Reconciliation and Reporting the Appraisal

Chapter 11: Reconciliation and Reporting the Appraisal

This chapter delves into the critical final stages of the appraisal process: reconciling the value indications derived from various approaches and communicating the final opinion of value in a clear, comprehensive, and defensible report. We will explore the principles underlying reconciliation, the factors influencing the reliability of value indicators, and the essential elements of a compliant appraisal report. This understanding is crucial not only for generating accurate appraisals but also for withstanding scrutiny from clients, reviewers, and legal challenges.

I. The Science of Reconciliation: Weighing and Balancing Value Indicators

Reconciliation is not a simple averaging of value indicators. It is a systematic process of analyzing the strengths and weaknesses of each approach to arrive at a single, credible opinion of value. It involves critical thinking, sound judgment, and a deep understanding of market dynamics.

• Definition: Reconciliation is the process of critically analyzing the value indications derived from different appraisal approaches (Sales Comparison, Cost, and Income) and available data to arrive at a single, supportable opinion of value for the subject property. This is a qualitative process based on reasoned judgment, not a quantitative averaging method.
• Scientific Foundation: Reconciliation is rooted in the principles of statistical inference and decision theory. We are essentially weighing evidence from different sources, each with its own associated error and bias, to arrive at the most probable estimate of the true value.

• Equation Analogy: While not a strict equation, the reconciliation process can be conceptually represented as:

  Value Opinion = w1*V1 + w2*V2 + w3*V3 + ε

  Where:
  * V1, V2, and V3 are the value indications from the Sales Comparison, Cost, and Income Approaches, respectively.
  * w1, w2, and w3 are the weights assigned to each approach, reflecting their relative reliability and relevance in the specific appraisal context ( w1 + w2 + w3 = 1).
  * ε represents a residual error term, acknowledging the inherent uncertainty in any valuation. This is influenced by factors not explicitly captured in the three approaches.

  Key takeaway: The crucial part is determining the weights, w1, w2, and w3. This requires a thorough understanding of the market and the subject property.

I.A. Steps in the Reconciliation Process: A Structured Approach

The reconciliation process involves several key steps:

1. Review and Verification: Scrutinize all data, calculations, and reasoning used in each appraisal approach.

   • Confirm the accuracy of all calculations. Even a minor arithmetic error can significantly skew the results.
   • Ensure consistency in applying appraisal techniques across the subject property and all comparables. For instance, if you’re adjusting for square footage in the Sales Comparison Approach, use the same methodology for all properties.

2. Assessing Reliability: Evaluate the reliability of each value indicator based on:

   • Amount of Data: Value indicators based on larger datasets, more detailed data, and independent sources are generally more reliable. For example, a Sales Comparison Approach based on five well-researched comparable sales is generally more reliable than one based on only two.
   • Accuracy of Data: The accuracy of the supporting data and the appraisal technique used to derive the indicator. Verified sales data from credible sources (e.g., deed records) is more reliable than unverified data from online listings.
   • Relevance to the Appraisal Problem: The consistency of the value indicator with the appraisal assignment’s terms and the appropriateness of the appraisal technique. The Income Approach is less relevant for a typical single-family residence than for an income-producing property.

3. Weighing Value Indicators: Assign relative weights to each value indicator based on its assessed reliability and relevance.

   • This is a judgmental process, not a purely mathematical one. Consider the strengths and weaknesses of each approach in the context of the specific property and market conditions.
   • Document the reasoning behind the assigned weights clearly in the appraisal report.

4. Deriving a Single Value Opinion: Combine the weighted value indicators to arrive at a single opinion of value.

   • This may involve selecting one of the value indicators as the most representative, adjusting it slightly based on the other indicators, or arriving at a value that falls within the range of the indicators.

5. Support and Justification: The selected value must be supported by the evidence and reasoning presented in the appraisal report.

I.B. Factors Influencing the Reliability of Value Indicators: A Deep Dive

The reliability of a value indicator is paramount in the reconciliation process. It depends on several factors:

1. Amount of Data:

   • Statistical Significance: A larger statistical sampling of data generally leads to a more reliable value opinion. This is based on the Law of Large Numbers, which states that as the sample size increases, the sample mean converges towards the population mean. In appraisal, this means that a value indicator based on more comparable sales will tend to be more accurate.
     • Practical Application: When using the Sales Comparison Approach, prioritize using as many comparable sales as possible, ideally exceeding three if the market provides ample data.
     • Related “Experiment”: Simulate a market with known property values. Generate random sales data with varying degrees of similarity to a subject property. Compare the accuracy of value estimates derived from small versus large samples of comparable sales.
   • Data Granularity: More detailed data allows for more precise adjustments and a more reliable value indicator.
     • Practical Application: Gather detailed information on comparable sales, including specific features, condition, financing terms, and any unusual circumstances affecting the sale.
   • Independent Sources: Value indicators supported by multiple independent sources are more credible.
     • Practical Application: Verify sales data from multiple sources, such as deed records, MLS listings, and interviews with parties involved in the transaction.

