doesn’t have the expertise to make that determination. Additionally, USPAP requires a statement that the use of the extraordinary assumption may have affected the results of the assignment.

There are no definitions for “clearly and visibly”. When making these disclosures, an appraiser should follow their conscience. A good rule of thumb is that disclosure of an extraordinary assumption makes wherever in the report the value conclusion appears. A disclosure buries on the last page of the appraisal report in 8-point type would likely not be considers clear and visible.

Sample Disclosure Statement

Jim is appraising a single-family home for a mortgage refinance loan. When he inspects the property, he finds a crack in the foundation. He doesn’t know if this crack is structural or cosmetic, and he doesn’t have the expertise to make that determination.

Then, in the addendum, Jim’s report states:

This valuation involves the use of an extraordinary assumption. Jim is appraising a single-family home for a mortgage refinance loan. When he inspects the property, he finds a crack in the foundation. He doesn’t know if this crack is structural or cosmetic, and he doesn’t have the expertise to make that determination. The use of this extraordinary assumption may have affected the results of the allocation.

Jim has complied with his disclosure requirements under the USPAP.

Note that Jim may or may not have checked the “Subject to” box at the bottom of page 2 of the URAR form. The USPAP does not instruct appraisers on how to complete appraisal report forms for nationwide property and appraisal services. The USPAP only asks Jim to make sure his disclosure is clear and visible.

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