Valuation Management Group’s Real Estate Appraisal Reviewers often encounter what appears to be a common misunderstanding about which value scenario should be used in handling proposed construction in an appraisal report, the hypothetical “As Complete” value scenario or the prospective “Upon Completion” value scenario. The former is based upon a hypothetical condition that the construction is complete on the current date, when in fact we know that to not be true. The latter is a “prospective opinion of value” based upon the extraordinary assumptions that the construction will be complete as of a certain date in the future, according to provided budget and plans, and that market conditions will not materially change between the present and future date. Both scenarios invoke USPAP requirements that the appraiser is clear about the conditions or assumptions relied upon and disclosure that the said conditions/assumptions may affect assignment results. Valuation Management Group has observed that most residential appraisals concerning proposed construction use a hypothetical value and hypothetical conditions, mainly because the time frame from start to finish of a single residential unit is usually minimal. Conversely, our reviewers and clients typically expect to see commercial appraisals concerning proposed construction demonstrating the prospective opinion of value and accompanying assignment-specific extraordinary assumptions. This is mainly due to Interagency Appraisal and Evaluation Guidelines requirements, longer commercial construction times, varied commercial contractors/approvals and related time-delay and price increase risks on a single commercial project, and the more unique construction characteristics involved with commercial developments.
The related definitions from the Dictionary of Real Estate Appraisal are as follows:
Hypothetical Condition – That which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.
Extraordinary Assumption – An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property such as market conditions or trends; or about the integrity of data used in an analysis.
Prospective Opinion of Value – A value opinion effective as of a specified future date. The term does not define a type of value. Instead, it identifies a value opinion as being effective at some specific future date. An opinion of value as of a prospective date is frequently sought in connection with projects that are proposed, under construction, or under conversion to a new use, or those that have not yet achieved sellout or a stabilized level of long-term occupancy.
Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
Valuation Management Group makes every attempt to obtain all pertinent information for an assignment before engaging an appraiser and we strive to make sure client personnel are knowledgeable as well. We are sensitive to and understand compliance issues and information necessary for credit decisions in all disciplines of appraisal. Discussion of this topic is another way Valuation Management Group is attempting to improve mutual understanding and communication between a client, appraiser and VMG staff members, so we all operate in an effective and fully-informed environment.
Valuation Management Group is a national, full service appraisal management service company that manages the appraisal process for banks, mortgage bankers, and credit unions. We offer the full array of commercial and residential appraisal products and services. We take the appraisal process from ordinary to extraordinary.