Reconciliation and Reporting: From Value Indicators to Appraisal Report

Chapter 11: Reconciliation and Reporting: From Value Indicators to Appraisal Report

Introduction

This chapter delves into the critical processes of reconciliation and reporting, the culmination of the appraisal process. It focuses on synthesizing various value indicators derived from different appraisal approaches and data sources into a single, well-supported opinion of value. The chapter further details the structure and content of an appraisal report, ensuring clear and effective communication of the appraiser’s analysis and conclusions to the intended users.

I. Reconciliation: Synthesizing Value Indicators

Reconciliation is the process of critically analyzing and weighing the results of multiple value indicators (e.g., sales comparison, cost, and income approaches) to arrive at a final, single opinion of value or a range of values. It is not simply averaging the values.

A. Nature of Reconciliation
* Reconciliation is a judgmental process, not a mathematical one. It requires the appraiser to exercise expertise, experience, and sound reasoning.
* The goal is to determine which value indicator is most reliable and applicable to the specific appraisal assignment, based on the data available and the characteristics of the subject property.
* Reconciliation acknowledges the limitations of each appraisal approach and seeks to minimize errors and biases.

B. Principles of Reconciliation

*   **Reliability of Data:**
    1.  **Amount of Data:** Value indicators derived from larger datasets, more detailed data, and multiple independent sources are generally considered more reliable.
    2.  **Accuracy of Data:** The accuracy of the data supporting each value indicator is critical. Verified and reliable data sources are paramount.
    3.  **Accuracy of Techniques:**  The selected valuation techniques should be appropriate for the specific property type and available data.

*   **Relevance to the Appraisal Problem:**
    1.  **Consistency with Assignment:** Value indicators must align with the appraisal's purpose, intended use, and definition of value.
    2.  **Appropriateness of Technique:** The appraisal technique used must be appropriate for the property type and the available data. The sales comparison approach might be most relevant for residential properties, while the <a data-bs-toggle="modal" data-bs-target="#questionModal-367006" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">income capitalization approach</span><span class="flag-trigger">❓</span></a> is typically more relevant for income-producing properties.

C. Steps in the Reconciliation Process:

1.  **Review and Verification:** Scrutinize all data, calculations, and reasoning underlying each value indicator. Check for errors and ensure consistency in applying appraisal techniques.
2.  **Data Validity Assessment:** Verify data sources and evaluate the reliability of information used in each approach.
3.  **Technique Validation:** Ensure the chosen appraisal techniques are appropriate for the property and consistent with the assignment’s requirements.
4.  **Weighting of Indicators:** Assign weights to each value indicator based on its reliability, relevance, and the quality of supporting data.
5.  **Value Opinion Derivation:** Formulate a final opinion of value based on the weighted value indicators, considering the strengths and weaknesses of each approach.

*Averaging is strictly avoided, and weighting based on appraiser experience is preffered.*

D. Mathematical Representation of Weighted Reconciliation (Example):

While not a mathematical average, the concept of weighting can be illustrated:

Let:

• V_SC = Value indicated by Sales Comparison Approach
• V_C = Value indicated by Cost Approach
• V_I = Value indicated by Income Approach
• w_SC = Weight assigned to Sales Comparison Approach
• w_C = Weight assigned to Cost Approach
• w_I = Weight assigned to Income Approach

Where: w_SC + w_C + w_I = 1 (The sum of the weights must equal 1 or 100%)

Reconciled Value (V_R) = (w_SC * V_SC) + (w_C * V_C) + (w_I * V_I)

Example:
* V_SC = $300,000
* V_C = $280,000
* V_I = $310,000
* w_SC = 0.6 (60% weight to Sales Comparison - Most reliable)
* w_C = 0.1 (10% weight to Cost - Least reliable)
* w_I = 0.3 (30% weight to Income)

V_R = (0.6 * $300,000) + (0.1 * $280,000) + (0.3 * $310,000)
V_R = $180,000 + $28,000 + $93,000
V_R = $301,000

The reconciled value is $301,000. The appraiser must provide a clear justification for the assigned weights and the rationale behind emphasizing certain indicators over others in the appraisal report.

E. Practical Applications:

1. Residential Appraisal: In appraising a single-family home, the sales comparison approach typically carries the most weight due to the availability of comparable sales data. The cost approach is less relevant, and the income approach is generally not applicable unless the property is a rental.

2. Commercial Appraisal: For an income-producing property like an office building, the income capitalization approach is often the primary indicator of value. The sales comparison approach is also relevant if comparable sales data exists. The cost approach is generally less emphasized.

3. Vacant Land Appraisal: The sales comparison approach is most relevant, analyzing similar land sales to determine value based on location, zoning, size, and potential use.

II. Appraisal Reporting: Communicating Value

An appraisal report serves as a structured and comprehensive documentation of the entire appraisal process, from problem identification to the final opinion of value.

