Reconciliation and Final Value Opinion

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Chapter: Reconciliation and Final Value Opinion

I. Introduction: Bridging Value Indicators to a Point Estimate

In real estate appraisal, particularly within the context of understanding property rights (easements, co-ownership, and partial interests), the reconciliation process is paramount. This chapter details the rigorous process by which an appraiser synthesizes potentially disparate value indicators❓❓ derived from multiple appraisal approaches and data sources to arrive at a single, supportable final value opinion. This is crucial for accurate property valuation, informing investment decisions, and navigating the complexities introduced by varying property rights.

II. Reconciliation: A Scientific Synthesis, Not a Mathematical Averaging

• Definition: Reconciliation is the critical process of analyzing and weighing the reliability and relevance of two or more value indicators to arrive at a single, defensible opinion of value. This is a critical process that follows all data collection and analysis.

• Misconceptions: It’s crucial to understand that reconciliation is not a simple mathematical averaging of indicated values. Averaging implies equal weighting, which is rarely justified in appraisal practice.

• Scientific Basis: The reconciliation process is fundamentally rooted in sound scientific reasoning, combining statistical concepts, market analysis, and valuation theory.

III. Factors Influencing Reliability of Value Indicators: A Scientific Approach

The reliability of each value indicator is paramount in reconciliation. The following factors are assessed:

• A. Amount of Data (Statistical Significance):

  1. Statistical Sampling: A larger sample size provides a more stable and reliable estimate of value. Statistical validity is strengthened when the sample is large and independently verified.
  2. Data Detail: The level of detailed data adds credibility to the process. Detailed data includes elements such as sales, surveys, etc. Detailed data is more easily verified.
  3. Independent Sources: Data corroborated by multiple independent sources (e.g., county records, MLS, interviews) increases confidence. Statistical confidence improves with multiple independent data sources.

  Example: In a sales comparison approach, using 10 comparable sales that have been independently verified generally results in a more reliable value indicator than using only 3 comparable sales with limited verification.
  * B. Accuracy of Value Indicators:

  1. Verification of Data: The accuracy of data depends on how well it has been verified. Direct verification from primary sources (e.g., buyers, sellers, brokers) is preferable to reliance on secondary sources.
  2. Relevance of Appraisal Technique: The appropriateness of the appraisal technique for the subject property is critical.

  Example: Using the income capitalization approach for a single-family residence is generally less reliable than using the sales comparison approach because single-family residences are rarely purchased solely for their income potential.

• C. Relevance to Appraisal Problem:

  1. Consistency with Assignment: The value indicator must be consistent with the scope of work, the intended use, and the definition of value (e.g., market value, investment value).

  2. Appropriateness of Technique: The appraisal technique must be appropriate for the property type❓ and market conditions.

  3. Example: A value indicator derived from the cost approach might be less relevant for a property with significant functional obsolescence or in a market dominated by speculative activity, because the cost approach may not adequately reflect market perceptions of value.

IV. The Role of Appraiser Judgment and Experience: A Bayesian Approach

• Bayesian Inference: The reconciliation process can be understood as a form of Bayesian inference. The appraiser starts with prior beliefs about value based on general market knowledge and then updates these beliefs based on the evidence from each value indicator.

  Formula:
  P(V|D) = [P(D|V) * P(V)] / P(D)

  Where:

  • P(V|D) is the posterior probability of the value (V) given the data (D).
  • P(D|V) is the likelihood of observing the data given the value.
  • P(V) is the prior probability of the value.
  • P(D) is the probability of the data.

  Application: This framework helps to quantify the appraiser’s judgment by explicitly considering prior knowledge and updating it with new data from the market. This also demonstrates the need for continual market studies.

• Appraiser Experience: An appraiser’s expertise enables them to assess the nuances of the market, understand the reliability of data sources, and appropriately weigh the value indicators.
  Example: An experienced appraiser might recognize subtle differences between comparable properties that a less experienced appraiser might overlook, leading to a more accurate adjustment and a more reliable value indicator.

V. Practical Application: Reconciling Value Indicators in Complex Scenarios

• A. Easements: When appraising a property encumbered by an easement, different approaches might yield varied results.

  Scenario: A property has a right-of-way easement benefiting a neighboring parcel. The sales comparison approach might indicate a lower value due to the encumbrance. The cost approach, based on replacement cost, would ignore this value diminution. In reconciliation, the appraiser gives more weight to the sales comparison approach, reflecting market perceptions of the easement’s impact on value.

  Experiment: A paired-sales analysis could be performed, comparing sales of similar properties with and without similar easements to quantify the impact on value. Statistical t-tests could be used to determine if the difference in means is significant.

• B. Co-ownership and Partial Interests: Appraising a partial interest (e.g., tenancy in common) requires careful consideration.

