Reconciliation and Appraisal Reporting

Chapter 11: Reconciliation and Appraisal Reporting

This chapter delves into the critical final stages of the real estate income estimation process: reconciliation and appraisal reporting. It explores the scientific principles underlying value reconciliation and provides a detailed guide to producing a comprehensive and defensible appraisal report.

I. Reconciliation: Synthesizing Value Indicators

Reconciliation is the process of critically analyzing multiple value indicators derived from different appraisal approaches (sales comparison, cost, income) or data sets to arrive at a single, supportable opinion of value. It is not simply averaging the results.

A. The Essence of Reconciliation

• Reconciliation is the process of weighing the reliability, relevance, and accuracy of each value indicator to form a final value conclusion. It’s an analytical process, not a mathematical❓ one.
• Reconciliation is a synthesis of evidence, leading to a single, well-supported estimate. It is the appraiser’s judgment that ultimately determines the final value opinion.
• It’s essential to remember that reconciliation is also used within each appraisal approach, such as reconciling the adjusted sale prices of comparable properties within the Sales Comparison Approach.

B. Principles Guiding Reconciliation

1. Review and Verification:

   • All data, calculations, and reasoning that led to each value indicator must be scrupulously reviewed for accuracy.
   • Equation: Error Correction. If a calculation resulted in a valuation estimate V and an error correction is found, a correct estimate V’ must be obtained: V’ = f(Corrected Inputs)

   • Example: An appraiser mistakenly used 1,500 sq ft as the building area instead of 1,600 sq ft. This needs correction in every approach affected.
     2. Consistency:

   • Appraisal techniques (e.g., capitalization rates, adjustments for square footage) must be applied consistently across the subject property and all comparables.

   • If inconsistent application is necessary, thoroughly explain and support the rationale.
     3. Reliability:

   • Assess the reliability of each value indicator, considering the quantity and quality of supporting data and the appropriateness of the appraisal technique.

   • Equation: Reliability Score for Value Indicator. A simplified example might weigh data quantity (Q), data accuracy (A), and technique relevance (R) on a scale of 0-1: Reliability = w1Q + w2A + w3R*, where w1, w2, and w3 are weights reflecting relative importance (w1+w2+w3 = 1).

   • Example: A sales comparison approach based on five recent, similar sales is generally considered more reliable than an income approach based on limited market rental data.
     4. Pertinence:

   • All pertinent data must be included and analyzed. Avoid selective inclusion that favors a predetermined outcome.

   • Transparency is key. Disclose any data or analysis excluded and explain why.
     5. Adherence to Assignment:

   • Value indicators must be derived in accordance with the terms of the appraisal assignment (e.g., definition of value, property rights appraised, intended use).

   • If a value indicator deviates from the assignment, it should be given less weight or excluded from the reconciliation.

C. Factors Affecting Reliability

1. Amount of Data:

   • Value indicators based on larger statistical samples are generally more reliable.
   • Detailed data is more reliable than general data (e.g., precise building measurements vs. estimates).

   • Indicators supported by multiple independent sources are more credible.
     2. Accuracy of Data:

   • Data accuracy depends on the extent of verification efforts. Document all verification steps.

   • The accuracy of the appraisal technique depends on its relevance to the appraisal problem.

   • Example: In a rapidly changing market, relying solely on historical sales data (even with many sales) may be less accurate than an income approach that incorporates current market trends.
     3. Relevance:

   • The value indicator should be consistent with the appraisal assignment’s terms.

   • The appraisal technique should be appropriate for the property type and the intended use of the appraisal.
   • Example: The Income Capitalization Approach is usually more relevant for income-producing properties like apartment buildings than for single-family homes.

D. Common Reconciliation Mistakes

• Averaging: Simply averaging the results of different approaches disregards the relative strengths and weaknesses of each indicator.
• Cherry-Picking: Selecting only the value indicator that supports a preconceived opinion of value, ignoring contradictory evidence.
• Insufficient Explanation: Failing to adequately explain the rationale for assigning different weights to the value indicators.
• Ignoring Data Quality: Overemphasizing a value indicator that is based on unreliable or poorly verified data.

II. Appraisal Reporting: Communicating the Value Opinion

The appraisal report is the vehicle for communicating the appraiser’s findings, reasoning, and final value opinion. It must be clear, accurate, and well-supported, capable of withstanding critical scrutiny.

A. Principles of Effective Appraisal Reporting

1. Clarity:

   • Use precise language and avoid jargon or ambiguity.
   • Organize the report logically and use headings and subheadings to enhance readability.

   • Write for the intended user, considering their level of understanding.
     2. Accuracy:

   • Ensure all data, calculations, and statements are accurate and verifiable.

