Reconciliation and Final Value Opinion

Introduction: Reconciliation and Final Value Opinion

In the dynamic field of real estate appraisal, the culmination of rigorous data analysis and market assessment lies in the process of reconciliation and the formation of a final value opinion. This chapter, “Reconciliation and Final Value Opinion,” addresses a critical aspect of professional real estate appraisal, bridging the gap between disparate value indicators and a cohesive, credible estimate of market value. As outlined in the course description for “Mastering Real Estate Appraisal: Standards & Practices,” this course aims to equip participants with the tools to conduct comprehensive property evaluations and comply with secondary market requirements, and to avoid common appraisal pitfalls. This chapter is directly aligned with these objectives.

The scientific importance of reconciliation stems from its role in mitigating the inherent subjectivity in appraisal methodologies. Real estate appraisal relies on diverse approaches – the sales comparison approach, the cost approach, and the income capitalization approach – each with its own strengths and limitations. These approaches, along with data from multiple comparable properties, may yield a range of value indicators. Reconciliation serves as a systematic framework for weighing the reliability and relevance of these indicators, ultimately converging on a single, defensible value opinion. This chapter will address the appraisal reconciliation in the context of secondary market, Fannie Mae and Freddie Mac.

Based on the book content provided, mathematical techniques and averaging formulas are inadequate substitutes for a critical review of data, assumptions, and appraisal techniques. The reconciliation process depends on the appraiser’s judgment and experience; therefore, this chapter will guide the reader through the essential principles of reconciling divergent data and providing a final value opinion. The core of this lies in the scientific approach to weighting various value indicators based on relevance, accuracy, and data support, ensuring compliance with Uniform Standards of Professional Appraisal Practice (USPAP) as emphasized by the Appraisal Foundation.

The educational goals of this chapter are threefold:

1. To provide a structured understanding of the reconciliation process, emphasizing its reliance on appraiser judgment and experience rather than rote calculation.
2. To equip participants with the ability to critically evaluate the reliability and relevance of different value indicators, including those derived from different appraisal techniques and comparable properties, and to explain how the different valuation techniques can be correctly applied.
3. To guide participants through the completion of the Uniform Residential Appraisal Report (URAR) Reconciliation section, including the articulation of a well-supported final value opinion, and in what instances it is necessary to go beyond the URAR form.
4. To train participants to review appraisal work to insure that it is easily understandable to a non-appraiser reader.

By mastering the concepts and practices presented in this chapter, participants will strengthen their ability to perform credible, well-supported real estate appraisals that withstand critical scrutiny and meet the standards of the appraisal profession and secondary market requirements.

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction: The Synthesis of Value in Real Estate Appraisal

This chapter delves into the critical final stages of the appraisal process, focusing on reconciliation and the articulation of a final value opinion. Building upon the foundational knowledge gained throughout this “Mastering Real Estate Appraisal: Standards & Practices” course, we will explore how an appraiser integrates data, applies valuation techniques, and exercises professional judgment to arrive at a credible and defensible estimate of market value. This process adheres strictly to the Uniform Standards of Professional Appraisal Practice (USPAP), secondary market requirements (Fannie Mae and Freddie Mac), and aims to avoid appraisal pitfalls that could lead to inaccurate or misleading conclusions. The chapter also addresses how an appraiser review will look at a report.

This chapter emphasizes the importance of critical thinking, data verification, and clear, concise communication, essential skills for navigating the complexities of real estate valuation and ensuring the reliability of appraisal reports. The ultimate goal is to equip you with the knowledge and confidence to provide well-supported opinions of value that withstand scrutiny from clients, review appraisers, and other stakeholders.

II. Understanding Reconciliation: A Scientific Approach

Reconciliation in appraisal is not merely averaging❓ different value indicators. It’s a qualitative and quantitative analysis of multiple value indications to arrive at a single, well-supported opinion of value.

A. Reconciliation: Definition and Application

1. Definition: Reconciliation is the process of analyzing the different value indicators derived from the Cost Approach, Sales Comparison Approach, and Income Approach to determine a single estimate of value for the subject property. It’s also used to reconcile values indicated by different comparable properties, different units of comparison, and/or different appraisal techniques.
2. Scientific Basis: The reconciliation process draws from statistical concepts such as weighted averages and regression analysis, although these are applied implicitly rather than through explicit mathematical formulas. The appraiser acts as a statistical analyst, evaluating the variance and standard deviation of the different value indicators to determine which are most reliable and representative of the subject property’s market value.

B. The Role of Judgment and Experience

1. Beyond Formulas: Mathematical formulas or techniques (such as averaging) are not used in reconciliation. Instead, the appraiser’s judgment and experience are the primary determinants of the final value opinion.

2. Review of Data and Reasoning: The reconciliation process begins with a thorough review of all data, calculations, and reasoning that have led to the different value indicators.

   a. All calculations must be checked for accuracy, and any mistakes corrected.
   b. The different appraisal techniques must be applied consistently to the subject property and to all comparables.
   c. The appraiser must assess the reliability of each value indicator.
   d. All pertinent data must be included and analyzed.
   e. The value indicators must be derived in accordance with the terms of the appraisal assignment.

