Reconciliation: Judgment and Experience

Chapter 11: Reconciliation: Judgment and Experience

I. Introduction: The Science and Art of Reconciliation

Reconciliation in real estate appraisal is the process of critically weighing the value indications derived from different appraisal approaches (Sales Comparison, Cost, and Income) and arriving at a single, supportable value opinion. This is NOT a mathematical averaging exercise, but rather a scientific judgment based on the appraiser’s experience and understanding of the market. It requires a deep understanding of appraisal principles, statistical relevance, and the nuances of local market dynamics.

A. Beyond Averaging: Unlike simple averaging, reconciliation involves:

1. Critical Evaluation: Assessing the strengths and weaknesses of each value indicator.
2. Weighting: Giving more emphasis to the most reliable and relevant indicators.
3. Judgment: Applying expertise to interpret data and form a final opinion.

B. Scientific Foundation: While reconciliation relies on judgment, it must be grounded in scientific principles:

1. Statistical Analysis: Understanding data distribution, central tendency, and variability.
2. Market Analysis: Identifying trends, supply and demand factors, and relevant market segments.
3. Economic Principles: Applying concepts of substitution, contribution, and highest and best use.

II. The Reconciliation Process: A Scientific Approach

The reconciliation process is a systematic❓ review and analysis of the appraisal data, calculations, and reasoning.

A. Review and Verification:

1. Data accuracy❓: All calculations and data points from each approach must be rigorously checked for accuracy. Mistakes must be identified and corrected.
2. Consistency: Each appraisal technique must be applied consistently to the subject property and all comparables.

B. Reliability Assessment:

1. Data Quantity:

   • Value indicators based on larger statistical samples are generally more reliable.
   • Indicators derived from detailed data are also preferable.
   • Support from multiple independent sources increases reliability.

   Example: Having 10 comparable sales is generally more reliable than relying on only 3, assuming the 10 sales are well-vetted and relevant.
   2. Data Accuracy:
   * Data accuracy depends on thorough verification.
   * Technique accuracy depends on relevance to the appraisal problem.

   Equation (Coefficient of Variation):
   CV = (Standard Deviation / Mean) * 100

   A lower CV indicates greater data consistency and potentially higher reliability.

2. Relevance to the Appraisal Problem:

   • The indicator must align with the appraisal assignment’s terms.
   • The technique must be appropriate for the property type and market.
     Example: Using the Income Capitalization Approach to value a single-family residence in a market with limited rental data would be less relevant than using the Sales Comparison Approach.
     C. Weighting the Indicators: Appraisers assign weights to each indicator based on their assessed reliability and relevance. This is a subjective but informed decision.

Equation (Weighted Average):
Vo = (W1 * V1) + (W2 * V2) + (W3 * V3)

 *Where: Vo = Overall Value, W = Weight of Indicator (as decimal, e.g., 0.40 for 40%), V = Value Indicator*

 *Example:*  If the sales comparison approach indicates a value of $500,000 (40% weight), the cost approach indicates $480,000 (30% weight), and the income approach indicates $520,000 (30% weight), the reconciled value would be:
*($500,000 * 0.40) + ($480,000 * 0.30) + ($520,000 * 0.30) = $500,000*

D. Justification and Support:

1. The final reconciled value must be supported by the evidence in the appraisal. The appraiser’s judgment is the determining factor.
2. The report should transparently explain the weighting process and the rationale behind it.

III. Judgment and Experience: The Art of Reconciliation

Reconciliation is not simply a mechanical process. It requires the appraiser’s judgment and experience to synthesize the information and arrive at a credible value opinion.

A. Market Expertise:

1. A deep understanding of the local market dynamics is crucial.
2. This includes knowing which market segments are most active, which property characteristics are most valued by buyers, and how market conditions are changing.

B. Data Interpretation:

1. Appraisers must be able to critically interpret data and identify trends and patterns.
2. This requires understanding statistical concepts and being able to identify potential biases or anomalies in the data.

C. Subjectivity and Objectivity:

1. While reconciliation involves subjective judgment, the appraiser must strive for objectivity.
2. This means being impartial, unbiased, and letting the data guide the decision-making process.

IV. Practical Applications and Related Experiments

A. Scenario: Single-Family Home Appraisal: An appraiser is appraising a single-family home using the Sales Comparison, Cost, and Income Approaches.

1. Sales Comparison Approach: Indicates a value of $475,000 based on three recent comparable sales, with adjustments for location, size, and condition.
2. Cost Approach: Indicates a value of $450,000 based on replacement cost less depreciation.
3. Income Approach: Indicates a value of $460,000 based on market rent and capitalization rate.
4. Reconciliation: The appraiser gives the Sales Comparison Approach the most weight (50%) because it is based on direct market evidence. The Income Approach is given moderate weight (30%) due to limited rental data, and the Cost Approach is given the least weight (20%) due to challenges in accurately estimating depreciation.

Equation (Weighted Average for Scenario):
Vo = (0.50 * $475,000) + (0.30 * $460,000) + (0.20 * $450,000) = $469,500

The appraiser may reconcile the value to $470,000, based on their judgment and market knowledge.

B. Scenario: Commercial Property Appraisal: An appraiser is appraising a commercial office building using the Sales Comparison, Cost, and Income Approaches.

1. Sales Comparison Approach: Indicates a value of $2,500,000 based on limited data due to the unique nature of the property.
2. Cost Approach: Indicates a value of $2,700,000 based on replacement cost less depreciation.
3. Income Approach: Indicates a value of $2,600,000 based on projected income and a market-derived capitalization rate.
4. Reconciliation: The appraiser gives the Income Approach the most weight (60%) because it is based on the most reliable data (rental rates, occupancy rates, and expenses). The Cost Approach is given moderate weight (30%), and the Sales Comparison Approach is given the least weight (10%) due to limited data and the uniqueness of the property.

Equation (Weighted Average for Scenario):
Vo = (0.10 * $2,500,000) + (0.30 * $2,700,000) + (0.60 * $2,600,000) = $2,620,000

The appraiser reconciles to $2,620,000 after reviewing all the pertinent details.

V. Conclusion: The Hallmark of a Skilled Appraiser

Reconciliation is the culmination of the appraisal process, blending scientific analysis with experienced judgment. A skilled appraiser can justify their value opinion with clear, supportable reasoning, demonstrating a deep understanding of the market and the appraisal principles that guide the profession. This is what separates an adequate appraisal from an exceptional one.