A. Purpose and Function of the Appraisal Report:

*   To communicate the appraiser's opinion of value and the supporting analysis to the intended users (e.g., lender, buyer, seller).
*   To provide a clear, understandable, and credible account of the appraisal process, data, and reasoning.
*   To comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and other relevant regulations.

B. Essential Elements of an Appraisal Report (According to USPAP Standard 2):

1.  **Identification of the Client and Intended Users:** Clearly state who the appraisal is for and who will be relying on the report.
2.  **Intended Use of the Appraisal:** Define the purpose of the appraisal (e.g., mortgage lending, estate settlement, tax assessment).
3.  **Definition of Value:** Specify the type of value being estimated (e.g., market value, fair value, liquidation value).
4.  **Effective Date of the Appraisal:** Indicate the date to which the opinion of value applies.
5.  **Subject Property Characteristics:** Provide a detailed description of the property, including location, physical characteristics, legal aspects, and any relevant environmental conditions.
6.  **Scope of Work:** Describe the extent of the research, data collection, and analysis performed in the appraisal.
7.  **Data and Analysis:** Present the relevant data and analysis used in the appraisal, including market data, comparable sales, cost data, and income data.
8.  **Appraisal Approaches:** Describe and explain the appraisal approaches used (sales comparison, cost, income) and the reasoning behind their application.
9.  **Reconciliation:** Explain the process of reconciling the value indicators from different approaches to arrive at the final opinion of value.
10. **Final Opinion of Value:** State the appraiser's opinion of value, either as a single point estimate or a range of values.
11. **Assumptions and Limiting Conditions:** Disclose any assumptions made and limiting conditions that may affect the validity of the appraisal.
12. **Certification:** Include a signed certification by the appraiser, attesting to the accuracy of the report, compliance with USPAP, and lack of bias.

C. Types of Appraisal Reports:

1.  **Self-Contained Appraisal Report:** Provides a comprehensive and detailed description of the data, analysis, and reasoning used in the appraisal.  Sufficient information is included so that the intended users fully understand the appraisal.

2.  **Summary Appraisal Report:** Summarizes the data and analysis used in the appraisal, with references to supporting documentation. Often used in residential mortgage lending. The Fannie Mae/Freddie Mac Uniform Residential Appraisal Report (URAR) is a common example of this type.

3.  **Restricted Appraisal Report:**  Provides a minimal amount of information and is intended for use by a single client for a specific purpose. This type of report is not suitable for general use.

D. The Uniform Residential Appraisal Report (URAR):

1.  **Page 1: Subject Property and Neighborhood:** Contains information about the subject property's address, legal description, ownership, tax information, neighborhood characteristics, and site characteristics.

2.  **Page 2: Sales Comparison Approach:** Includes a grid for comparing the subject property to comparable sales, making adjustments for differences in characteristics, and arriving at an indicated value.

3.  **Page 3: Cost Approach, Income Approach, and PUD Information:** Provides space for the cost approach calculation, income approach analysis (if applicable), and project information for planned unit developments (PUDs).

4.  **Pages 4-6: Addendum, Limiting Conditions, and Certification:** Includes any addenda, the definition of market value, limiting conditions of the appraisal, and the appraiser's certification.

E. Point Estimate vs. Range Value:

1.  **Point Estimate:** Stating the final opinion of value as a single dollar amount. This is the most common form of value opinion.
2.  **Range Value:** Expressing the final opinion of value as a range of values. This may be appropriate when there is significant uncertainty or a lack of precise data.  However, the appraiser must provide a clear justification for using a range.

F. Rounding of Value Opinions:
* Value opinions should be rounded to reflect the level of precision in the data and analysis. Appraisers typically round to the nearest $100 or $1,000.

III. Review and Critical Analysis

Before finalizing the appraisal report, a thorough review is crucial.

A. Appraiser’s Self-Review:

1. Clarity and Understandability: Review the report to ensure it is clear, concise, and easily understandable to a non-appraiser reader.
2. Consistency: Check for internal consistency throughout the report, ensuring that data and analysis are consistent across all sections.
3. Support and Justification: Verify that all opinions and conclusions are adequately supported by data and analysis.
4. USPAP Compliance: Ensure that the report complies with all applicable USPAP requirements.

B. Third-Party Review (Optional):

*   Consider having another qualified appraiser review the report to identify any potential errors or omissions.
*   This is particularly important for complex or high-value assignments.
*   Reviewing other appraiser's reports is crucial to the review appraiser since they will be looking for any opening to discredit the appraiser’s reasoning and conclusions.
*   The appraiser should ask themself, "Will the work pass muster in a critical review? If it won’t, don’t send it!"

IV. Conclusion

Reconciliation and reporting are the cornerstones of a credible and reliable appraisal. Effective reconciliation requires the appraiser to exercise sound judgment, weigh the strengths and weaknesses of different value indicators, and arrive at a well-supported opinion of value. A well-written appraisal report communicates the appraiser’s analysis and conclusions clearly, accurately, and transparently, ensuring that the intended users can rely on the information provided.