Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction to Reconciliation

• Reconciliation is the critical process of analyzing multiple value indicators derived from different approaches, data sets, or comparables to arrive at a single, supportable opinion of value. This is a crucial stage in the appraisal process where the appraiser uses their judgment and experience to weigh the reliability and relevance of each indicator.
• Reconciliation can also refer to the step in the appraisal process where the appraiser reaches an opinion of value.
• It involves reconciling values indicated by:
  • Different comparable properties.
  • Different units of comparison (e.g., price per square foot vs. price per acre).
  • Different appraisal techniques (e.g., sales comparison, cost, and income capitalization approaches).

II. The Role of Appraiser Judgment

• Reconciliation is not a mathematical averaging process. Mathematical formulas or techniques (such as averaging) are not used in reconciliation. It requires the appraiser’s informed judgment❓ and experience to determine the most credible value opinion.
• The process begins with a thorough review of:
  • All data collected.
  • calculations❓ performed.
  • Reasoning employed to arrive at each value indicator.

III. Ensuring Data Accuracy and Consistency

• All calculations must be checked for accuracy, and any mistakes corrected. This includes verifying the mathematical correctness of adjustments, capitalization rates, and other quantitative analyses.
• The different appraisal techniques must be applied consistently to the subject property and to all comparables. This ensures a fair and reliable comparison.

IV. Assessing Reliability of Value Indicators

• The reliability of each value indicator must be assessed. Factors influencing reliability include:
  • amount❓ of data supporting the indicator.
  • Accuracy of the data.
  • Relevance of the indicator to the appraisal problem.
• All pertinent data must be included and analyzed.
• The value indicators must be derived in accordance with the terms of the appraisal assignment.

V. Data Quantity and Statistical Significance

• 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.
  3. They are supported by several independent sources.
• A larger sample size generally leads to a more reliable estimate due to the reduction of sampling error. This is based on the Central Limit Theorem, which states that the distribution of sample means approaches a normal distribution as the sample size increases.

VI. Data Accuracy and Verification

• The accuracy of a value indicator depends on:
  1. The accuracy of the supporting data, which relies on verification.
  2. The accuracy of the appraisal technique, which depends on the relevance of the technique to the problem.

VII. Relevance to the Appraisal Problem

• The relevance of a value indicator is crucial and is assessed based on:
  1. The indicator itself being consistent with the terms of the appraisal assignment.
  2. The appraisal technique used to derive the indicator being appropriate for the specific property and market.

VIII. Mathematical Examples and Weighting

• While reconciliation does not involve simple averaging, understanding statistical concepts helps in weighing value indicators.
• Example: Suppose the sales comparison approach indicates a value of \$500,000, the cost approach indicates \$480,000, and the income approach indicates \$520,000.
  • The appraiser might assign weights based on the perceived reliability:
    • Sales Comparison: 50%
    • Cost Approach: 20%
    • Income Approach: 30%
  • Reconciled Value = (0.50 * \$500,000) + (0.20 * \$480,000) + (0.30 * \$520,000) = \$496,000
• These weights should be supported by the analysis and discussion within the appraisal report, explaining why the sales comparison approach, for instance, was given more weight.

IX. The Final Value Opinion

• The choice of a reconciled value should be supported by the evidence in the appraisal. The appraiser’s judgment must be the determining factor.
• The process of reaching an opinion of value is essentially the same as the reconciliation process.
  • The appraiser reviews all data, calculations and reasoning contained in the entire appraisal.
  • The reliability of each value indicator is assessed.
  • If necessary, additional data is collected and additional analysis is performed.

X. uniform❓ Residential Appraisal Report (URAR)

• The appraiser completes the Uniform Residential Appraisal Report’s Reconciliation section.
  • The appraiser indicates if the appraisal was made as is or is subject to the property being altered.
  • Any conditioning factors are listed.
  • Any appraisal approaches used are listed.
  • The purpose of the appraisal is reaffirmed.
  • 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.

XI. Stating the Final Value

• The opinion of value is stated as a single dollar amount, known as a “Point Estimate.”
• An alternative is the “Range Value,” which is an appraiser’s opinion of the range in which the property’s value is most likely to fall.
• Value opinions should be rounded.

XII. Review and Clarity

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