An Extraordinary Assumption is a presumption made during the appraisal of a property when a critical factor or condition is uncertain. This assumption is fundamental because the value estimate provided by the appraisal would be substantially incorrect if the assumption were found to be wrong. It allows appraisers to move forward with their valuation despite uncertainties about the accurate state or conditions of the property.
Examples
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Environmental Cleanup: If a property’s site assessment is pending, an appraiser might assume that the site will meet environmental cleanup standards. If the actual assessment later shows contamination, the initial appraisal would be significantly off.
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Building Compliance: When there’s pending information about a building’s compliance with zoning laws, an appraiser might assume it complies. If it later turns out the building does not conform to zoning laws, its value could be much lower.
Frequently Asked Questions
Q1: When is an Extraordinary Assumption used?
An Extraordinary Assumption is used during an appraisal when there is uncertainty about a critical factor. It allows the appraiser to provide a valuation while acknowledging the uncertainty.
Q2: What happens if the assumption proves false?
If the assumption proves false, the estimated value of the property would be incorrect. The valuation should be revisited once accurate information is available.
Q3: How is an Extraordinary Assumption different from a Hypothetical Condition?
An Extraordinary Assumption pertains to uncertain conditions that are assumed to be factual for the purpose of appraisal. A Hypothetical Condition involves an assumption known to be false but used for appraisal to portray a scenario that does not exist.
Hypothetical Condition:
A condition that is contrary to what exists but is assumed for the sake of analysis.
Appraisal:
A professional assessment to determine the value of a property.
Market Value:
The price at which a property would sell under normal conditions in the market.
Online References
Suggested Books
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“The Appraisal of Real Estate” by The Appraisal Institute
For comprehensive understanding on principles and procedures of real estate valuation.
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“Fundamentals of Real Estate Appraisal” by William L. Ventolo Jr. and Martha R. Williams
This book covers the basics and practical approaches in real estate appraisal.
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“Real Estate Valuation Theory” by Ken Parker
Provides insights into various appraisal theories and methodologies.
### What is an Extraordinary Assumption in the context of an appraisal?
- [ ] An assumed minor detail that doesn't affect the valuation.
- [ ] The only factor appraisers consider.
- [x] An assumption so critical that the value would be erroneous if proven false.
- [ ] A typical assumption used in daily life.
> **Explanation:** An Extraordinary Assumption is a critical assumption that, if proven false, would make the valuation incorrect. It's a key detail in real estate valuations.
### Can an appraiser proceed without an Extraordinary Assumption when uncertain conditions prevail?
- [ ] Yes, they base every appraisal on known facts only.
- [x] No, it allows appraisal to continue amidst uncertainties.
- [ ] It depends on client request.
- [ ] Only in specific situations.
> **Explanation:** An Extraordinary Assumption allows appraisers to proceed with their valuation despite uncertainties about critical factors.
### In what scenario might an appraiser rely on an Extraordinary Assumption?
- [ ] When a property is in perfect condition.
- [x] When a pending site assessment might reveal environmental contamination.
- [ ] When the market is highly predictable.
- [ ] Only when mandated by law.
> **Explanation:** An appraiser might use an Extraordinary Assumption when a pending site assessment might reveal environmental contamination, acknowledging this uncertainty.
### If the zoning compliance is uncertain, what might an appraiser assume?
- [ ] Assume the building is non-compliant.
- [x] Assume the building complies with zoning laws.
- [ ] Ignore the factor completely.
- [ ] Wait indefinitely for updated information.
> **Explanation:** The appraiser might assume the building complies with zoning laws to proceed with the valuation, acknowledging this as an Extraordinary Assumption.
### What happens to the property value if an Extraordinary Assumption proves inaccurate?
- [x] The value would be significantly incorrect.
- [ ] The value would not change.
- [ ] The value increases.
- [ ] The time of valuation lengthens.
> **Explanation:** If an Extraordinary Assumption proves inaccurate, the appraised property value would be significantly incorrect.
### How does an Extraordinary Assumption differ from a Hypothetical Condition?
- [ ] They are exactly the same.
- [ ] Hypothetical is based on truth, Extraordinary is not.
- [x] Hypothetical is a knowingly false scenario, Extraordinary deals with unknown but assumed true factors.
- [ ] One applies to assets, other to liabilities.
> **Explanation:** A Hypothetical Condition involves assuming a knowingly false scenario for analysis, whereas an Extraordinary Assumption deals with uncertain but assumed factors.
### What critical nature of assumptions affects appraisals?
- [ ] Minor details only.
- [ ] Personal opinions.
- [x] Significant uncertainties such as environmental and compliance factors.
- [ ] Style preferences.
> **Explanation:** Significant uncertainties, such as environmental conditions and compliance factors, involve critical assumptions affecting appraisals.
### Whose standards should appraisers refer to while making Extraordinary Assumptions?
- [ ] Local charity’s guidelines.
- [ ] Real estate developers.
- [x] Professional standards like The Appraisal Foundation.
- [ ] Media reports.
> **Explanation:** Appraisers should refer to professional standards, such as those set by The Appraisal Foundation, while making Extraordinary Assumptions.
### Why might an appraiser declare assumed environmental safety during valuation?
- [x] To proceed with valuation amidst pending site assessments.
- [ ] Because every site is environmentally safe.
- [ ] To increase the property's value artificially.
- [ ] As directed by property owner.
> **Explanation:** Declaring assumed environmental safety allows appraisers to proceed with property valuation amidst pending site assessments, reflecting an Extraordinary Assumption.
### What document often outlines the use of an Extraordinary Assumption?
- [ ] Local news.
- [ ] Banking statements.
- [ ] The appraiser's report.
- [x] The appraisal report.
> **Explanation:** The appraisal report often outlines and discloses the use of an Extraordinary Assumption, explaining its necessity and implications on the valuation.
Thank you for exploring the concept of Extraordinary Assumptions with us and tackling our insightful quiz. Keep refining your real estate appraisal knowledge!
