Definition
A Hypothetical Condition refers to a scenario or circumstance assumed to exist for the purpose of an appraisal or analysis that is known to be contrary to actual, current facts. In real estate, this could involve assessing property value as though zoning laws were different from those presently in effect, or assuming a certain level of equipment or improvement that does not currently exist.
Examples
- Zoning Changes: Assuming that a property is zoned for commercial use when it is currently zoned as residential.
- Unbuilt Structures: Valuing a property as if an additional building or facility exists which has not yet been constructed.
- Environmental Conditions: Appraising a piece of land as if it were free from contamination when it is actually affected by pollution.
- Economic Changes: Estimating property value based on a fully revitalized economic district that remains underdeveloped at present.
Frequently Asked Questions (FAQs)
What is the purpose of using a hypothetical condition in real estate appraisal?
Answer: The purpose of employing hypothetical conditions is to estimate the possible value or utility of a property under certain assumed scenarios that differ from current factual conditions. This can be useful in planning, feasibility studies, and alternate investment scenarios.
How does hypothetical condition differ from an extraordinary assumption?
Answer: While both hypothetical conditions and extraordinary assumptions involve assumptions that may alter an appraisal outcome, a hypothetical condition intentionally contradicts current known facts. In contrast, an extraordinary assumption is grounded in a reasonable but unverified assumption that must be validated over time.
Can hypothetical conditions be used in litigation?
Answer: Yes, hypothetical conditions can be used in litigation, especially in cases where alternate scenarios or outcomes need to be explored for potential damages, benefits, or compensation assessments.
Can an appraisal based on a hypothetical condition be used for mortgage lending?
Answer: Typically, appraisals based on hypothetical conditions are not accepted for traditional mortgage lending because they do not reflect actual, current property conditions. However, they may be used for specialized purposes or by private investors.
Are hypothetical conditions legal in appraisals?
Answer: Yes, hypothetical conditions are legal in appraisals and are recognized by appraisal standards, such as those outlined by the Uniform Standards of Professional Appraisal Practice (USPAP), provided they are clearly disclosed and explained in the report.
Related Terms
Appraisal
An objective evaluation and analysis of the value of a property, which often involves detailed documentation and comparison with similar properties.
Zoning
The legislative process for dividing land into zones for different uses. Zoning laws and regulations define how land and property can be used in different geographic areas.
Extraordinary Assumption
An assumption directly related to a specific assignment, as of a date of the opinion of value, which, if found to be false, could alter the appraiser’s opinions or conclusions.
Feasibility Study
An analysis of how successfully a project can be completed, accounting for factors like economic, technical, legal, and scheduling aspects.
Online References
- Uniform Standards of Professional Appraisal Practice (USPAP) - www.appraisalfoundation.org
- International Valuation Standards Council (IVSC) - www.ivsc.org
- Appraisal Institute - www.appraisalinstitute.org
Suggested Books for Further Studies
- “The Appraisal of Real Estate” by Appraisal Institute
- “Real Estate Valuation in Litigation” by J.D. Eaton
- “Property Valuation: The Five Methods” by David Isaac and John O’Leary
- “Real Estate Principles” by Charles F Sirmans and others
Fundamentals of Hypothetical Condition: Real Estate Basics Quiz
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