   • Cite all sources of information and clearly identify any assumptions or limiting conditions.
     3. Completeness:

   • Include all relevant information necessary for the intended user to understand the appraisal process and the basis for the value opinion.

   • Address all elements required by USPAP and any specific requirements of the client or intended users.
     4. Objectivity:

   • Present the appraisal in a neutral and unbiased manner.

   • Avoid advocacy for any particular outcome.

   • Disclose any potential conflicts of interest.
     5. Supportability:

   • Provide clear and convincing evidence to support all conclusions.

   • Explain the reasoning behind each adjustment, analysis, and value opinion.
   • Document all steps taken in the appraisal process in the work file.

B. Key Components of an Appraisal Report (As Applicable to URAR)

1. Subject Property Description:

   • Accurate and detailed description of the property, including address, legal description, physical characteristics, site characteristics, and any relevant improvements.

   • Example: “The subject property is a single-family dwelling located at 123 Main Street, Anytown, USA, legally described as Lot 1, Block A, Subdivision X, per the recorded plat. It features a 3-bedroom, 2-bath layout, a detached two-car garage, and a fenced backyard.”
     2. Purpose of the Appraisal:

   • clearly state❓ the purpose of the appraisal (e.g., mortgage lending, estate planning, litigation support).

   • Identify the intended user(s) of the appraisal.
     3. Definition of Value:

   • Specify the definition of value being used (e.g., market value, insurable value, liquidation value).

   • Ensure the definition is appropriate for the intended use of the appraisal.
     4. Effective Date of Appraisal:

   • State the date on which the value opinion is effective.

   • The effective date may differ from the report date.
     5. Scope of Work:

   • Describe the scope of work performed, including the extent of research, data collection, and analysis.

   • Justify any limitations on the scope of work.
     6. Assumptions and Limiting Conditions:

   • Clearly state any assumptions or limiting conditions that affected the appraisal.

   • Explain the potential impact of these assumptions or conditions on the value opinion.
     7. Analysis and Conclusions:

   • Present a detailed analysis of all relevant data and factors considered in the appraisal process.

   • Support all conclusions with credible evidence and logical reasoning.

   • Explain the rationale for selecting specific comparables, capitalization rates, or discount rates.
     8. Approaches to Value:

   • Describe each approach to value considered (sales comparison, cost, income).

   • Explain why each approach was included or excluded, and provide a summary of the findings for each approach used.
   • Sales Comparison: 368
   • Cost: 371

   • Income: 372
     9. Reconciliation:

   • Provide a clear and concise explanation of the reconciliation process, including the weight assigned to each value indicator and the rationale for the final value opinion.
     10. Final Value Opinion:

   • State the appraiser’s final opinion of value as a single point estimate❓ (e.g., \$350,000) or a range of values (e.g., \$340,000 to \$360,000).

   • Round the value opinion appropriately.
     11. Certifications and Signatures:

   • Include all required certifications, attesting to the appraiser’s competence, objectivity, and compliance with USPAP.

   • Sign and date the appraisal report, including the appraiser’s license or certification number.
     12. Addenda:

   • Include any necessary addenda, such as maps, photographs, floor plans, or supporting documentation.

   • All attachments must be clearly labeled and referenced in the body of the report.

C. Practical Applications and Related Experiments

1. Case Study:
   • Present a hypothetical appraisal scenario with multiple value indicators derived from different approaches.
   • Challenge trainees to reconcile the indicators and justify their final value opinion.
   • Encourage discussion and debate about the relative strengths and weaknesses of each indicator.
2. Sensitivity Analysis:
   • Experiment with different weightings of the value indicators to assess the sensitivity of the final value opinion to changes in the reconciliation process.
   • Equation: Sensitivity = ΔValue / ΔWeight, where ΔValue is the change in the final value opinion and ΔWeight is the change in the weight assigned to a specific value indicator.
   • Example: Increase the weight assigned to the sales comparison approach by 10% and observe the resulting change in the final value opinion. This helps to understand the influence of the Sales Comparison approach for the given property.
3. Report Review Exercise:
   • Provide trainees with sample appraisal reports and challenge them to critically evaluate the reports for clarity, accuracy, completeness, objectivity, and supportability.
   • Encourage trainees to identify any weaknesses in the reconciliation process or reporting.
4. Role-Playing:
   • Simulate a review appraiser challenging the original appraiser’s value opinion.
   • Trainees can practice defending their reconciliation process and appraisal report.

III. Conclusion

Reconciliation and appraisal reporting are the culmination of the real estate income estimation process. By understanding the scientific principles underlying value reconciliation and adhering to the highest standards of appraisal reporting, appraisers❓ can provide credible, defensible, and useful opinions of value that serve the needs of their clients and the public interest.