Reconciliation and Appraisal Reporting

Chapter 11: Reconciliation and Appraisal Reporting

This chapter delves into the crucial aspects of reconciliation and appraisal reporting, essential for mastering residential design from layout to construction. We will explore the scientific principles underlying these processes, emphasizing accuracy, relevance, and the appraiser’s professional judgment.

I. Reconciliation: Integrating Value Indicators

Reconciliation is the process of critically analyzing and weighing multiple value indicators derived from different approaches and data sources to arrive at a single, supportable opinion of value. This process acknowledges that each valuation❓ method has inherent strengths and weaknesses and that no single indicator is definitively superior.

• A. Understanding Reconciliation:
  • Reconciliation is NOT simply averaging or mathematically combining value indicators. It requires in-depth analysis and reasoned judgment. Mathematical techniques are not suitable in reconciliation. The appraiser must weigh all available data.
  • Reconciliation occurs at multiple stages within the appraisal process, such as:
    • Reconciling value differences from comparable properties in the sales comparison approach.
    • Reconciling the adjustments made to individual comparable properties.
    • Reconciling the final value indications derived from the Sales Comparison, Cost, and Income Approaches (if applicable).
• B. Key Steps in the Reconciliation Process:
  1. Reviewing Data, Calculations, and Reasoning: Thoroughly examine all data, calculations, and reasoning behind each value indicator.
  2. Ensuring Consistency: Verify consistent application of appraisal techniques to the subject property and all comparables.
  3. Assessing Reliability: Evaluate the reliability of each value indicator based on data quantity, accuracy, and relevance.
  4. Including Pertinent Data: Ensure all pertinent data is incorporated and properly analyzed.
  5. Adhering to Assignment Terms: Confirm all value indicators are derived in accordance with the appraisal assignment’s terms.

II. Factors Influencing the Reliability of Value Indicators

The reliability of a value indicator is determined by the quantity, accuracy, and relevance of the underlying data and the applied techniques.

• A. Amount of Data: A larger statistical sample leads to more reliable value conclusions.

  1. Statistical Sampling: The larger the dataset, the greater the statistical significance of the findings.

     • For example, analyzing 20 comparable sales will likely yield a more reliable value indication than analyzing only 3.
     • The central limit theorem supports this: as sample size increases, the sample mean approaches the population mean.

     Mathematical Explanation:
     Sample Variance s2 = Σ(xi - x̄)2 / (n - 1)
     * Where:
     * xi is each individual data point.
     * x̄ is the sample mean.
     * n is the sample size.
     * Larger ‘n’ generally leads to a more stable and representative ‘s2’ and hence, a more reliable estimation.

  2. Data Detail: Value indicators derived from detailed data are generally more dependable.

  3. Independent Sources: Multiple independent sources supporting a value enhance its credibility.

• B. Accuracy of Value Indicators: The reliability hinges on the verification of supporting data and the appropriateness of the technique.

  1. Data Verification: The accuracy of data hinges on verification from reliable sources. Data should be cross-validated whenever possible.
  2. Technique Relevance: An appraisal technique’s accuracy hinges on its appropriateness for the specific appraisal problem. Applying the Income Approach to a property where it is irrelevant would lead to inaccurate results.

• C. Relevance of Value Indicators: A value indicator’s relevance is paramount.

  1. Assignment Consistency: Value indicator must align with the appraisal assignment’s scope and definition of value.
  2. Technique Appropriateness: Appraisal technique used must be suitable for the property type and intended use.

III. Appraisal Reporting: Communicating Value Conclusions

Appraisal reporting serves to communicate the appraiser’s analysis, reasoning, and conclusions in a clear, concise, and understandable manner. The appraiser must present the data and analysis in a way that provides the reader with all relevant information.

• A. Essential Elements of Appraisal Reporting:

  1. Clear Identification of Property: Precise and unambiguous description of the subject property.
  2. Statement of Purpose and Scope: Explicit statement of the appraisal’s intended use and the scope of work performed.
  3. Data and Analysis: Comprehensive presentation of relevant data, including market data, property data, and comparable data, along with the analyses performed.
  4. Reasoning and Rationale: Clear explanation of the appraiser’s reasoning and the rationale supporting the value conclusion.
  5. Value Opinion: A clearly stated opinion of value.
  6. Certification: Appraiser certification, attesting to the accuracy, objectivity, and independence of the appraisal.

• B. URAR and Reconciliation Section:

  1. The Uniform Residential Appraisal Report (URAR) form contains a specific “Reconciliation” section.
  2. This section requires the appraiser to:
     • Summarize the value indications from each approach used (Sales Comparison, Cost, Income).
     • Explain the rationale for the final value opinion, giving weight to different approaches as appropriate.
     • Indicate if the appraisal was made “as is” or “subject to” certain conditions (repairs, alterations).
     • Reaffirm the purpose of the appraisal.
     • State the final opinion of market value.

IV. Examples and Practical Application

• Example 1: Sales Comparison Approach with Varying Data Reliability:

  • An appraiser uses three comparable sales:

    • Comp A: Recent sale, verified with both buyer and seller, minimal adjustments needed.
    • Comp B: Sale six months ago, verified through MLS data only, moderate adjustments.
    • Comp C: Distant sale, not fully verified, significant adjustments required.

  • In the reconciliation, the appraiser should give the most weight to Comp A due to its higher reliability. The appraiser should clearly explain why Comp A was favored over Comp B and C.

• Example 2: Conflicting Value Indicators from Cost and Sales Comparison Approaches:

  • Sales Comparison Approach indicates a value of $350,000.
  • Cost Approach indicates a value of $325,000.

  • The appraiser determines the local market heavily favors location over construction costs.

  • In the reconciliation, the appraiser should give more weight to the Sales Comparison Approach, explaining the market’s emphasis on location.

V. Mathematical and Statistical Considerations

• Weighting Value Indicators: When combining value indicators, different weights can be assigned based on their reliability. This is similar to a weighted average.

  Weighted Average = (w1 x v1 + w2 x v2 + … + wn x vn) / (w1 + w2 + … + wn)

  • Where:*
    • wi is the weight assigned to value indicator ‘i’.
    • vi is the value of indicator ‘i’.

• Statistical Analysis of Adjustments: Techniques like regression analysis can be used to support adjustments made in the sales comparison approach.

VI. Quality Control and Review

• Appraisers should have a robust quality control process to minimize errors and omissions. This includes:
  • Reviewing all data and calculations for accuracy.
  • Ensuring the report is free of ambiguities and inconsistencies.
  • Obtaining a second opinion from a qualified appraiser.

VII. Common Mistakes to Avoid

• Averaging Value Indicators: Simply averaging value indicators without considering their reliability.
• Ignoring Relevant Data: Failing to incorporate all pertinent data into the analysis.
• Over-Reliance on a Single Approach: Placing undue emphasis on one valuation approach to the exclusion of others.
• Inadequate Support for Adjustments: Failing to provide sufficient justification for adjustments made in the sales comparison approach.
• Lack of Clarity in Reporting: Producing a report that is difficult to understand or that lacks a clear explanation of the appraiser’s reasoning.

By understanding and applying these principles, techniques, and quality control measures, appraisers can arrive at well-supported value conclusions and communicate them effectively through clear and comprehensive appraisal reports.