III. Reliability of Value Indicators: A Multifaceted Assessment

The reliability of a value indicator depends on the amount of data, the level of accuracy, and its relevance to the appraisal problem. It’s like running a scientific experiment; the more robust your data, the more accurate your methods, and the more aligned your approach is to the problem, the more reliable your results.

A. Amount of Data and Statistical Significance

1. Value indicators are considered more reliable when:

   a. They are based on a larger statistical sampling of data;
   b. They are derived from more detailed data; or
   c. They are supported by several independent sources.
   2. The principle of statistical significance is relevant here. A larger sample size generally leads to a smaller margin of error and a more reliable estimate of the population parameter (in this case, market value).
   Formula Example:
   Margin of Error (ME) = z * (s / √n)
   Where:
   z = z-score corresponding to the desired confidence level
   s = sample standard deviation
   n = sample size
   A smaller ME indicates a more reliable estimate.

B. Accuracy and Validation Techniques

1. The accuracy of a value indicator depends on the accuracy of the supporting data and the accuracy of the technique used to derive the indicator from the data.

   a. The accuracy of data depends on how well it has been verified. For example, sales data from a local multiple listing service (MLS) is generally more reliable than unverified data from public records.
   b. The accuracy of the appraisal technique depends on the relevance of the technique to the problem.
   2. Data Validation Experiment: To test the accuracy of sales data, an appraiser could compare MLS data with verified data from county records, title companies, or interviews with parties involved in the transaction. Statistical analysis (e.g., calculating correlation coefficients) could be used to quantify the degree of agreement between the different data sources.

C. Relevance and Alignment with the Appraisal Problem

1. The relevance of a value indicator to the particular appraisal problem influences the appraiser’s judgment.

   a. The indicator itself must be consistent with the terms of the appraisal assignment. If the assignment calls for an opinion of market value, a value indicator based on investment value would be less relevant.
   b. The appraisal technique used to derive the indicator must be appropriate. For example, the income capitalization approach is generally more relevant for income-producing properties than for single-family residences.
   2. The appropriateness of an appraisal technique is often determined by the type of property being appraised and the availability of data. For example, the cost approach may be most reliable for new construction, while the sales comparison approach may be more appropriate for established residential neighborhoods.

IV. Supporting the Reconciled Value: Evidence-Based Justification

The choice of a reconciled value should be supported by the evidence in the appraisal.

A. The Appraiser’s Judgment: The Determining Factor

1. The appraiser’s judgment must be the determining factor in the reconciliation process. This judgment should be based on a thorough understanding of the market, the property, and the strengths and weaknesses of the different value indicators.
2. Appraisers must provide clear, logical, and persuasive support for their judgment. This includes explaining the rationale for giving more weight to certain value indicators over others, and addressing any inconsistencies or limitations in the data.
3. An opinion of value is stated as a single dollar amount❓❓ known as a Point Estimate. An alternative to the Point Estimate 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.

B. Review all Data, Calculations, and Reasoning

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.

V. Reconciliation Process: A Review of the Entire Appraisal

The process of reaching an opinion of value is essentially the same as the reconciliation process.

A. Reviewing all Data, Calculations, and Reasoning

1. The appraiser reviews all data, calculations, and reasoning contained in the entire appraisal.
2. The reliability of each value indicator is assessed.
3. If necessary, additional data is collected and additional analysis is performed.

VI. Completing the URAR Reconciliation Section: Accuracy and Clarity

The appraiser completes the Uniform Residential Appraisal Report’s Reconciliation section.

A. Indications and Reaffirmations

1. The appraiser indicates if the appraisal was made as is or is subject to the property being altered.
2. Any conditioning factors are listed.
3. Any appraisal approaches used are listed.
4. The purpose of the appraisal is reaffirmed.

B. Final Market Value and Sign-Off

1. 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.

VII. Delivering Understandable Appraisal Reports

An appraiser should review his or her work to ensure that it is easily understandable to a non-appraiser reader. This relates directly to USPAP’s focus on clear communication and avoiding misleading information.

A. Considerations During Final Review

1. Is the appraisal easily understandable to a non-appraiser reader?
2. Does the report follow a logical process and contain all relevant data?
3. Are all calculations accurate?
4. Are all terms and concepts clearly defined?
5. Are all conclusions supported by the evidence in the appraisal?
6. Will the work pass muster in a critical review? If it won’t, don’t send it!

VIII. Conclusion: Mastering the Art and Science of Reconciliation

Reconciliation is a critical process in real estate appraisal that requires not only technical expertise but also sound judgment and ethical conduct. By understanding the scientific principles underlying reconciliation, and by applying these principles in a consistent and transparent manner, you can provide credible and defensible opinions of value that meet the requirements of USPAP, the secondary market, and your clients.