USPAP – Keep Extraordinary Assumptions Extraordinary!

The following is a reprint from the most recent LSI Vantage - Point Newsletter by Chief Appraiser, George Vann, SRA. As a practical device, the Extraordinary Assumption (EA) is useful for its ability to let appraisers slide through some tight spots where certain appraisal analyses are concerned. Lately, however, there has developed habitual overuse of the extraordinary assumption. It might be said that these assumptions are becoming as common as to become "ordinary," rather than extraordinary. How would you consider your own use of EAs? Here is a hint ... if you feel you should always use an extraordinary assumption or you have added to your skeleton reports, you are too dependent upon them. The EA allows us to assume something to be true when we have no way of knowing whether it is true or not. Its overuse tends to occur when we are unwilling to perform our scope of work to our fullest. For example: Assume your Subject has a worn out roof. From the yard, you can see that the shingles are puffed at the corners, or worse, the roof shingle corners are crumbling so you are reasonably certain this roof has reached the end of its economic life. The interior inspection reveals no signs of leaks ... no telltale ceiling watermarks, etc. What should you do? If you feel that from your inspection that your peers would agree that this roof is worn out, you should simply state that it as your opinion. Do you go ahead and call it deferred maintenance and estimate its replacement cost to repair as a part of your condition adjustment? You should. But perhaps you have doubts ... What about the potential hidden defects to roof sheathing and support members? This is where the overuse of Extraordinary Assumptions is often found. The correct process would be to state or disclose that you are not a contractor and that the scope of your inspection did not include determination of hidden defects in the roof, and that your deferred maintenance is based upon the observed condition from the ground. That statement clarifies the limits of your scope of work, and limited expertise such that, if the lender wants a more expert opinion, they may seek one. The expert may indeed discover more issues that you could not see from the ground. Perhaps the roof sheathing is rotted but somehow no water marks have been found on the ceiling. The lender will not hold you responsible because it is outside the scope of your assignment to discover hidden defects. What is more, you have placed the lender on notice that your inspection did not consider hidden defects. There is no reason to use Extraordinary Assumptions to either assume the roof has hidden defects or not. Make your appraisal decisions based upon the facts discoverable within your scope of work. These statements of fact, plus the disclosure of your limited scope of inspection, covers any inaccuracy that might later be revealed as a result of a roofer peeling back the layers or climbing through the attic to discover more. In this way, clear statements within your appraisal resolved the potential conflict. Let us take it still one more step. Assume you had seen spots on the ceiling, or other unmistakable signs of that roof leaks. It is clear to you that the roof leak IS having an impact on the structure and that further delay could harm the structural integrity and soundness of the house. Mold could invade. Clearly, it is time to anticipate that repairs are not just reasonable, but required. But what repairs? Your scope of work did not require this level of inspection nor do you have the necessary experience in that case. It is prudent to have an expert conduct a detailed inspection. This is the appropriate time to check off "Box 4," (Subject to the following required inspection and based upon the extraordinary assumption that the condition or deficiency does not require alteration or repair) to be checked. By so doing, you are putting people on notice and reflecting the value as if unaffected by the adverse condition. The lender will hire the appropriate contractor to conduct a full roof inspection and calculate the cost to repair. Because it is a curable physical deterioration, the cost to cure is likely going to be the price of the roofer's repair. The correct process is, granted, a matter of degree, but it should be dictated by factual information and observed condition, not fear of the unknown, acknowledging your scope of work as well as lack of expertise. In summary, call the deferred maintenance as you see it, not as you fear it might be (no supporting facts), and make the deduction in your Condition adjustment. Use Extraordinary Assumptions when you have reason to believe that there may be additional hidden problems, the extent of which cannot be known without expert opinions by specialized contractors doing on site inspections. Combining this with a notice of your limit of expertise on the subject will free you to finish the assignment assuming there is no cost associated with the issue, yet lets the client know they must have somebody assess the hidden impact associated with the problem.

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