Valuation Management Group Discusses Hypothetical Conditions in an Appraisal Report

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Valuation Management Group Discusses Hypothetical Conditions in an Appraisal Report

Valuation Management Group, as an appraisal management services company, deals with many unique appraisal issues and methodologies. As our quality assurance appraisal reviewers notice areas of interest, we strive to share the industry information with our clients and appraisers to keep everyone informed.

The Uniform Standards of Professional Appraisal Practice (USPAP) states in Standards Rule 2-1 (c) that each written or oral real property appraisal must “clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.” USPAP defines hypothetical condition as “A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of the analysis.”  In other words, a hypothetical is something that is contrary to what the appraiser knows to be true.

There are a variety of circumstances and situations that could require an appraiser to use a hypothetical condition and a full list of every probable scenario would be impossible to capture. For example, many times when appraisers value a proposed residential structure, a hypothetical condition is employed that the proposed structure exists on the effective date of value, when in fact it does not.  Many within the industry refer to this a “subject to” value, which is essentially shorthand for a value subject to a hypothetical condition.  Another example of when a hypothetical condition may be used is in the case of a parcel that can or will be divided into two parcels.  We recently reviewed an appraisal of two buildings on one large parcel.  The owner of the buildings and parcel was selling one of the buildings along with a portion of the parcel to another user.  The two conceptual parcels could legally stand alone, but were not yet subdivided as of the effective date of value.  However, for financing purposes for the potential buyer, only one building and that related land needed to be valued in the appraisal.  The appraiser made the value subject to the hypothetical condition that the parcels were legally subdivided, although the buyer, seller, appraiser, lender, and reviewer all knew this to be contrary to what existed.  The hypothetical condition was clearly labeled in order to be properly understood by the intended users and therefore considered appropriate.

The burden is upon the appraiser to clearly disclose any hypothetical conditions that have been relied upon. As part of our review, VMG reviewers check to make sure that the necessary hypothetical conditions are appropriate to the assignment, have been fully disclosed, and clearly labeled so as not to be misleading.

Valuation Management Group is a national, residential and commercial appraisal management services company that manages the appraisal process, including the appraisal review, for financial institutions, banks, mortgage bankers, and credit unions. VMG offers a full array of commercial and residential appraisal products and services. The company’s goal is to take the appraisal process from ordinary to extraordinary for its clients and appraisers.

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