Reconciliation and Reporting of Value

Chapter 11: Reconciliation and Reporting of Value

This chapter delves into the critical final stages of the real estate valuation process: reconciliation and reporting. After exploring various approaches to value, the appraiser must synthesize the data and analyses into a single, credible opinion of value, and then communicate this opinion effectively in a comprehensive appraisal report.

I. Reconciliation: Synthesizing Value Indicators

Reconciliation is the process of critically analyzing the results obtained from different valuation approaches (e.g., cost approach, Sales Comparison Approach❓❓, income capitalization approach) and arriving at a single, supportable opinion of value. It is not a simple averaging of the different value indications. Instead, it involves a careful weighing of the strengths and weaknesses of each approach in the context of the specific appraisal assignment.

A. The Science of Weighing Evidence:

Reconciliation relies on principles of statistical inference and decision theory. Each value indicator can be considered an estimator of the true market value. The goal is to choose the “best” estimator, or a combination of estimators, based on their reliability and relevance.

1. Reliability: This relates to the accuracy and consistency❓ of the data and methods used.

   • Amount of Data (Sample Size): Value indicators based on larger and more comprehensive datasets are generally more reliable. This relates to the Law of Large Numbers: As the sample size (n) increases, the sample mean approaches the population mean (μ). Mathematically, the standard error of the mean (SEM) is calculated as:

     • SEM = σ / √n
       • Where:
         • σ = population standard deviation (estimated by sample standard deviation, s)
         • n = sample size

     • A lower sem❓ indicates a more precise estimate. Thus, larger datasets are preferable.

     • Example: An appraisal using 20 comparable sales is generally more reliable than one using only 3, assuming data quality is similar.

       • Data Verification: The accuracy of the data supporting each value indicator is crucial. Thorough verification minimizes errors and increases confidence in the results.
     • Experiment: An appraiser could track the time and effort spent verifying data for different sales and then correlate that effort with the magnitude of subsequent adjustments needed in the sales comparison approach. A strong negative correlation would suggest that more rigorous verification leads to more accurate data.
       • Model/Technique Accuracy: This refers to the inherent limitations of the valuation technique itself.
     • Example: The cost approach relies heavily on accurate cost data and depreciation estimates, which can be subjective and difficult to quantify accurately. The sales comparison approach is only as good as the comparability of the sales.
       2. Relevance: This refers to the applicability of the approach to the specific property and assignment.
       • Consistency with Assignment: The value indicators must align with the intended use, property rights being appraised, and effective date of the appraisal.
     • Example: Using a discounted cash flow analysis (DCF) with a terminal capitalization rate might be appropriate for an income-producing property but inappropriate for a simple single-family residence appraisal for mortgage lending.
       • Appropriateness of Technique: The valuation technique must be suitable for the property type and market conditions.
     • Example: The income capitalization approach is typically most relevant for income-producing properties like apartments or office buildings, less relevant for owner-occupied residences. The sales comparison approach is usually favored for single-family homes.

B. Mathematical Considerations (Weighting):

While averaging is not used, the concept of weighted averages can be helpful in understanding the reconciliation process. Imagine each value indicator as an estimate V_i with an associated weight w_i representing its reliability and relevance (0 ≤ w_i ≤ 1, and Σw_i = 1). The reconciled value V_r could conceptually be represented as:

• V_r = Σ (w_i V_i)

• Example:

  • Sales Comparison Approach (V₁): $300,000 (w₁ = 0.6) - Most weight due to ample comparable sales
  • Cost Approach (V₂): $280,000 (w₂ = 0.3) - Some weight, but depreciation is difficult to estimate accurately
  • Income Capitalization Approach (V₃): $270,000 (w₃ = 0.1) - Least weight as the property is primarily owner-occupied, and rental data is limited
  • V_r = (0.6 * $300,000) + (0.3 * $280,000) + (0.1 * $270,000) = $291,000

• Important Note: This is a simplified example. The appraiser does not explicitly calculate weights. The weights represent the appraiser’s professional judgment, not explicit numerical inputs. The appraiser will select a single value point, considering the above calculation to be an indication of what is most likely, given the available information.

