An extraordinary assumption refers to a crucial hypothesis within an appraisal. It is an underlying assumption that the value opinion or conclusion derived from the appraisal would be significantly flawed if the assumption were found to be false. In essence, the appraiser presumes certain conditions are true for the purpose of the valuation, even if they cannot be verified at the time of the appraisal.
Characteristics of an Extraordinary Assumption
- Essential for Validity: The assumption is so fundamental that the appraised value would be incorrect without it.
- Unverifiable at Appraisal Date: The condition or hypothesis assumed cannot be confirmed during the appraisal process.
- Potential Risk: There is always a risk associated with depending on these assumptions since their validity might change over time.
Importance in Appraisal
Risk Mitigation
Appraisers use extraordinary assumptions to proceed with evaluations in scenarios where certain information is missing or unverifiable. It allows the appraisal to move forward but flags these assumptions as critical points that must be monitored.
Examples of Use
- Property Assessment: Assuming a property’s environmental conditions are stable and not affected by unknown contamination.
- Market Value: Supposing the market conditions remain consistent during the appraisal period without sudden economic shifts.
Comparison to Hypothetical Condition
Common Attributes
- Both are Based on Assumptions: Both use scenarios or conditions that may not be verifiable during the appraisal.
- Influence on Value: Both affect the appraised value and are critical to the conclusion.
Key Differences
- Foundation of Assumptions:
- Extraordinary Assumption: Based on plausible but unverified conditions.
- Hypothetical Condition: Based on conditions known to be contrary to fact but used for analytical purposes.
- Applicability: Extraordinary assumptions ensure a reasonable estimate in uncertain conditions, while hypothetical conditions are more for “what if” scenario analysis.
FAQs
What happens if an extraordinary assumption is found to be false?
How is an extraordinary assumption disclosed?
References
- The Appraisal of Real Estate, 14th Edition, by Appraisal Institute
- USPAP - Uniform Standards of Professional Appraisal Practice
Summary
An extraordinary assumption plays a pivotal role in real estate and financial appraisals. It allows appraisers to proceed with cautious optimism, recognizing that certain key data points, though unverifiable at the time, are treated as true. This assumption’s importance highlights the difference it makes in providing an accurate value opinion and compares it aptly to the concept of a hypothetical condition. Thus, understanding and properly disclosing extraordinary assumptions are essential for transparency and accuracy in appraisals.
