Reconciliation and Reporting: Mastering Appraisal Outcomes

Chapter 11: Reconciliation and Reporting: Mastering Appraisal Outcomes

This chapter delves into the critical final stages of the appraisal process: reconciliation and reporting. We will explore the scientific principles underpinning these stages, highlighting the appraiser’s role in synthesizing data, resolving discrepancies, and communicating a well-supported value opinion in a clear, concise, and defensible manner.

I. The Science of Reconciliation: Weighing Value Indicators

Reconciliation is not a simple averaging of various value indications. Instead, it is a process of critical analysis and reasoned judgment aimed at arriving at a single, credible opinion of value. It acknowledges that different approaches and data points may yield varying results, and it seeks to resolve these differences through careful examination of the underlying assumptions, methodologies, and data reliability.

• Definition: Reconciliation is the process of analyzing two or more value indicators to arrive at a single, supportable value opinion. This encompasses reviewing data, calculations, and reasoning underlying each indicator to determine its reliability and relevance.

• Key Principles:

  • Objective Analysis: The process must be grounded in objective analysis rather than arbitrary selection. It involves a systematic review of all gathered data, calculations, and the reasoning used to derive each value indicator.

  • Data Verification: Ensuring the accuracy of the data supporting each value indicator is crucial. This involves verifying the data sources, checking calculations, and correcting any errors found.

  • Consistent Application: Appraisal techniques must be applied consistently across the subject property and all comparables. This reduces bias and ensures a fair comparison.
  • Reliability Assessment: Each value indicator’s reliability must be assessed based on the amount of data, its accuracy, and its relevance to the appraisal problem.
  • Comprehensive Data Inclusion: All pertinent data must be included and analyzed, ensuring a holistic view of the property’s value drivers.
  • Adherence to Assignment Terms: Value indicators must be derived in accordance with the specific terms and conditions of the appraisal assignment.
  • Mathematical Underpinnings: While reconciliation doesn’t rely on simple averaging, understanding statistical distributions and weight❓ed averages can provide a framework for thinking about the relative contribution of different value indicators. Imagine that you’ve calculated 3 sale prices adjusted and that these represent a range of plausible prices for the property in question.

  • Statistical Thinking: The goal of reconciliation could be formalized by considering the set of plausible prices as a probability distribution. We could calculate a sample variance (s2) to characterize the diversity of adjusted prices.

  • Weighted Average: The final opinion of value can be viewed as a weighted average where W is the weight, n is the sale number, and S is the indicated sale price.
    Value = Σ (Wn * Sn) where ΣWn = 1

  • The weights would be determined by the reliability and relevance of the adjusted sale price to the subject property.

  • The Role of Judgment: Reconciliation relies heavily on the appraiser’s experience and judgment. Mathematical formulas or simple averaging cannot replace the critical thinking required to synthesize diverse data points and arrive at a defensible value opinion. This judgement can be described as being affected by the following indicators: amount of data, the level of accuracy, and the relevance to the appraisal problem.

  • The amount of data is significant because value indicators are considered more reliable when they are based on a larger statistical sampling of data; they are derived from more detailed data; or, they are supported by several independent sources.

  • The accuracy of a value indicator depends on the accuracy of the supporting data, and the accuracy of the technique used to derive the indicator from the data.
  • The relevance of value indicator to the particular appraisal problem influences the appraiser’s judgment. The indicator itself must be consistent with the terms of the appraisal assignment. The appraisal technique used to derive the indicator must be appropriate.

• Practical Example: Consider an appraisal where the Sales Comparison Approach indicates a value of \$300,000, while the Cost Approach suggests \$285,000. The appraiser must delve deeper:

  1. Sales Comparison: Are the comparable sales truly comparable? Were adjustments made accurately and appropriately? Was there a high demand in the market when these sales occurred, potentially inflating prices?
  2. Cost Approach: Was the depreciation estimate accurate? Did it adequately account for functional obsolescence or external factors? Was the land value supported?
     Based on this deeper analysis, the appraiser might conclude that the Sales Comparison Approach is more reliable due to strong market evidence and well-supported adjustments. They might then place more weight on the \$300,000 indication, perhaps slightly adjusting it downward to account for uncertainties identified in the analysis, reaching a final value opinion of \$295,000.

• Experiment: Appraise a property using all three approaches to value (sales comparison, cost, and income). Identify the data points that have the biggest impact on each approach. Then, systematically vary these data points within a reasonable range and observe how the value indications change. This will help you understand the sensitivity of each approach and the importance of accurate data.

II. Reporting Appraisal Outcomes: Clarity, Transparency, and Defensibility

The appraisal report is the primary means of communicating the appraiser’s findings and conclusions to the intended users. It must be clear, transparent, and defensible, providing a logical and well-supported pathway from the initial problem definition to the final value opinion. The appraisal report is not the same thing as an appraisal. An appraisal is an opinion of value, which is based on professional experience and arrived at by following recognized valuation techniques. An appraisal report is the document by which the orderly process leading to the appraiser’s conclusions are communicated to the intended user(s).

• Essential Elements of a Comprehensive Appraisal Report:

  1. Problem Definition: A clear statement of the appraisal problem, including the intended use of the appraisal, the property rights appraised, and the effective date of the appraisal.

