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Reconciliation and Appraisal Reporting
Chapter 11: Reconciliation and Appraisal Reporting
This chapter delves into the critical final steps of the appraisal process: reconciliation and reporting. We will explore the scientific principles and practical considerations involved in synthesizing value indicators and communicating your professional opinion in a clear, credible, and compliant manner.
I. Reconciliation: Synthesizing Value Indicators
Reconciliation is not simply averaging; it’s a critical analysis and weighting of different value indications to arrive at a single, supportable opinion of value. It requires the appraiser’s expertise, judgment, and experience to determine which indicators are most reliable and applicable to the specific appraisal assignment.
A. Defining Reconciliation:
- Reconciliation is the process of critically examining and weighting the value indications derived from different appraisal approaches (Sales Comparison, Cost, and Income) to arrive at a single, supportable opinion of value. It’s also performed within each approach, selecting and weighing comparables.
- It begins with a thorough review of all data, calculations, and reasoning used in each approach.
- mathematical averagingโโ is explicitly not considered an acceptable reconciliation technique.
B. Principles of Weighting:
The goal is to give greater weight to the most reliable and relevant value indications. Reliability and relevance are determined by:
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Data Quantity: Value indications based on larger, more detailed, and independently verified datasets are generally more reliable. Think of this in terms of statistical significance: the more data points you have, the smaller the standard error and more confident your estimate will be.
- Example: A sales comparison approach based on 5 well-matched comparables will generally be more reliable than one based on only 2.
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Mathematical Analogy: Consider a simple arithmetic mean of comparable sales prices. The standard error of the mean (SEM) is calculated as:
SEM = s / sqrt(n)Where:
*sis the standard deviation of the sample of comparable prices.
*nis the number of comparable sales.As
n(the number of comparables) increases, the SEM decreases, indicating a more precise estimate of the mean. While reconciliation isn’t a simple mean, this highlights the impact of the amount of data.
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Data Accuracy: The accuracy of the underlying data and the techniques used to derive the value indication is paramount. This necessitates careful verification of data sources and ensuring the chosen appraisal techniques are appropriate for the property type and market.
- Example: A cost approach based on inaccurate cost data or inappropriate depreciation estimates will be less reliable than a sales comparison approach using verified sales data.
- Practical Application: Always verify sales data with at least one party to the transaction (buyer, seller, or agent). Reviewing property records for accuracy is essential.
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Relevance to the Appraisal Problem: A value indication must be consistent with the assignment’s purpose, intended use, and defined value. The chosen appraisal technique must be appropriate for the property type, market conditions, and available data.
- Example: An income capitalization approach is typically irrelevant for a single-family owner-occupied residence unless it is currently being rented, but it’s very applicable for an apartment building.
C. Reconciliation Steps:
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Review and Verify: Thoroughly review all data, calculations, and reasoning in each appraisal approach. Correct any errors in computation or data.
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Consistency Check: Ensure consistent application of appraisal techniques across the subject propertyโ and comparables. For example, apply similar depreciation methods in the cost approach for all properties.
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Reliability Assessment: Evaluate the amount, accuracy, and relevance of the data supporting each value indication. Consider the source of the data and the verification methods used.
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Pertinent Data Inclusion: Ensure all pertinent and available data has been includeโd and appropriately analyzed. Missing key information can significantly impact the reliability of your conclusions.
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Adherence to Assignment Terms: Verify that all value indicators are derived in accordance with the terms of the appraisal assignment, including the definition of value, effective date, and any specific client requirements.
D. Example of Reconciliation in Practice:
Imagine an appraisal of a single-family residence where the Sales Comparison Approach indicates a value of \$450,000, the Cost Approach indicates a value of \$425,000, and an (inapplicable) Income Approach gives \$375,000 based on a high market rent assumption.
- The appraiser would critically analyze why the Income Approach is so low and deem it as irrelavant, due to low reliabilty.
- The appraiser would then assess that the most weight should be given to the Sales Comparison Approach due to the abundance of reliable comparable sales data.
- However, the appraiser might slightly lower the final opinion of value from \$450,000, since the cost approach is lower than the sales comparison approach.
- The appraiser concludes to a final opinion of value as $445,000.
II. Appraisal Reporting: Communicating Your Opinion
The appraisal report is the formal communication of your analysis, opinions, and conclusions. It must be clear, accurate, and compliant with all applicable regulations and standards (e.g., USPAP). The report should lead the reader logically from the statement of the appraisal problem to your final opinion of value.