2. Accuracy of Data:

   • Verification: Thorough verification of data is crucial. Data should be verified with reliable sources.
     • Practical Application: Verify sales data directly with the buyer, seller, or their representatives.
     • Mathematical Analogy: Consider the concept of “measurement error”. Every data point has an associated error. Minimizing this error through rigorous verification increases data accuracy.
   • Relevance of the Technique: The appraisal technique used must be appropriate for the property type, market conditions, and appraisal problem.
     • Practical Application: The income capitalization approach would not be appropriate for vacant land.

3. Relevance to the Appraisal Problem:

   • Consistency with Assignment: The value indicator must be consistent with the terms of the appraisal assignment, including the definition of value, the property rights being appraised, and the effective date of the appraisal.
     • Practical Application: If appraising the value as of a date in the past, use sales data from that time period, not current sales data.
   • Appropriateness of Technique: The appraisal technique used must be appropriate for the property type and the intended use of the appraisal.
     • Practical Application: Appraising a commercial property for loan purposes would suggest income capitalization approach.

II. Reporting the Appraisal: Communicating Value with Clarity and Transparency

The appraisal report is the formal communication of the appraiser’s opinion of value and the reasoning behind it. It must be clear, accurate, and transparent, allowing the intended users to understand the appraisal process and reach their own informed conclusions.

II.A. Essential Elements of an Appraisal Report: A Checklist

USPAP (Uniform Standards of Professional Appraisal Practice) Standard 2 outlines the requirements for appraisal reports. A compliant report must include, at a minimum, the following elements:

1. Client and Intended Users: Clearly identify the client and any other intended users of the appraisal.
2. Intended Use: State the intended use of the appraisal (e.g., mortgage lending, estate planning).
3. Type of Value: Define the type of value being estimated (e.g., market value, assessed value). Include the specific definition being used.
4. Property Rights Appraised: Specify the property rights being appraised (e.g., fee simple, leasehold).
5. Effective Date of Appraisal: State the effective date of the appraisal.
6. Subject Property Identification: Provide a clear and accurate description of the subject property, including its address, legal description, and relevant characteristics.
7. Scope of Work: Describe the scope of work performed in the appraisal, including the extent of research, analysis, and data verification.
8. Assumptions and Limiting Conditions: Clearly state any assumptions or limiting conditions that affect the appraisal. Examples include assuming clear title, assuming the accuracy of information provided by others, or limiting the scope of the inspection.
9. Appraisal Approaches Used: Identify the appraisal approaches used (Sales Comparison, Cost, and Income) and explain the reasoning for including or excluding each approach.
10. Data and Analysis: Present the data and analysis used in each appraisal approach, including comparable sales data, cost data, and income data. Explain any adjustments made and the rationale behind them.
11. Reconciliation: Explain the reconciliation process and the reasoning for assigning weights to each value indicator.
12. Final Opinion of Value: State the appraiser’s final opinion of value.
13. Certification: Include a signed certification affirming the appraiser’s adherence to USPAP.
14. Supplemental information: including maps, photos, and sketches of the property.

II.B. Point Estimate vs. Range Value: Precision vs. Accuracy

• Point Estimate: The traditional appraisal report typically presents a point estimate – a single dollar amount representing the appraiser’s opinion of value. This implies a level of precision that may not always be justified.
• Range Value: An alternative approach is to provide a range value – an opinion of the range within which the property’s value is most likely to fall. This acknowledges the inherent uncertainty in the valuation process and may be more appropriate in certain situations.
• Rounding: Value opinions should be rounded to reflect the level of accuracy achievable. Rounding to the nearest $100 or $1,000 is generally appropriate for residential properties.

II.C. Ensuring Understandability: Writing for a Non-Appraiser Audience

The appraisal report should be written in a clear and concise manner that is easily understandable to a non-appraiser reader.

• Avoid Jargon: Minimize the use of technical jargon and explain any specialized terms that are necessary.
• Use Plain Language: Write in plain language, avoiding complex sentence structures and convoluted reasoning.
• Organize Logically: Organize the report logically, presenting the information in a clear and easy-to-follow sequence.
• Visual Aids: Use visual aids, such as maps, photographs, and charts, to enhance understanding.
• Clarity of Reasoning: Explicitly state all assumptions, analysis, and conclusions with clearly explained rationale.

By adhering to these principles, appraisers can ensure that their reports are not only compliant with USPAP but also effectively communicate their opinion of value to the intended users. This is crucial for building trust, avoiding misunderstandings, and protecting the appraiser from liability.