Hypothetical Conditions

Appraisal assignments can be completed based on assumptions, with presumed uncertainty, or with conditions that clearly do not exist on the appraisal date.  The Scope of Work discussed in an appraisal repot identifies whether extraordinary assumptions or hypothetical conditions have been employed.  As an example; subdivision lots that lack roads, water lines, sewer lines and power can be appraised as if the lots were, for analytic purposes, in their "finished" condition with the improvements completed.  The improvements do not exist, but the hypothetical conditions are asserted for appraisal purposes.

It is important that the appraiser prominently disclose throughout an appraisal report the fact that a subject property is being appraised with extraordinary assumptions or with one or more hypothetical condition.  Without prominent disclosure a reader of the appraisal report may be led to believe that the property has existing improvements in its "as is" state, which would be misleading and could be the cause of a financial loss.

Appraisal assignments generally include a value opinion being express for the property in its "as is" state and in its "upon completion" state subject to the extraordinary assumptions or hypothetical conditions.  This leaves little room for a mistake to be made regarding the value the subject property before and after its improvement.

Reports that include hypothetical conditions are most often requested on pre-construction projects, or when a construction project is nearing completion and interim financing is being replaced with permanent financing.  Report with hypothetical conditions are also typical in condemnations, where appraisers look at a property both "before" and "after" an acquisition will occur.  

The use of hypothetical conditions in an appraisal report is also useful when a building expansion is planned.  Expected changes to the income stream must be forecasted and analyzed to determine how the value of the property will change.

An example of an extraordinary assumption is appraising a retail property that has an existing use that is not permitted under current zoning.  Since it is uncertain that its continued use will be allowed with minor modification, an appraiser could make an extraordinary assumption that the use will be allowed to continue.  It is important to note that when extraordinary assumptions are proven wrong, the value opinions / conclusions of an appraisal report no longer hold true.  

It is incumbent upon an appraiser to make only extraordinary assumptions or consider only hypothetical conditions that are reasonably probable.  If, for example, an appraisal is completed with the assertion that commercial zoning will be approved for the site, yet no planning, zoning or other information reasonably supports a possible change in zoning, the report becomes entirely fictional and can not be relied upon.  

Contact us with your questions or concerns regarding hypothetical conditions or regarding your appraisal assignment in Nevada via e-mail at grigdon@cox.net or by phone at 1-702-568-6699. 

Commercial Real Estate Appraisals in the Las Vegas & Henderson, Nevada Area.