Reconciliation and Appraisal Reporting

Chapter 11: Reconciliation and appraisal report❓ing

IV. CHAPTER SUMMARY
I. Reconciliation is the process of analyzing two or more different value indicators, to reach a single opinion of value.
A. Reconciliation can also refer to the step in the appraisal process where the appraiser reaches an opinion of value.
B. Reconciliation is used to reconcile values indicated by different comparable properties, different units of comparison, and/or different appraisal technique❓s.

II. Reconciliation depends on the appraiser’s judgment and experience.
A. Mathematical formulas or techniques (such as averaging) are not used in reconciliation.
B. The process of reconciliation begins with a review of all the data, calculations, and reasoning that have led to the different value indicators.
1. All calculations must be checked for accuracy, and any mistakes corrected.
2. The different appraisal techniques must be applied consistently to the subject property and to all comparables.
3. The appraiser must assess the reliability of each value indicator.
4. All pertinent data must be included and analyzed.
5. The value indicators must be derived in accordance with the terms of the appraisal assignment.

III. The reliability of a value indicator depends on the amount of data, the level of accuracy, and the relevance to the appraisal problem.
A. The amount of data is significant because value indicators are considered more reliable when:
1. They are based on a larger statistical sampling of data;
2. They are derived from more detailed data; or
3. They are supported by several independent sources.
B. 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.
1. The accuracy of data depends on how well it has been verified.
2. The accuracy of the appraisal technique depends on the relevance of the technique to the problem.
C. The relevance of value indicator to the particular appraisal problem influences the appraiser’s judgment.
1. The indicator itself must be consistent with the terms of the appraisal assignment.
2. The appraisal technique used to derive the indicator must be appropriate.

Reconciliation and Final Value Opinion

IV. The choice of a reconciled value should be supported by the evidence in the appraisal.
A. The appraiser’s judgment must be the determining factor.

V. The process of reaching an opinion of value is essentially the same as the reconciliation process.
A. The appraiser reviews all data, calculations, and reasoning contained in the entire appraisal.
B. The reliability of each value indicator is assessed.
C. If necessary, additional data is collected, and additional analysis is performed.

VI. The appraiser completes the Uniform Residential Appraisal Report’s Reconciliation section.
A. The appraiser indicates if the appraisal was made as is or is subject to the property being altered.
B. Any conditioning factors are listed.
C. Any appraisal approaches used are listed.
D. The purpose of the appraisal is reaffirmed.
E. The opinion of market value is set forth, and the appraiser signs and dates the appraisal report and includes his or her appraisal license or certification number.

VII. An opinion of value of an appraised property is stated as a single dollar amount❓❓ known as a “Point Estimate.”
A. 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.
B. Value opinions should be rounded.

VIII. An appraiser should review his or her work to ensure that it is easily understandable to a non-appraiser reader.

Detailed Scientific Content: Reconciliation and Appraisal Reporting

1. Introduction to Reconciliation in Real Estate Appraisal

   • Definition of Reconciliation: Reconciliation, in the context of real estate appraisal, is the critical process of synthesizing the value indications derived from multiple appraisal approaches (sales comparison, cost, and income capitalization) into a single, supportable, and defensible final value opinion. It is not a simple averaging of the results, but a reasoned analysis weighing the reliability and relevance of each approach.
   • Purpose: The primary goal of reconciliation is to arrive at the most credible and accurate❓ estimate of market value, given the specific characteristics of the subject property and the prevailing market conditions.

2. Scientific Principles Underlying Reconciliation

   • Statistical Weighting: While not employing explicit mathematical formulas, reconciliation inherently relies on statistical principles of weighting. Greater weight is assigned to value indicators with more reliable data, smaller standard deviations, and stronger correlations to the subject property.
   • Bayesian Inference: The appraiser acts as a Bayesian estimator, updating their prior beliefs about value based on new evidence from each appraisal approach. The prior is adjusted based on the likelihood and confidence associated with the new data.
   • Decision Theory: The reconciliation process can be viewed through the lens of decision theory. The appraiser weighs the potential costs (e.g., errors, legal challenges) and benefits (e.g., accuracy, defensibility) associated with relying on each value indicator.
   • Example: If the sales comparison approach uses a large sample of recent, highly comparable sales with minimal adjustments, it will likely receive greater weight than the cost approach, which involves estimating depreciation and subjective inputs.

