Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction to Reconciliation

Reconciliation is the critical process in appraisal where the appraiser analyzes multiple value indicators derived from different appraisal approaches or comparable properties to arrive at a single, supportable opinion of value. This isn’t simply averaging; it involves critical judgment and a deep understanding of the data’s reliability and relevance.

• A. Definition: Reconciliation is the process of critically analyzing and weighing the value indications derived from different appraisal approaches (sales comparison, cost, and income) and/or different comparable properties to arrive at a final, single opinion of value for the subject property.
• B. Purpose: The goal is not to find the “average” value, but to determine the most credible and well-supported value based on the specific characteristics of the subject property and the available market data.
• C. Importance: A well-reasoned reconciliation demonstrates the appraiser’s competence and provides a strong defense against challenges or critical reviews of the appraisal.

II. Principles of Reconciliation

Reconciliation requires a rigorous review of all data, calculations, and reasoning used to arrive at the different value indicators. mathematical averaging❓ is explicitly not part of this process. Instead, the appraiser applies judgment based on experience and a deep understanding of appraisal principles.

• A. Review and Verification:
  • 1. Accuracy: All calculations must be meticulously checked for errors.
  • 2. Consistency: Appraisal techniques should be applied consistently to the subject property and all comparables. This includes adjustments, data verification, and application of market principles.
• B. Reliability Assessment:
  • 3. Data Sufficiency: Evaluate whether the data used is sufficient for a reliable value conclusion.
  • 4. Data Verification: Verify the accuracy of all data used, including sales information, cost estimates, and income data.
• C. Relevance Evaluation:
  • 5. Appropriateness: Ensure each appraisal technique used is appropriate for the property type and the appraisal problem.
  • 6. Assignment Compliance: Verify the value indicators align with the appraisal assignment’s purpose and intended use.
• D. The Appraiser’s Judgment:
  • The final selection of a reconciled value must be supported by evidence and well-reasoned explanations.
  • Mathematical techniques like averaging are inappropriate as the sole basis for a final value opinion.

III. Factors Influencing the Reliability of Value Indicators

The reliability of a value indicator is directly related to the amount, accuracy, and relevance of the data used to derive it. These factors provide the basis for weighting the various value indicators during the reconciliation process.

• A. Amount of Data: Value indicators are generally considered more reliable when:

  • 1. Statistical Sampling: Based on a larger statistical sample of data (e.g., a larger number of comparable sales). A larger sample size reduces the impact of outliers and provides a more stable estimate. This aligns with statistical principles where larger samples generally lead to smaller standard errors and more reliable estimates of population parameters.
  • 2. Data Detail: Derived from more detailed data (e.g., detailed cost breakdowns rather than generalized estimates).
  • 3. Independent Sources: Supported by several independent sources (e.g., verifying sales data with both the buyer and seller). Independent verification minimizes bias and increases confidence in the data’s accuracy.

• B. Accuracy of Data: Accuracy depends on the verification of supporting data and the technique used.

  • 1. Data Verification: Accuracy is enhanced through thorough❓❓ verification of data (e.g., confirming sales details with both parties to the transaction).
  • 2. Technique Relevance: The chosen appraisal technique should be relevant to the appraisal problem (e.g., the income capitalization approach is more relevant for income-producing properties).

• C. Relevance to the Appraisal Problem: The appraiser must consider the relevance of the value indicator to the specific assignment.

  • 1. Assignment Consistency: The indicator must be consistent with the terms and purpose of the appraisal assignment.
  • 2. Technique Appropriateness: The appraisal technique used must be appropriate for the specific property type and market conditions. For example, using the cost approach for a property with significant functional obsolescence may yield an unreliable indicator.

  • Example: Appraising a single-family residence, the sales comparison approach, using recent sales of similar homes in the same neighborhood, would typically be given the most weight due to its direct relevance and reliance on actual market transactions.

IV. Mathematical Considerations in Reconciliation

While averaging is inappropriate, a weighted average based on the appraiser’s judgment can be useful for visualizing the relative importance of different value indicators.

• A. Weighted Average (Visualization):

  • Let $V_i$ represent the value indicator from approach or comparable $i$.
  • Let $w_i$ represent the weight assigned to value indicator $i$, where $\sum w_i = 1$ (the sum of all weights equals 1).

  • The weighted average, $V_{WA}$, can be calculated as:

    $$V_{WA} = \sum (w_i \cdot V_i)$$

  • Example:

    • Sales Comparison Approach (V1): \$300,000, Weight (w1): 0.6
    • Cost Approach (V2): \$280,000, Weight (w2): 0.2
    • Income Approach (V3): \$290,000, Weight (w3): 0.2

    $$V_{WA} = (0.6 \cdot \$300,000) + (0.2 \cdot \$280,000) + (0.2 \cdot \$290,000) = \$294,000$$

  • Note: This weighted average is not the final value opinion. It is a tool to visualize the appraiser’s weighting and judgment. The appraiser must still select a single value.

V. The Final Value Opinion

The final value opinion is the appraiser’s best estimate of the property’s value based on the reconciled value indicators and all relevant market data.

• A. point estimate❓ vs. Range Value:
  • 1. Point Estimate: A single dollar amount representing the appraiser’s opinion of value.
  • 2. Range Value: An alternative approach presenting a range within which the property’s value is most likely to fall. The use of a range, however, may not be accepted by all clients and requires thorough justification.
• B. Rounding: Value opinions should be rounded to a level appropriate for the property type and market conditions. Reporting a value to the nearest dollar is generally inappropriate.
• C. Subject to Conditions:
  • As-Is: Appraised based on the property’s current condition.
  • Subject To: Appraised subject to certain repairs, alterations, or inspections being completed. These conditions must be clearly outlined, and the impact on value explained. Hypothetical conditions or extraordinary assumptions must be explicitly stated.

VI. Completing the appraisal report❓

The final step is to clearly and concisely communicate the reconciliation process and the final value opinion in the appraisal report.

• A. Reconciliation Section:
  • Describe the value indicators considered❓❓ (sales comparison, cost, income).
  • Explain the weight given to each indicator and the reasons for that weighting.
  • Clearly state the final reconciled value opinion.
• B. Appraisal Conditions:
  • Indicate whether the appraisal is “as is” or “subject to” conditions.
  • List any extraordinary assumptions or hypothetical conditions.
• C. Assignment Elements:
  • Reaffirm the purpose of the appraisal.
  • Sign and date the report and include the appraiser’s license or certification number.

VII. Self-Review and Clarity

Before finalizing the report, the appraiser should review the entire document to ensure it is clear, concise, and easily understandable to a non-appraiser reader.

• A. Clarity: The report should be free of technical jargon and ambiguous language.
• B. Supportability: The final value opinion must be logically supported by the data and analysis presented in the report.
• C. Defensibility: The report should be structured to withstand scrutiny from review appraisers or other stakeholders.

By following these guidelines, appraisers can produce credible, well-supported value opinions that meet professional standards and withstand critical review.