An appraiser is told the property has no environmental contamination and cannot verify it. How should this be handled?
Correct Answer
C) State it as an extraordinary assumption disclosed
Why this is correct: An extraordinary assumption is used for a fact that is uncertain but not known to be false. The appraiser cannot verify the absence of contamination, so this is the proper classification. USPAP requires its disclosure and a statement that the conclusion might change if the assumption proves false. Why the other choices are wrong: Refusing the assignment until testing is completed is not required; the assignment can proceed with proper disclosure. Reporting it silently as an ordinary assumption is incorrect because ordinary assumptions are for facts that are typically accepted as true without verification. Treating it as a hypothetical condition of the site is wrong because a hypothetical condition assumes a fact contrary to what is known, which is not the case here. Exam tip: Remember the hierarchy: ordinary assumption (common, undisclosed), extraordinary assumption (uncertain, must be disclosed), hypothetical condition (known false, must be disclosed).
Why This Is the Correct Answer
Option C is right because the absence of contamination is uncertain information whose falsity could alter the conclusions, which is the definition of an extraordinary assumption. Using one requires disclosure, and the report must state that its use might have affected assignment results. Good practice also names the source of the information and recommends the environmental expertise the appraiser does not have. Properly disclosed, the assumption lets a credible assignment proceed while telling every intended user exactly what the opinion rests on.
Why the Other Options Are Wrong
Option A: Refuse the assignment until testing is completed
Refusing until testing is complete treats an unverifiable fact as a bar to the assignment, when USPAP supplies a mechanism for exactly this situation. Environmental assessments are expensive and slow, and many assignments would never be completed if verification were a precondition. Declining is appropriate where the appraiser cannot produce credible results at all, not where a disclosed assumption resolves the uncertainty.
Option B: Report it silently as an ordinary assumption
Treating it silently as an ordinary assumption is the actual danger, because it hides from intended users the single fact the value opinion most depends on. The distinguishing test is consequence: an assumption whose falsity could change the conclusions cannot be carried silently. Ordinary assumptions are the routine, low-consequence matters that go without saying.
Option D: Treat it as a hypothetical condition of the site
A hypothetical condition is used when the appraiser knows something to be contrary to fact and analyzes the property as though it were otherwise - valuing a contaminated site as though clean, for instance, where contamination is known. Here nothing is known to be false; the condition is simply unverified. Choosing this option reverses the definitions of the two disclosed conditions.
Unknown is extraordinary, known-false is hypothetical
Two words decide it. Unknown to you means extraordinary assumption. Known to be false but analyzed anyway means hypothetical condition. If it is neither consequential nor uncertain, it is just an ordinary assumption and needs no special disclosure.
How to use: For each assumption in a fact pattern, ask do I know this is false. Yes points to a hypothetical condition. No, but I cannot verify it and the answer matters, points to an extraordinary assumption. Then confirm the option requires disclosure, because both categories always do.
Exam Tip
Both extraordinary assumptions and hypothetical conditions must be disclosed; any answer that describes either one as silent or implicit is wrong regardless of how it classifies the fact.
Common Mistakes to Avoid
- -Carrying a consequential unverified fact as an ordinary assumption
- -Reversing the definitions of extraordinary assumption and hypothetical condition
- -Omitting the statement that use of the assumption might have affected results
- -Offering an opinion on environmental conditions the appraiser is not qualified to give
Concept Deep Dive
Analysis
This question tests the three-way classification of things an appraiser accepts without proof. An ordinary assumption is a matter the appraiser reasonably accepts as true without verification and that is not so consequential as to require special treatment - that public records are broadly accurate, for example. An extraordinary assumption is an assignment-specific assumption, as of the effective date, regarding uncertain information used in an analysis which, if found to be false, could alter the appraiser's opinions or conclusions. A hypothetical condition is contrary to what is known by the appraiser to exist on the effective date but is used for the purpose of analysis. The environmental fact pattern fits the middle category precisely: the appraiser does not know whether contamination exists, cannot verify it, and the answer would materially change the value opinion. Appraisers are also not environmental professionals, and USPAP does not require them to become ones; it requires them to be clear about what they assumed.
Background Knowledge
You need the USPAP definitions of extraordinary assumption and hypothetical condition and the requirement to identify them in developing the appraisal under Standards Rule 1-2 and to disclose them clearly and accurately in the report under Standards Rule 2-1, including a statement that their use might have affected assignment results. You should also know that appraisers are not expected to have environmental expertise and that recommending appropriate expertise is standard practice where a condition may materially affect value.
Real-World Application
A lender orders an appraisal on a former dry cleaner site and provides a letter stating there is no contamination, without a Phase One assessment. The appraiser values the property under a disclosed extraordinary assumption that the site is free of contamination, states that the value could change materially if that proves false, and recommends an environmental professional.
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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