3. Factors Influencing the Reliability of Value Indicators

   • Data Quantity: A larger sample size generally leads to a more reliable value indicator. Statistical theory dictates that increasing sample size reduces the standard error of the estimate.
   • Data Accuracy: The accuracy of the supporting data is crucial. This is assessed through thorough verification and validation.
     * Formula: Error = |Actual Value - Reported Value|
     * Minimizing error through robust verification methods.
   • Relevance: The relevance of the appraisal technique to the property type and market conditions significantly impacts the reliability of the value indicator.
     • Sales Comparison Approach: Most relevant for properties with active markets.
     • Cost Approach: Most relevant for newer or unique properties where reliable sales data is scarce.
     • Income Approach: Most relevant for income-producing properties.

4. Techniques for Analyzing Value Indicators

   • Sensitivity Analysis: Evaluating how changes in key assumptions (e.g., capitalization rate, depreciation rate) affect the resulting value indicators. This helps to identify the most critical variables influencing the value opinion.
   • Correlation Analysis: Assessing the correlation between the value indicators and other relevant market data. Higher correlation suggests greater reliability.
     • Formula: Pearson Correlation Coefficient (r) to quantify the strength and direction of linear relationships.
   • Scenario Planning: Developing different scenarios based on potential future market conditions and evaluating how each value indicator would perform under those scenarios.
     • Example: A scenario where interest rates rise may significantly impact the income approach, necessitating a reduction in its weight.

5. Mathematical Underpinnings (Examples using Latin Notation)

   • Weighted Average (Conceptual representation, NOT to be used in appraisal): While simple averaging is discouraged, the concept of a weighted average illustrates the underlying principle of reconciliation.
     • Formula: Value = (w1 * V1) + (w2 * V2) + (w3 * V3) where V1, V2, and V3 are the value indicators, and w1, w2, and w3 are their corresponding weights (Σwi = 1).
   • Capitalization Rate Sensitivity: Demonstrating how a change in cap rate impacts value.
     • Formula: Value (V) = Net Operating Income (NOI) / Capitalization Rate (R)
     • Example: dV/dR = -NOI/R^2 (This demonstrates the inverse relationship between cap rate and value).

6. Practical Applications and Related Experiments

   • Case Study: Appraising a mixed-use property
     • Sales Comparison Approach: Review comparable sales adjustments to determine which sales are most reflective of the subject’s characteristics. Conduct sensitivity analysis on key adjustments (e.g., location, size).
     • Cost Approach: Validate cost estimates using local construction data and cost manuals. Assess the impact of different depreciation rates on the final value indicator.
     • Income Approach: Perform sensitivity analysis on the capitalization rate and vacancy rate. Analyze the financial stability of tenants and lease terms.
     • Reconciliation: Justify the weighting assigned to each approach based on the reliability and relevance of the data. Address any discrepancies or inconsistencies in the value indicators.
   • Experiment: Develop a Monte Carlo simulation to assess the impact of uncertainty in key assumptions on the final value opinion. This involves running hundreds or thousands of simulations with randomly generated inputs within specified ranges.
     * Example: Varying capitalization rates, rental growth rates, and expense ratios within a defined probability distribution to simulate a range of potential value outcomes.

7. Appraisal Reporting

   • Clear Articulation: The appraisal report must clearly articulate the reconciliation process, including the rationale for the weighting assigned to each value indicator.
   • Justification: Provide a well-reasoned justification for the final value opinion, supported by market data and analytical techniques.
   • Transparency: Transparency is essential for defensibility. The appraiser must disclose all pertinent data, assumptions, and analytical methods used in the reconciliation process.

8. Conclusion

   • Reconciliation is a critical and scientifically informed step in the real estate appraisal process. By carefully analyzing the reliability and relevance of different value indicators, applying statistical principles, and exercising sound judgment, appraisers❓ can arrive at credible and supportable estimates of market value. The appraisal report must transparently document this process to ensure its defensibility and understandability.