Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction: The Pinnacle of the Appraisal Process

Reconciliation is a critical stage in real estate appraisal, representing the synthesis of data and analysis into a cohesive, supportable final value opinion. In the context of this course, “Mastering Real Estate Appraisal: FIRREA & USPAP Essentials,” a strong understanding of reconciliation is paramount to producing credible appraisals in federally related transactions. This chapter will delve into the scientific and practical underpinnings of reconciliation, ensuring compliance with the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and the Uniform Standards of Professional Appraisal Practice (USPAP). This chapter will also focus on creating Appraisal reports that meet secondary mortgage market guidelines.

II. Defining Reconciliation: More Than Just Averaging

Reconciliation is defined as:

• The process of analyzing two or more different value indicators❓ to arrive at a single, supportable opinion of value.
• The step in the appraisal process where the appraiser formulates the final value opinion.

Important Note: Reconciliation is NOT a mathematical averaging of different value indications. This is a critical point that differentiates a professional, supportable appraisal from a simplistic, potentially misleading valuation. Relying on averaging would fail to account for the varying reliability and relevance of different indicators, which is non compliant with USPAP. As stated in USPAP, each opinion, analysis and conclusion must be communicated in a manner that is not misleading.

III. The Scientific Basis of Reconciliation: Reliability and Relevance

The reconciliation process relies on sound scientific principles to ensure a defensible final value opinion. A value indicator can be derived through several techniques such as: values indicated by different comparable properties, different units of comparison, and/or different appraisal techniques.

A. Reliability: Data-Driven Confidence

The reliability of a value indicator is directly proportional to the quantity, quality, and verification of the data supporting it.

• Amount of Data: A value indicator is considered more reliable when:

  • It’s based on a larger statistical sampling of data. A larger sample size reduces the standard error, providing a more accurate representation of the market.
  • It’s derived from more detailed data. More granular data allows for finer adjustments and more precise comparisons.
  • It’s supported by several independent sources. Independent verification minimizes bias and strengthens the credibility of the data.

  Example: An appraiser is valuing a single family property and uses the sales comparison approach. They choose three comparable sales within 1 mile of the subject property. In comparison, they use five comparable sales within 1/2 mile of the subject property from multiple data providers and direct verification with the parties. The appraiser places more weight on the value indicated by the latter.
  * Accuracy of Data: The accuracy of a value indicator depends on:
  * The accuracy of the supporting data, which is determined by how well it has been verified. Data verification is crucial to ensuring accuracy.
  * The accuracy of the appraisal technique, which depends on its relevance to the appraisal problem. The chosen technique must be appropriate for the property type, market conditions, and intended use of the appraisal.
  * Mathematical Representation of Reliability: While we don’t calculate reliability in reconciliation, understanding the underlying statistics is crucial:

  Let:

  • n = sample size
  • σ = standard deviation
  • SEM = standard error of the mean

  SEM = σ / √n

  This equation demonstrates that as the sample size (n) increases, the standard error of the mean (SEM) decreases, indicating higher reliability.

B. Relevance: Alignment with the Appraisal Problem

The relevance of a value indicator hinges on its consistency with the appraisal assignment and the appropriateness of the appraisal technique used.

• Consistency with the Appraisal Assignment: The value indicator must align with the terms of the appraisal assignment, including the definition of value, property rights appraised, and intended use of the appraisal.
• Appropriateness of the Appraisal Technique: The chosen appraisal technique must be suitable for the property type, market conditions, and data availability.
• Example: An appraiser using an income capitalization approach would be less relevant in an appraisal of vacant land or a single-family residence due to the properties generally lack ability to generate reliable income.

IV. Practical Application: The Reconciliation Process

The reconciliation process begins with reviewing all data, calculations, and reasoning that have led to the different value indicators.
Checking all data, calculations, and reasoning to ensure validity and accuracy. The appraiser must apply appraisal techniques consistently to the subject property and to all comparables.
Assessing the reliability of each value indicator and performing additional collection and analysis when required.

All Pertinent data must be included and analyzed, and the value indicators must be derived in accordance with the terms of the appraisal assignment.

A. Steps in the Reconciliation Process:

1. Review of Data and Calculations: Scrutinize all data sources, calculations, and adjustments for errors or inconsistencies. Ensure that appraisal techniques have been applied consistently to the subject property and comparable sales.
2. Assessment of Reliability: Evaluate the reliability of each value indicator based on the amount of data, accuracy, and relevance.
3. Weighting of Value Indicators: Assign weights to each value indicator based on its reliability and relevance. Indicators with higher reliability and relevance should receive greater weight.
4. Formulating the Final Value Opinion: Based on the weighted value indicators, formulate a single, supportable final value opinion.
5. Support the Choice of the Reconciled Value: The appraiser must support the appraisal by providing evidence that backs their judgment and overall analysis.
6. Documentation: Thoroughly document the reconciliation process, including the rationale for weighting each value indicator and the reasoning behind the final value opinion. This ensures transparency and defensibility.

7. Report Completion: The appraiser must complete the Uniform Residential Appraisal Report’s (URAR) reconciliation section by indicating:

   • if the appraisal was made as is or is subject to the property being altered,
   • any conditioning factors,
   • any appraisal approaches used,
   • the purpose of the appraisal and

   • the opinion of market value and the appraiser signs and dates the appraisal report, and includes his or her appraisal license or certification number.
     8. Estimate a Point Estimate: Appraiser must estimate a value as a single dollar amount known as a “Point Estimate.”

   • Alternatively, an appraiser may set a “Range Value”, which is the appraiser’s opinion of the range that the property’s value will fall into.

   • All value opinions should be rounded.
     9. Ensure Understandability: Review work to ensure it is easily understandable to non-appraiser readers.

B. Mathematical Formulas: Tools for Analysis (Not Direct Input)

While reconciliation isn’t a mathematical average, understanding the underlying math can inform the weighting process:

• Weighted Average (Conceptual):

  Final Value = (Weight_1 * Indicator_1) + (Weight_2 * Indicator_2) + ... + (Weight_n * Indicator_n)

  Where the weights reflect the appraiser’s judgment of reliability and relevance.
  * Example: The Sales Comparison Approach is determined by the appraiser to be the most reliable indicator due to a strong level of comparable data. The Cost Approach was not relied upon due to excessive depreciation of the property. The Income Approach is determined to have some validity but limited information. The sales comparison approach will be weighted higher due to higher reliability and the income approach with a lesser degree. The appraiser may weight the Sales Comparison Approach to 70%, the Income Approach to 20%, and 10% to the Cost Approach.

V. USPAP and FIRREA Compliance: Navigating the Regulatory Landscape

• USPAP Competency Rule: Before accepting an assignment, the appraiser must possess the necessary knowledge and experience to perform the appraisal competently, especially in the reconciliation process.
• USPAP Scope of Work Rule: The scope of work must be sufficient to produce credible assignment results, including a well-supported final value opinion through the reconciliation process.
• FIRREA Title XI: Compliance with FIRREA requires that appraisals in federally related transactions are performed in writing, adhere to USPAP, and are conducted by state-certified or state-licensed appraisers. This underscores the importance of a well-documented and supportable reconciliation process.

VI. Review: A Critical Safeguard

Appraisers should review their work to insure that it is easily understandable to a non-appraiser reader.

It is the appraiser’s responsibility to ensure transparency in their appraisal reports and it is therefore necessary to ensure that the report is easily understandable.