Mastering Appraisal Reconciliation & Reporting

Chapter 11: Mastering Appraisal Reconciliation & Reporting

I. Introduction to Appraisal Reconciliation

Reconciliation is the critical process in appraisal where the appraiser analyzes the results from various appraisal approaches (e.g., Sales Comparison, Cost, Income) and data points to arrive at a single, credible opinion of value. This isn’t a simple averaging exercise; it requires careful judgment, experience, and a deep understanding of the market and the subject property.

• Definition: Reconciliation is the systematic analysis of value indications derived from different appraisal approaches, comparable properties, units of comparison, and data sources to arrive at a final value opinion.
• Objective: To synthesize diverse information into a well-supported and defensible value conclusion.
• Importance: Reconciliation is the most subjective part of the appraisal process and heavily relies on the appraiser’s expertise. It’s the point where “art” meets “science” in valuation.
• Critical Review: The reconciled value and its supporting reasoning must be robust enough to withstand scrutiny from review appraisers and other stakeholders.

II. The Scientific Basis of Reconciliation

While not based on a single equation, reconciliation incorporates principles of statistics, market analysis, and decision theory.

• Statistical Weighting: Implicitly, the appraiser assigns different weights to different value indicator❓s based on their reliability and relevance. This is akin to a weighted average, but without a strict mathematical calculation. A value indicator with more supporting data, higher accuracy, and direct relevance to the appraisal problem receives a larger “weight” in the reconciliation process.

  • Example: If a property is owner-occupied, the Sales Comparison Approach should be given more weight than the Income Approach.
  • Decision Theory: Reconciliation can be viewed as a decision-making process under uncertainty. The appraiser must evaluate the potential for error in each value indicator and make a judgment about the most likely value range.
  • Market Efficiency: Reconciliation acknowledges that markets are not perfectly efficient. Different approaches capture different aspects of value, and their convergence suggests a more reliable value opinion. However, discrepancies may highlight market inefficiencies or unique property characteristics.

III. Factors Influencing the Reliability of Value Indicators

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

1. Amount of Data: A larger and more comprehensive dataset typically leads to a more reliable indicator.

   • Statistical Significance: A value indicator derived from a large sample size is more statistically reliable. The larger the sample size, the more accurately it reflects the population. This relies on the Central Limit Theorem, which states that the distribution of sample means approaches a normal distribution as the sample size increases, regardless of the population distribution.
   • Data Diversity: Data from multiple independent sources strengthens the reliability of the value indicator.
   • Example: Using 10 comparable sales is generally better than using 3, provided the 10 sales are truly comparable and accurately reflect the subject property.

2. Accuracy of Data: The accuracy of the underlying data directly impacts the reliability of the value indicator.

   • Verification: Data verification involves confirming the accuracy of information with reliable sources (e.g., buyers, sellers, brokers, public records).
   • Measurement Error: Minimize measurement errors (e.g., in square footage calculations, adjustments).
   • Example: Verifying sale prices directly with the buyer and seller, and scrutinizing the documentation is a sound practice.

3. Relevance of the Appraisal Technique: Choosing the appropriate appraisal technique based on the property type, market conditions, and intended use is crucial.

   • Market Suitability: The technique should be suited to the characteristics of the property and the market.
   • Intended Use Consistency: The technique should align with the purpose of the appraisal assignment.
   • Example: Using the income capitalization approach❓❓ for a single-family residence in a non-rental market would be less relevant than the Sales Comparison Approach.

IV. The Reconciliation Process: A Step-by-Step Guide

1. Review and Verification:

   • Data Audit: Scrutinize all data for accuracy, consistency, and completeness.
   • Calculation Check: Verify all calculations to eliminate mathematical errors.
   • Technique Consistency: Ensure appraisal techniques are applied consistently across the subject property and comparables.

2. Assess the Reliability of Value Indicators:

   • Data Sufficiency: Evaluate whether each value indicator is supported by an adequate amount of data.
   • Data Accuracy: Assess the degree to which the supporting data has been verified and deemed accurate.
   • Technique Relevance: Determine the suitability of each appraisal technique for the given appraisal problem.

