An appraiser assumes a pending zoning application will be approved. What must accompany this?
Correct Answer
B) Disclosure and a statement of possible effect
Why this is correct: An extraordinary assumption is an assignment-specific assumption about uncertain information which, if found to be false, could alter the appraiser's opinions or conclusions. A zoning application that is still pending on the effective date is exactly that kind of uncertain fact. USPAP permits the assumption only where it is required for credible results and the appraiser has a reasonable basis for it, and it imposes two obligations that travel together: the assumption must be clearly and conspicuously disclosed, and the report must state that its use might have affected the assignment results. Why the other choices are wrong: 'The application number and the hearing date' is useful supporting detail and belongs in the analysis, but supplying a file reference is not the required disclosure. 'A letter of support from the zoning authority' is not required and generally would not exist; a jurisdiction does not endorse an application before it rules on it. 'A second value opinion under current zoning' can be a valuable service and is sometimes ordered, but USPAP does not require an alternative conclusion whenever an extraordinary assumption is used. Exam tip: Extraordinary assumptions come as a pair — disclose the assumption, and state that using it might have affected the results. Any answer supplying only one half of that pair, or something else entirely, is wrong.
Why This Is the Correct Answer
Option B is correct because disclosure plus a statement of possible effect is the two-part requirement attached to every extraordinary assumption. Disclosure alerts the reader that an uncertain fact was assumed, and the statement of possible effect warns that the conclusion could change if the assumption fails. Neither half suffices alone, which is why the option pairs them. The appraiser must also have a reasonable basis for expecting approval before relying on it at all.
Why the Other Options Are Wrong
Option A: The application number and the hearing date
The application number and hearing date are useful supporting detail and belong in a well-documented report, but supplying them does not satisfy the required disclosure or the statement of possible effect. A reader could see the case number and still not understand that the value depends on an uncertain outcome. Documentation of the underlying facts and disclosure of the assumption are different obligations.
Option C: A letter of support from the zoning authority
Zoning authorities do not issue letters of support for pending applications, and no standards provision requires one. What the appraiser needs is a reasonable basis for the assumption, which might come from the staff recommendation, the approval history of similar applications, or consistency with an adopted comprehensive plan. Requiring an endorsement that does not exist would make such assignments impossible.
Option D: A second value opinion under current zoning
A second value under current zoning is a common and often sensible deliverable, especially for lenders who must understand collateral value if the application fails, but it is a client requirement rather than the disclosure the standards mandate. Providing an alternative value without disclosing the assumption would still leave the primary conclusion unexplained. The requirement being tested is disclosure and the effect statement.
Flag It and Warn About It
Every extraordinary assumption needs a flag and a warning. The flag says I assumed something uncertain; the warning says the answer could change if I am wrong. One without the other leaves the reader half informed, which is worse than either alone.
How to use: Identify whether the assumed fact is uncertain or contrary to what is known. Uncertain means extraordinary assumption, contrary means hypothetical condition. Either way, look for the option pairing disclosure with a statement of possible effect, and reject options offering supporting documents or an alternative value in place of that pairing.
Exam Tip
Both extraordinary assumptions and hypothetical conditions carry the same two-part disclosure duty; classify which one you have, then apply the identical disclosure and effect statement.
Common Mistakes to Avoid
- -Disclosing the assumption without the statement that results might have differed
- -Relying on an extraordinary assumption with no reasonable basis for expecting approval
- -Classifying a pending outcome as a hypothetical condition rather than an extraordinary assumption
Concept Deep Dive
Analysis
This question tests the handling of an extraordinary assumption. An extraordinary assumption is an assignment-specific assumption about uncertain information which, if found to be false, could alter the appraiser's opinions or conclusions. A pending zoning application fits exactly: its outcome is unknown on the effective date, and whether it is granted could change the highest and best use and therefore the value substantially. That distinguishes it from a hypothetical condition, which is contrary to a known fact rather than uncertain. USPAP permits an extraordinary assumption only when it is required for the assignment's intended use, the appraiser has a reasonable basis for it, and its use results in a credible analysis. The disclosure obligation has two parts that must travel together: the assumption must be clearly and conspicuously disclosed, and the report must state that its use might have affected the assignment results. Clients frequently want both scenarios, so a common practice is to also report a value under existing zoning, but that is a client accommodation rather than the standards requirement being tested here.
Background Knowledge
You need to know the definitions and the difference between an extraordinary assumption, which concerns uncertain information, and a hypothetical condition, which is contrary to known fact, and that both require clear and conspicuous disclosure along with a statement that their use might have affected the assignment results. You should also know that an extraordinary assumption is permitted only when it is required for the intended use, the appraiser has a reasonable basis for it, and it produces a credible analysis.
Real-World Application
Valuing a parcel with a rezoning application pending and a favorable staff recommendation on file, an appraiser relies on an extraordinary assumption that the application will be approved, discloses it on the transmittal page and in the certification, states the results might differ if it is denied, and provides a second value under existing zoning at the lender's request.
More USPAP Questions
Reconciliation of the approaches to value is best described as which activity?
Why should the reconciliation address the quantity of evidence as well as its quality?
How long must a report be retained compared with the workfile?
What distinguishes an appraisal review from an appraisal?
An appraiser reconciles to a value at the top of the indicated range because the client needs that figure. What has occurred?
What does it mean that a value opinion must be reasonable rather than merely arithmetically derived?
What should the reconciliation section explain to the reader?
How do the content obligations of the two report options differ with respect to the information analyzed?
The three approaches indicate $480,000, $495,000 and $610,000. What should the appraiser do first?
Three approaches indicate $1.02 million, $1.05 million and $1.04 million. How should this be reported?
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