  2. Scope of Work: A detailed description of the scope of work performed, including the data sources used, the appraisal methods applied, and any limitations or assumptions made.

  3. Data Presentation: A thorough and organized presentation of all relevant data, including property characteristics, market information, and comparable sales data.

  4. Analysis and Reasoning: A clear and logical explanation of the appraiser’s analysis and reasoning, including the rationale for selecting and applying specific appraisal methods, and the basis for any adjustments made.

  5. Reconciliation: A detailed explanation of the reconciliation process, including the weighting given to different value indicators and the rationale for the final value opinion.

  6. Final Value Opinion: A clearly stated opinion of value, expressed as a point estimate (single dollar amount) or a range of values, along with the effective date of the opinion. An alternative to the Point Estimate is the “Range Value,” which is an appraiser’s opinion of the range in which the property’s value is most likely to fall.

  7. Certifications and Disclosures: Required certifications and disclosures, including the appraiser’s qualifications, independence, and compliance with applicable standards (e.g., USPAP).

• USPAP Reporting Standards: Uniform Standards of Professional Appraisal Practice (USPAP) Standard 2 dictates the requirements for appraisal reporting. It emphasizes the need for a report that is “not misleading” and provides sufficient information for intended users to understand the appraiser’s analysis and conclusions. Standard 2 of USPAP governs the content of an appraisal, it does not dictate the form, format or style of a report. These are determined by the appraiser and by the needs of the client.

• Uniform Residential Appraisal Report (URAR): The URAR form (or similar standardized forms) are commonly used in residential appraisals. These forms provide a structured framework for presenting data and analysis, ensuring consistency and comparability across appraisals. The Uniform Residential Appraisal Report form is one of the most commonly used form reports in the appraisal industry. This report is used in the vast majority of single-family residential appraisals made for mortgage lending purposes, and is required by most secondary market agencies.

  • Key Sections of the URAR:

    • Subject Section: Property address, legal description, tax information, and borrower/owner details.

    • Neighborhood Section: Description of the neighborhood, including its boundaries, characteristics, and market trends.

    • Site Section: Description of the subject site, including its dimensions, zoning, utilities, and any adverse conditions.

    • Improvements Section: Detailed description of the subject improvements, including their condition, materials, and features.

    • Sales Comparison Approach Section: Presentation of comparable sales data, adjustments, and the indicated value by the Sales Comparison Approach.

    • Cost Approach Section: (If applicable) Calculation of the cost to reproduce or replace the improvements, less depreciation, plus land value.

    • Income Approach Section: (If applicable) Analysis of the property’s income potential, using methods like the Gross Rent Multiplier (GRM).

    • Reconciliation Section: Summary of the value indications from the different approaches and the appraiser’s final value opinion.

• The “Critical Review” Test: A crucial element of defensibility is ensuring that the report can withstand scrutiny from a review appraiser or other interested party. Ask yourself: “Will this work pass muster in a critical review? If it won’t, don’t send it!” If the work is lacking, the appraiser is vulnerable to their reasoning and conclusions being discredited.

• Avoiding Common Reporting Pitfalls:

  • Lack of Support: Value adjustments that are not adequately supported by market data or analysis.
  • Inconsistent Reasoning: Contradictory statements or analyses within the report.
  • Vague Language: Use of ambiguous or unclear language that could be misinterpreted.
  • Omission of Relevant Information: Failure to disclose important facts or conditions that could affect the property’s value.
  • Cut-and-Paste Errors: Using canned language or boilerplate without tailoring it to the specific property and appraisal problem.

• Experiment: Obtain an appraisal report for a property similar to one you’ve appraised. Critically review the report, looking for areas where the analysis could be strengthened or where the reasoning is unclear. How could the report be improved to enhance its clarity, transparency, and defensibility?

III. Digital Tools and Technologies for Reconciliation and Reporting

The digital age offers powerful tools to enhance the accuracy, efficiency, and transparency of reconciliation and reporting.

• Data Analysis Software: Statistical software packages can be used to analyze market data, identify trends, and support value adjustments. Statistical analysis can be used to determine outliers that should be discounted in a reconciliation analysis.

• Mapping and GIS: Geographic Information Systems (GIS) can be used to visualize comparable sales data, identify neighborhood boundaries, and assess environmental factors.

• Automated Valuation Models (AVMs): While AVMs should not replace the appraiser’s judgment, they can provide a valuable data point in the reconciliation process, offering an independent estimate of value. Automated Valuation Models (AVMs) should only be used to assist the appraiser and should never be used as the sole source of value.

• Report Writing Software: Specialized report writing software streamlines the process of creating appraisal reports, ensuring compliance with USPAP standards and facilitating clear and organized data presentation. In markets with computerized data available, the report writing software helps to quickly analyze and synthesize sales data for the appraiser.

• Digital Signatures and Secure Delivery: Digital signatures and secure electronic delivery methods enhance the integrity and security of appraisal reports, preventing unauthorized alterations.

IV. Conclusion

Reconciliation and reporting are the culmination of the appraisal process, demanding careful analysis, reasoned judgment, and clear communication. By understanding the scientific principles underpinning these stages and leveraging available digital tools, appraisers can deliver well-supported, transparent, and defensible value opinions that meet the needs of their clients and stand up to scrutiny. Mastering these skills is essential for success in the digital age of real estate appraisal.