Jan 17, 2016
What is the difference between a regular assumption and an extraordinary assumption? Did you know Fannie Mae does not allow EAs? Bob Keith takes us through the world of what can and cannot be assumed without marking that little box at the bottom of page 2.
Hi Dustin, I have been at it for 20 years and have always done the extra-ordinary assumption the same way as you. So, for now on you are going to mark the box subject to an inspection?
Also, I believe USPAP made using an EA or a Hypothetical without Client knowledge/permission a violation. May want to check that. I always just buried them in the Addendum. Have a great day!
seven and a half years ago
Question: Can an RA (Review Appraiser) make an extra ordinary assumption to rely on the OA’s (Original Appraiser) indiscreet assumption that surrounding adjacent neighborhoods have similar appeal and value to justify comp selection outside of subject’s neighborhood without adjustments for location differences.
Indiscreet assumption means the OA made no comments on whether adjacent surrounding neighborhoods have similar market appeal, characteristics or similar value as subject’s neighborhood.
For example, subject's neighborhood in the city had only 1 sale within the current 12 month period, only 3 sales during the prior 2 years, and there are no current listings in the area; no meaningful current market trend analysis can be concluded due to limited data within the past 3 years to support a dated sale with time adjustments.
The OA selected all comparables outside of subject’s neighborhood from surrounding areas all located outside of 1 mile radius from subject property, up to 3 miles away, all sold at full list price priced between $1.10M-$1.50M and all sold 6-12 months ago within 45 days on market.
OA noted in the appraisal that market is increasing with shortage of inventory, which is true for the adjacent surrounding neighborhoods and also overall county’s market condition.
During the review, the RA noticed the OA had missed a recent sale within the subject’s neighborhood just half a mile away, and deemed it is a valid comparable even though property is slightly larger in terms of lot size and dwelling size both bigger by 35%, but all other factors being similar, was sold within the past 3 months at full list price of $1.25M after 30 days on market. Land value in the neighborhood accounts for more than 65% of total value.
If this recent sale within the neighborhood was used as a comparable, the adjusted value after property size difference would be near $1,000,000... killing the deal in escrow with purchase price of $1.25M.
The RA concludes the adjusted value difference is most likely due to location difference, but unable to make that determination in the review due to only 1 current sales data in the neighborhood.
So in conclusion, rather than commenting there should be adjustments to be made for location differences on the 3 comparables in the OA, the RA added the recent sale as a comparable in the appraisal report and commented the RA had made extraordinary assumption to rely on OA’s assumption the neighborhoods did not require location adjustments, but have placed more weight and more emphasis on the new comparable which is a more recent and a more proximate sale, and adjusted the OA’s value of $1.25M to $1.10M.
Please provide feedback as to whether RA’s extraordinary assumption to rely on OA’s assumption that adjacent neighborhoods have similar market appeal and value, was appropriate or not appropriate.
And please also comment on whether the RA had provided an inaccurate or misleading report by not making additional efforts to further research and analyze the neighborhoods to conform whether there is indeed a significant location difference to be accounted for.