The Review Assignment With an Unsupported Extraordinary Assumption
You are engaged to review an appraisal of a 12-unit apartment building. The report contains an extraordinary assumption that the building's roof has no active leaks and will not need replacement for five years, based on the owner's statement. The appraiser did not inspect the roof and did not review any inspection report. The report also states the property is in "average" condition, though the photos show stained ceiling tiles in two units and a water stain on the top-floor hallway ceiling. The value conclusion is $1,850,000. The appraiser's certification states that the extraordinary assumption is "not material to the value conclusion." The client's engagement letter asked for an as-is value. The report contains no statement of limiting conditions addressing the assumption's effect.
1. Evaluate the extraordinary assumption under USPAP and explain the conflict in the certification.
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An extraordinary assumption is a condition that, if found to be false, would alter the appraiser's opinion. The report's own definition of the situation - a roof that may need replacement within five years - is exactly the kind of condition that could change value, since a roof replacement on a 12-unit building is a material capital cost. So the appraiser's certification that the assumption is "not material to the value conclusion" is internally contradictory. If it is not material, it is not an extraordinary assumption; if it is an extraordinary assumption, it is material by definition.
The report also fails the disclosure requirement. The appraiser must state the assumption clearly, explain why it was necessary, and disclose its effect on the value opinion. Here the appraiser relied on the owner's statement without inspection or documentation, and the report contains no limiting condition addressing the effect. The stained ceiling tiles are visible evidence that the assumption may be false.
For an as-is value, the appraiser cannot assume away a condition that the market would price. The client asked for as-is; a value premised on an unverified roof condition is not as-is.
2. As reviewer, what findings and requirements should you issue, and how should the review report handle the value?
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The review should identify:
- Contradictory certification: the assumption is either material (and must be disclosed as such) or not an extraordinary assumption at all.
- Insufficient verification: the appraiser relied on an owner's statement and did not inspect the roof or review an inspection report, despite visible water staining.
- Scope mismatch: the client requested as-is value; the report delivers a value conditioned on an unverified assumption without disclosing the effect.
- Condition inconsistency: "average" condition conflicts with the photographic evidence.
Requirements to the appraiser: either obtain and document roof condition evidence, or retain the assumption and explicitly disclose it, its basis, and its effect on value. The certification language must be corrected, and the condition rating must be reconciled with the photos.
On value, the reviewer has two acceptable paths. If the review is an appraisal review without a value opinion, the reviewer should state whether the value is credible as reported. Given the unsupported assumption, the reviewer should conclude it is not credible as an as-is value and explain why. If the engagement includes the reviewer's own value opinion, the reviewer must develop it independently, including a cost estimate for roof replacement and its effect on the income and sales comparison indications. The reviewer should not silently substitute a number; the review report must state the basis and the reviewer's scope of work.