  Scenario: A property is owned as tenants in common, with one owner seeking to sell their 50% interest. The sales comparison approach based on whole property sales must be adjusted to reflect potential discounts for fractional ownership and the limitations on marketability. If the partition laws for co-owners are well developed, then those would be more heavily weighted. If the cost approach is developed, that provides a value for the whole but not the partial interests. In reconciliation, the appraiser carefully weighs the limited marketability of a partial interest.
  If market data is present on the sale of similar fractional interests, that data should be given more weight.

  Experiment: Market research into sales of fractional interests in similar properties can provide empirical data to support the discount applied to the partial interest.

• C. Leaseholds and Leased Fees: Leased fee and leasehold valuations may create vastly different values.

  Scenario: A property is being leased for far below the existing market rent. In this case the leased fee suffers and the leasehold excels in valuation. In reconciliation, those market dynamics would be accounted for and weighted.

  Experiment: Conducting a new rental survey and comparing this to the lease helps support the variance.

VI. Completing the Appraisal Report and Reaching the Point Estimate:

• Uniform Residential Appraisal Report (URAR):

  • The appraiser explains the reconciliation process in the Sales Comparison Approach Section. The URAR requires a reasoned explanation of how value conclusions were reached.

  • The appraiser reconciles the various approaches to value, explains which approaches were given the most weight, and justifies the final value opinion in the Reconciliation Section❓❓ of the URAR.

  • It is important to state whether the appraisal was made ‘as is’ or is subject to repairs.

• Reporting Considerations:

  • Clarity: The report should be easily understandable to a non-appraiser.
  • Supportability: The final value opinion must be supported by the evidence presented.
  • Transparency: The reconciliation process should be transparent and clearly documented.

• Rounding: Value opinions should be rounded to a level that is appropriate for the type of property and the intended use of the appraisal. (e.g., rounding to the nearest \$100 for a residential property or to the nearest \$1,000 for a commercial property).

VII. Conclusion: Defensible Value Opinions in Complex Property Scenarios

Reconciliation is not a perfunctory step but the culmination of a rigorous, scientific process. By systematically analyzing value indicators, applying sound judgment, and clearly documenting the reasoning, the appraiser provides a credible and defensible final value opinion, even in situations involving complex property rights such as easements, co-ownership, and leaseholds. Ultimately, the appraiser must be prepared to justify their conclusion in a critical review. The appraiser reviews all data, calculations, and reasoning contained in the entire appraisal. If necessary, additional data is collected and additional analysis is performed.

VIII. Chapter Quiz Questions

1. Which of the following is the most important factor in the reconciliation process?
   a. Amount of Data
   b. Accuracy of the Value Indicators
   c. Relevance of the Appraisal Techniques
   d. Appraiser’s Judgment and Experience
2. When reconciling different value indicators into a final estimate of value, the appraiser:
   a. Calculates the average of all the different indicators.
   b. Chooses the indicator that is most relevant to the appraisal problem.
   c. Evaluates the reliability of the different indicators.
   d. Gives the most weight to the value indicated by the sales comparison approach.
3. When reconciling value indicators, the appraiser will review the data and procedures used to derive the indicators in order to:
   a. Correct any errors in computation.
   b. Assess the reliability of the value indicators.
   c. Insure that all appraisal techniques have been applied consistently.
   d. All of the above.
4. Which of the following is NOT a factor influencing the reliability of a value indicator?
   a. The amount of data supporting the indicator.
   b. The verification of the data supporting the indicator.
   c. The sophistication of the appraisal technique.
   d. The relevance of the appraisal technique.
5. The reliability of a value indicator derived by the sales comparison approach depends on:
   a. the number of adjustments made to the comparable sales price.
   b. the amount of the adjustments made to the comparable sales price.
   c. the manner in which the comparable sales data was verified.
   d. all of the above.
6. The amount of data supporting a value indicator is significant because:
   a. it indicates whether the appraiser has done a thorough job.
   b. a larger amount of data always leads to a more reliable value opinion.
   c. a value conclusion is more reliable when it is supported by independent sources.
   d. nt sources.
7. A value indicator derived by the income capitalization approach would be least relevant in an appraisal of:
   a. an office building.
   b. vacant land.
   c. a single-family residence.
   d. a shopping center.
8. The relevance of an appraisal technique to a particular appraisal problem would most likely depend on:
   a. the type of property being appraised.
   b. the effective date of the appraisal.
   c. the identity of the appraisal client.
   d. the size of the subject improvements.
9. A final value opinion that is stated as a single dollar amount is known as a:
   a. range value.
   b. single value.
   c. dollar estimate.
   d. point estimate.
10. In the process of reconciliation, the appraiser must choose a value that is:
    a. supported by the evidence.
    b. higher than the lowest value indicator.
    c. lower than the highest value indicator.
    d. all of the above.