Extraordinary Assumptions vs. Hypothetical Conditions: What Appraisers Need to Know

Extraordinary assumptions and hypothetical conditions are often misunderstood terms within real estate appraisal. Both serve to frame the appraiser’s analysis when certain facts are unknown or intentionally altered. Yet their proper use—and disclosure—is critical for producing credible, compliant reports.

Defining the Terms (The Appraisal of Real Estate, 15th Edition)

According to The Appraisal of Real Estate, 15th Edition (Appraisal Institute, 2020):

A special or extraordinary assumption is something believed to be true on the effective date of the appraisal for the sake of the analysis but that may or may not, in fact, be true as of that date. Unlike general assumptions, which often apply to many appraisal assignments (and are sometimes treated as boilerplate), special assumptions are specific to the assignment at hand. An appraisal may be subject to more than one special assumption.

A hypothetical condition, on the other hand, is used when something is known to be false but is assumed to be true for analytical purposes.

Understanding the Difference

The Appraisal of Real Estate, 15th Edition distinguishes these two concepts clearly:

• A special or extraordinary assumption applies when something is uncertain but presumed true.

• A hypothetical condition applies when something is known to be false but is assumed to be true for the sake of analysis.

In simpler terms:

• Extraordinary Assumption → Unknown but assumed true

• Hypothetical Condition → Known to be false but assumed true

According to the Uniform Standards of Professional Appraisal Practice (USPAP), an extraordinary assumption may be used only when:

1. It is required to properly develop credible opinions and conclusions;

2. The appraiser has a reasonable basis for the assumption; and

3. Its use results in a credible analysis.

Furthermore, it must be clearly disclosed in the report.

USPAP defines a hypothetical condition as an assumption contrary to known facts—used only if:

• It is clearly required for legal purposes, reasonable analysis, or comparison; and

• Its use results in a credible analysis.

When and Why They Matter

Both concepts allow appraisers to explore value scenarios that might otherwise be impossible or impractical to analyze. For instance:

• Extraordinary assumptions help bridge information gaps (pending inspections, missing plans, uncertain data).

• Hypothetical conditions allow for “what if” analyses—valuing a property as if a proposed improvement were completed or an adverse condition did not exist.

Examples

Extraordinary Assumptions

• Limiting Property Inspection: The interior is unknown, but an assumption is made based on the information available.

• Prospective Valuation: The appraisal assumes the proposed construction will be completed based on plans provided.

• Tenant Information: Original leases were provided, but documents related to extensions or options were not provided.

Hypothetical Conditions

• Valuation of Proposed Construction “as of today”: The appraisal assumes the construction is complete today, although that is contrary to fact.

• Contamination: The appraisal assumes there is no contamination, although contamination exists.

Disclosure

Failure to properly identify or disclose these conditions can mislead clients and end users. Professional standards require appraisers to state not only that such conditions were used, but also how they influenced the results. One interesting nuance is that USPAP does not specifically require appraisers to label these assumptions, as long as they are clearly identified. However, best practices suggest labeling them for clarity.