A. Essential Components of an Appraisal Report:
While specific formats may vary, all appraisal reports must include the following essential elements, as dictated by USPAP Standard 2:
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Identification of the Client and Intended Users: Clearly state the name and type of the client and any other intended users of the appraisal. Crucially, also identify what not intended users, with a warning.
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Intended Use of the Appraisal: Specify how the appraisal will be used (e.g., mortgage lending, estate settlement, property tax appeal). This guides the scope of work and the level of detail required.
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Purpose of the Appraisal, including the Type of Value: State the objective of the appraisal (e.g., estimate market value, insurable value, liquidation value). Define the specific type of value being estimated (e.g., market value as defined by Fannie Mae).
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Identification of the Real Estate: Provide a clear and unambiguous legal description and address of the subject property. Include relevant physical characteristics such as size, shape, zoning, and location.
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Property Rights Appraised: Clearly state the specific property rights being appraised (e.g., fee simple estate, leasehold interest, easement).
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Effective Date of the Appraisal: The date as of which the value opinion is applicable. This is crucial because market conditions can change rapidly.
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Scope of Work: A detailed description of the procedures followed to develop the appraisal. This includes the data sources used, the appraisal approaches considered, and any limitations or assumptions made.
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Assumptions, Extraordinary Assumptions, and Hypothetical Conditions: Disclose and clearly explain any assumptions (things believed to be true), extraordinary assumptions (assumptions that, if found to be false, could affect the appraisal’s opinions or conclusions), or hypothetical conditions (assumptions contrary to known facts used for analysis).
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Relevant Characteristics of the Property: A thorough description of the subject property’s physical, legal, and economic characteristics that are relevant to the valuation process.
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Analysis of Market Data: A detailed analysis of relevant market data, including comparable sales, cost information, and income data.
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Appraisal Approaches Used: Describe the appraisal approaches used (Sales Comparison, Cost, and/or Income) and explain the reasoning for their selection or rejection.
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Reconciliation of Value Indicators: A clear explanation of the reconciliation process used to arrive at the final opinion of value, including the weighting of different value indications.
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Final Opinion of Value: A clear and concise statement of the appraiser’s opinion of value, expressed as a single point estimate. If warranted, a range may be provided, but it must be clearly justified.
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Signed Certification: A signed statement by the appraiser certifying compliance with USPAP and affirming the accuracy and objectivity of the appraisal.
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Supporting Documentation: Include all relevant supporting documentation, such as maps, photographs, sketches, and data sources.
B. Uniform Residential Appraisal Report (URAR):
The URAR is a standardized form commonly used for residential appraisals, particularly for mortgage lending purposes. It is designed to provide a consistent and comprehensive framework for reporting appraisal findings.
- Page 1: Focuses on describing the subject property, including its location, physical characteristics, and relevant legal information.
- Page 2: Devoted to the Sales Comparison Approach, including the selection and analysis of comparable sales.
- Page 3: Includes sections for the Cost Approach, Income Approach (if applicable), and PUD (Planned Unit Development) information.
- Pages 4-6: Contain the definition of Market Value, Limiting Conditions, and the Appraiser’s Certification.
C. Key Considerations for Reporting:
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Clarity and Conciseness: Use clear and concise language, avoiding jargon or technical terms that may not be understood by the intended users.
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Accuracy and Objectivity: Present all data and analyses accurately and objectively, avoiding bias or advocacy.
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Supportability: Ensure that all opinions and conclusions are supported by credible and reliable evidence.
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Compliance: Adhere to all applicable regulations, standards, and client requirements.
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Review and Proofreading: Thoroughly review and proofread the report for errors in grammar, spelling, and calculations.
D. Example of Report Wording
Sales Comparison Approach Reconciliation:
“Based on the adjusted sales prices of the comparable sales, the Sales Comparison Approach indicates a value range of $440,000 to $460,000. Comparable 1 was given the most weight in the reconciliation process due to its superior location and similarity to the subject property in terms of size and condition. Comparable 3 was given the least weight due to its significant distance from the subject property. After considering the strengths and weaknesses of each comparable sale, it is the appraiser’s opinion that the Sales Comparison Approach indicates a value of \$450,000 for the subject property.”