3. Analyze Discrepancies:

   • Identify Outliers: Pinpoint value indicators that deviate significantly from the others.
   • Investigate Discrepancies: Analyze the reasons for any discrepancies and consider the underlying market dynamics.
   • Refine Adjustments: If applicable, refine adjustments based on the analysis of discrepancies.

4. Reconcile Value Indicators:

   • Weighted Judgment: Based on the reliability assessment, assign implicit “weights” to each value indicator.
   • Value Range Determination: Determine a plausible value range considering all value indicators.
   • Final Value Opinion: Select a single value opinion that is well-supported by the evidence and represents the most probable market value.

V. Practical Applications and Examples

Example 1: Single-Family Residence

• Approaches Used: Sales Comparison, Cost
• Value Indications:
  • Sales Comparison: \$350,000
  • Cost: \$375,000
• Reconciliation: The Sales Comparison Approach is deemed more reliable due to a robust dataset of recent comparable sales. The Cost Approach is given less weight due to the subjective nature of depreciation estimates. The final value opinion is \$355,000, reflecting a slight upward adjustment from the Sales Comparison Approach due to the Cost Approach supporting the property’s intrinsic value.

Example 2: Income-Producing Property

• Approaches Used: Sales Comparison, Income Capitalization
• Value Indications:
  • Sales Comparison: \$1,000,000
  • Income Capitalization: \$1,100,000
• Reconciliation: The Income Capitalization Approach is considered more reliable because the property’s value is primarily driven by its income-generating potential. The Sales Comparison Approach is given less weight due to limited comparable sales data. The final value opinion is \$1,075,000, reflecting a slight downward adjustment from the Income Capitalization Approach to account for market conditions as reflected in the Sales Comparison Approach.

VI. Mathematical Formulations (Illustrative)

While reconciliation isn’t a purely mathematical exercise, these formulas can help conceptualize the weighting process:

• Weighted Average (Conceptual):

  Value = (w1 * V1) + (w2 * V2) + ... + (wn * Vn)

  Where:

  • Value = Reconciled Value
  • w1, w2, …, wn = Weights assigned to each value indicator (summing to 1)
  • V1, V2, …, Vn = Value indications from different approaches.

• Weighting Example:

  • Sales Comparison Value (V1) = \$350,000, Weight (w1) = 0.6
  • Cost Value (V2) = \$375,000, Weight (w2) = 0.4
  • Reconciled Value = (0.6 * \$350,000) + (0.4 * \$375,000) = \$350,000 + \$150,000 = \$360,000

Note: The weights are subjective and assigned based on the appraiser’s judgment, not derived from a formula.

VII. Appraisal Reporting

The appraisal report must clearly and concisely document the reconciliation process. This includes:

• Listing all approaches used.
• Stating the value indication from each approach.
• Providing a detailed explanation of how the value indicators were reconciled.
• Justifying the final value opinion.
• Addressing any hypothetical conditions or extraordinary assumptions.

VIII. Point Estimate vs. Range Value

• Point Estimate: Stating the value opinion as a single dollar amount. This is the most common form of reporting.
• Range Value: Stating the value opinion as a range of values within which the property’s value is most likely to fall. This may be appropriate when there is significant uncertainty in the market.

Note: Regardless of the format, value opinions should be rounded to a reasonable level of precision.

IX. The Importance of Clear Communication

The appraisal report must be easily understandable to a non-appraiser reader. This requires:

• Using clear and concise language.
• Avoiding technical jargon.
• Providing sufficient detail to support the value conclusion.
• Organizing the report in a logical and coherent manner.

X. Conclusion

Mastering appraisal reconciliation is a crucial skill for any appraiser. It requires a combination of technical knowledge, analytical skills, and sound judgment. By understanding the scientific basis of reconciliation and following a systematic process, appraisers can develop well-supported and defensible value opinions that withstand critical review.