A client asks for a current-effective-date appraisal of land as though commercial zoning were already in place, although the appraiser knows the current zoning is residential. Assuming the premise is appropriate and produces credible results, how should it be treated?
Correct Answer
A) Complete the assignment using a hypothetical condition
Because commercial zoning is contrary to the known current zoning on the effective date, the assumed premise is a hypothetical condition. Its use must be appropriate for the intended use, lead to credible results and be clearly disclosed, including possible effect on results. A forecast of future rezoning is a different analysis.
Why This Is the Correct Answer
Option A is correct because the assumed commercial zoning is contrary to the known residential zoning on the effective date, which matches the USPAP definition of a hypothetical condition. USPAP permits a hypothetical condition when it is required for legal purposes, for reasonable analysis or for comparison, when it results in a credible analysis, and when the appraiser complies with disclosure requirements. The report must clearly disclose the hypothetical condition and state that its use might have affected the assignment results.
Why the Other Options Are Wrong
Option B: Value the property under current zoning only
Option B, valuing the property under current zoning only, ignores the client's legitimate request. USPAP allows a hypothetical condition when its use is appropriate and credible, so the appraiser is not limited to current zoning.
Option C: Complete the assignment using an extraordinary assumption
Option C, using an extraordinary assumption, misapplies the term. An extraordinary assumption concerns uncertain information that, if found false, could alter the results; here the zoning is known to be residential, so assuming commercial zoning is contrary to known fact and is a hypothetical condition.
Option D: Decline the assignment as it violates USPAP
Option D, declining because the assignment violates USPAP, is wrong because USPAP expressly allows hypothetical conditions under stated conditions. The question says the premise is appropriate and produces credible results, so the assignment can proceed with proper disclosure.
Known false means hypothetical
If the appraiser knows the premise is false on the effective date, it is a hypothetical condition. If the appraiser does not know and assumes it true, it is an extraordinary assumption.
How to use: Use this when deciding which label applies to an assumed fact about zoning, construction or condition.
Exam Tip
Ask whether the appraiser knows the assumed fact is untrue as of the effective date. Known contrary facts point to a hypothetical condition, which still requires clear disclosure.
Common Mistakes to Avoid
- -Calling a known-false premise an extraordinary assumption
- -Believing USPAP prohibits any appraisal based on a condition contrary to fact
- -Forgetting to disclose that the hypothetical condition might have affected the results
Concept Deep Dive
Analysis
This question tests the distinction between a hypothetical condition and an extraordinary assumption. The key fact is that the appraiser knows the current zoning is residential, yet the client wants a current value as though commercial zoning were in place. A premise contrary to what is known to exist on the effective date is a hypothetical condition, which may be used when it is appropriate, leads to credible results and is clearly disclosed.
Background Knowledge
USPAP defines a hypothetical condition as a condition directly related to a specific assignment that is contrary to what is known by the appraiser to exist on the effective date, but used for the purpose of analysis. An extraordinary assumption, by contrast, is presumed true about uncertain information. A forecast of future rezoning would be a different analysis than valuing as though rezoning were already in place on a current effective date.
Real-World Application
A developer asks for the current value of a residential-zoned parcel as though commercial zoning were already approved, to evaluate whether to pursue a rezoning application. The appraiser accepts the assignment, values the land under the hypothetical condition of commercial zoning, and clearly discloses that the condition is contrary to fact and might have affected the results. The appraiser may also report the value under current zoning for comparison if the scope of work calls for it.
More USPAP Questions
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Under 2024 USPAP Standard 1, which listed assignment element must be identified in developing a real property appraisal?
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According to USPAP, what is the primary purpose of the Ethics Rule?
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Which list gives the sections of the 2024 USPAP Ethics Rule?
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