Final Opinion of Value:
“Based on the analysis and reconciliation of the appraisal approaches described above, it is the appraiser’s opinion that the market value of the subject property, as of [Effective Date], is \$445,000 (Four Hundred Forty Five Thousand Dollars).”
III. Conclusion
Reconciliation and appraisal reporting are crucial steps in the valuation process. By adhering to scientific principles, applying sound judgment, and communicating your findings clearly and accurately, you can produce credible and reliable appraisals that meet the needs of your clients and comply with all applicable regulations and standards. The aim of the report is to ensure that a reviewer can understand the appraisers opinion of value.
Chapter Summary
Here’s a detailed scientific summary of the chapter “Reconciliation and Appraisal Reporting” from the training course “Navigating Appraisal: History, Technology, and Regulation,” focusing on the topic of reconciliation and appraisal reporting:
Summary: Reconciliation and Appraisal Reporting
This chapter addresses the crucial stage of reconciliation in the appraisal process, where multiple value indicators are analyzed to arrive at a single, supportable opinion of value. It emphasizes the importance of appraiser judgment and experience over strict mathematicalโ formulas in the reconciliation process. The chapter also covers the elements required in appraisal reporting, primarily using the Uniform Residential Appraisal Report (URAR) as a framework.
Main Scientific Points:
- Definition of Reconciliation: Reconciliation is defined as the process of analyzing two or more value indicators to determine a single opinion of value. It also encompasses the broader step where the appraiser reaches their overall opinion. It involves values from different comparable properties, units of comparison, or appraisal techniques (e.g., sales comparison, cost approach, income approach).
- Subjectivity and Expertise: Reconciliation is explicitly stated to rely on the appraiser’s judgment and experience. Averaging values or using mathematical formulas is deemed inappropriate.
- Data Review and accuracyโ: The process necessitates a thorough review of all data, calculations, and reasoning leading to the various value indicators. This includes checking for accuracy in calculations, consistent application of appraisal techniques to the subject and comparables, and ensuring all pertinent data is included and appropriately analyzed.
- Reliability of Value Indicators: The reliability of each indicator is assessed based on three key factors:
- Amount of Data: Indicators based on largerโ statistical samples, more detailed data, or supported by multiple independent sources are considered more reliable.
- Accuracy of Data and Technique: This depends on the verification of supporting data and the relevance and appropriateness of the appraisal technique to the specific problem.
- Relevance to the Appraisal Problem: Value indicators must align with the terms of the appraisal assignment, and the technique used must be appropriate for the property type and market.
- Supportable Conclusions: The chosen reconciled value MUST be supported by evidence presented in the appraisal. Appraiser judgment is paramount.
- Point Estimate vs. Range Value: The chapter introduces the concept of a “point estimate” (a single dollar amount) as the final opinion of value, with an alternative “range value” being considered when it represents a more accurate representation of the value.
- Appraisal Reporting: The summary then shifts towards the reporting of the appraisal and the different elements of the URAR. It notes that an appraisal report is the document that leads a reader from the definition of the appraisal problem to a specific conclusion using reasoning and descriptive data. It further highlights that USPAP governs appraisal reports, but does not dictate the form, format or style of a report.
- The Uniform Residential Appraisal Report (URAR): Discusses the function and contents of the URAR. The report includes the description of the subject property, analysis of the neighborhood and site, the sales comparison approach, the cost approach, and income approach.
- Other Appraisal Reports: The report describes alternative forms, such as desktop and property inspection reports.
Conclusions and Implications:
- Reconciliation is a critical, subjective process: It is not a mechanical application of formulas but a reasoned analysis of available data.
- Appraiser credibility is paramount: The process requires expertise, sound judgment, and the ability to clearly communicate the reasoning behind the final value opinion.
- Data Quality Matters: The reliability of the appraisal is directly tied to the quality, quantity, and relevance of the data used.
- Reporting is an integral component of the appraisal process: It ensures transparency, allows for review, and communicates the appraiser’s findings in a clear and understandable manner. The appraiser determines the depth of the report required, not the client. The appraiser is responsible for ensuring that the report is not misunderstood in the marketplace.
In essence, the chapter emphasizes that reconciliation is the heart of the appraisal, bridging data collection and analysis with a defendable value opinion. The report is the conduit to communicate the appraiser’s results. The credibility of the appraisal profession hinges on the skill and integrity with which this process is executed and reported.