C. Practical Application - Reconciliation Checklist:

1. Review Data and Calculations: Ensure accuracy and consistency across all approaches. Recalculate where needed.
2. Identify Strengths and Weaknesses: Objectively assess the reliability and relevance of each approach.
3. Analyze Market Conditions: Consider current market trends and their impact on each value indicator.
4. Weigh the Evidence: Prioritize the approaches that are most applicable and reliable for the subject property and market.
5. Justify the Reconciled Value: Provide a clear explanation of the reasoning❓ behind the chosen value, emphasizing the supporting evidence.

II. Reporting of Value: Communicating the Opinion

The appraisal report serves as the primary means of communicating the appraiser’s analysis, reasoning, and conclusions to the intended users. It must be clear, concise, and understandable to a non-appraiser reader.

A. Essential Components of the Appraisal Report:

1. Clear Identification of the Property: Complete and accurate legal description and street address.
2. Statement of Purpose and Intended Use: Explicitly state the purpose of the appraisal and the intended use of the report.
3. Definition of Value: Clearly define the type of value being estimated (e.g., market value, investment value, insurable value).
4. Effective Date of the Appraisal: The specific date to which the value opinion applies.
5. Scope of Work: Detailed description of the research, data, and analyses performed.
6. Data and Analysis: Presentation of relevant data, including property characteristics, comparable sales, cost data, and income information.
7. Valuation Approaches: Explanation of the valuation approaches considered and the reasoning for including or excluding them.
8. Reconciliation: Clear explanation of the reconciliation process and the rationale for the final value opinion.
9. Final Opinion of Value: A single dollar amount representing the appraiser’s opinion of value (point estimate). A range value can also be included when appropriate.
10. Assumptions and Limiting Conditions: Identification of any assumptions or limiting conditions that affected the appraisal.
11. Appraiser’s Certification: Statement affirming the appraiser’s qualifications, independence, and adherence to professional standards (e.g., USPAP).

B. Point Estimate vs. Range Value:

1. Point Estimate: A single dollar amount representing the most probable value. This is the most common form of value opinion.
2. Range Value: A range of values within which the appraiser believes the property’s value is most likely to fall. This may be appropriate when there is significant uncertainty or market volatility.

C. Rounding:

Value opinions should be rounded to a reasonable degree of precision. Reporting a value down to the exact dollar is generally inappropriate and suggests a false sense of certainty. Rounding to the nearest $1,000 or $5,000 is often appropriate, depending on the property value and market conditions.

D. Uniform Appraisal Dataset (UAD):

The UAD specifies standardized definitions and formats for certain data elements in appraisal reports, particularly those used for mortgage lending. Adherence to the UAD ensures consistency and facilitates data analysis.

E. Ensuring Clarity and Understandability:

1. Use clear and concise language: Avoid jargon and technical terms that may not be familiar to the reader.
2. Organize the report logically: Follow a consistent structure and use headings and subheadings to guide the reader.
3. Provide supporting documentation: Include photographs, maps, and other relevant exhibits to support the analysis.
4. Review the report carefully: Check for errors in grammar, spelling, and calculations.
5. Anticipate critical review: Ensure that the report is well-supported, clearly reasoned, and defensible against scrutiny.
   • Consider, “Will the work pass muster in a critical review? If it won’t, don’t send it!”

F. Example - Reporting the Sales Comparison Approach Analysis and Reconciliation:

“Based on the sales comparison analysis, the adjusted sales prices of the comparable properties ranged from $285,000 to $310,000. Comparable #1 was given the most weight in the reconciliation process because it was the most similar to the subject property in terms of location, size, and condition. Comparable #2 required significant adjustments due to differences in lot size, and comparable #3 was located in a slightly less desirable neighborhood. Considering these factors, the indicated value by the sales comparison approach is $295,000.”

III. Conclusion

Reconciliation and reporting are the culminating steps in the real estate valuation process. By carefully analyzing the results of different valuation approaches and effectively communicating the findings in a comprehensive appraisal report, the appraiser provides a credible and reliable opinion of value that supports informed decision-making. The reliance on judgement is the single, most important factor in reconciliation.