Reconciliation: The Appraiser's Judgment and Experience

Chapter: Reconciliation: The Appraiser’s Judgment and Experience

Introduction

In the realm of property valuation, mastery extends beyond the application of isolated techniques. The culmination of the appraisal process lies in reconciliation, a sophisticated synthesis of diverse value indicators into a single, well-supported opinion of value. This chapter delves into the scientific and subjective dimensions of reconciliation, highlighting the paramount role of the appraiser’s judgment and experience. We will explore how an appraiser integrates market data, applies appraisal principles, and leverages their professional acumen to arrive at a credible and defensible value conclusion❓, directly addressing the course objective of refining appraisal judgment to provide credible value opinions. As a review appraiser, you will need to know how to identify any opening to discredit the appraiser’s reasoning and conclusions.

1. The Science of Reconciliation

Reconciliation is NOT a simple averaging of value indicators. Instead, it is a critical review and weighted analysis of the results obtained from the Sales Comparison Approach, the Income Capitalization Approach, and the Cost Approach (when applicable).

• Definition: Reconciliation is the process of critically analyzing the results derived from two or more appraisal approaches or different data points within an approach to arrive at a single, supportable value conclusion. This process is essential for converting independent value indications into a cohesive and reliable estimate of market value.

• Scientific Principles:

  • Statistical Weighting: Though formal statistical averaging❓ is avoided, the appraiser implicitly assigns weights to different value indicators based on their reliability and relevance. This involves considering the:
    • Sample Size: Indicators derived from larger, more representative datasets are typically given more weight.
    • Data Accuracy: Greater weight is placed on indicators based on verified, reliable data.
    • Relevance: The appropriateness of the appraisal approach and the comparability of the data to the subject property significantly impact the weight assigned to each indicator.
  • Decision Theory: The appraiser acts as a decision-maker under uncertainty, evaluating the expected value and potential risks associated with each value indicator. The reconciliation process seeks to minimize the expected error in the final value opinion.
  • Market Efficiency: The appraiser must consider the overall efficiency of the market. In highly efficient markets, value indicators are likely to converge, simplifying the reconciliation process. In less efficient markets, greater judgment is required to account for market imperfections and potential biases.

2. The Art of Judgment and Experience

Reconciliation is not solely a mechanical process; it relies heavily on the appraiser’s judgment and experience to navigate the complexities of real estate valuation.

• Factors Influencing Judgment:

  • Data Adequacy: The appraiser evaluates the quantity and quality of data supporting each value indicator.
  • Market Knowledge: A deep understanding of local market dynamics, trends, and influences is crucial for assessing the relevance of each indicator.
  • Appraisal Expertise: Mastery of appraisal principles and techniques enables the appraiser to identify potential biases, errors, and inconsistencies in the data and analysis.

• Mathematical Representation:
  The reconciled value (Vr) can be conceptualized as a weighted average of the value indicators:

  Vr = w1V1 + w2V2 + w3V3
  

  Where:

  V1, V2, V3 = Value indicators from the Sales Comparison Approach, Income Capitalization Approach, and Cost Approach, respectively.
  w1, w2, w3 = Weights assigned to each value indicator, reflecting the appraiser's judgment of their reliability and relevance.
  

  Note: The weights (w1, w2, w3) are not determined through a purely mathematical formula but are based on the appraiser’s subjective evaluation of the factors mentioned above.

• Practical Application: An appraiser might place more weight on the Sales Comparison Approach for a single-family residential property in a well-established neighborhood with numerous comparable sales. Conversely, the Income Capitalization Approach might receive greater weight for an income-producing property with a stable rental history.

3. Reliability of Value Indicators

The reliability of a value indicator depends on several factors:

• Amount of Data:
  1. A larger statistical sample of data provides more reliable conclusions.
  2. More detailed data allows for a more thorough analysis.
  3. Value conclusions are more reliable if they are supported by several independent sources.
• Accuracy of Data:
  1. Data should be verified.
  2. Accuracy is relevant to the specific appraisal problem.
• Relevance of Data:
  1. Value indicators must be consistent with the terms of the appraisal assignment.
  2. The appraisal technique must be appropriate.

4. Practical Applications and Experiments

• Case Study:
  Consider a commercial property with the following value indications:

  • Sales Comparison Approach: $1,200,000 (based on 5 comparable sales with adjustments)
  • Income Capitalization Approach: $1,150,000 (based on stabilized income and market-derived capitalization rate)
  • Cost Approach: $1,300,000 (based on replacement cost less depreciation)

  The appraiser’s judgment might lead them to assign the following weights:

  • Sales Comparison Approach: 50% (most relevant due to market activity)
  • Income Capitalization Approach: 40% (reliable income stream, but market cap rate might not fully capture potential)
  • Cost Approach: 10% (least reliable due to depreciation estimates)

  Reconciled Value: (0.50 * $1,200,000) + (0.40 * $1,150,000) + (0.10 * $1,300,000) = $1,190,000

  This illustrates how the appraiser’s judgment, informed by market knowledge and appraisal expertise, influences the final value opinion.

• Experimental Exercise:

  1. Divide students into groups and provide each group with a dataset containing information on a hypothetical property and comparable sales, income data, and cost information.
  2. Instruct each group to independently develop value indicators using the Sales Comparison Approach, Income Capitalization Approach, and Cost Approach.
  3. Have each group present their value indicators and explain their rationale for assigning weights to each approach during reconciliation.
  4. Facilitate a class discussion on the differences in judgments and the factors that influenced each group’s decision-making process.

5. Common Pitfalls and Mitigation Strategies

• Confirmation Bias: The tendency to favor information confirming pre-existing beliefs. Mitigate by actively seeking out contradictory data and perspectives.
• Anchoring Bias: Over-reliance on an initial value indicator, even if it is subsequently found to be unreliable. Mitigate by independently evaluating each approach and avoiding premature commitment to a specific value range.
• Overconfidence: Overestimating one’s own judgment and expertise. Mitigate by seeking peer review and acknowledging the inherent uncertainties in real estate valuation.
• Averaging as Reconciliation: As noted, this is a common mistake that is not permitted. An appraiser must provide details of their assessment of approaches used, and those not used with a full accounting.

6. Reconciliation on the URAR Form

The Uniform Residential Appraisal Report (URAR) prompts the appraiser to explicitly state the values derived from each approach, if developed, and to reconcile these values into a final opinion of value.

• Key Considerations:
  • Explain the rationale for giving more weight to specific approaches.
  • Address any inconsistencies or discrepancies between value indicators.
  • Clearly state the final opinion of value and its effective date.
  • Reaffirm the purpose of the appraisal.

Conclusion

Reconciliation is the apex of the appraisal process, demanding a blend of scientific rigor and subjective judgment. By understanding the principles of statistical weighting, decision theory, and market efficiency, and by honing their expertise through experience and continuous learning, appraisers can confidently navigate the complexities of reconciliation and provide credible, defensible value opinions that serve the needs of their clients and the public interest. A critical review is to ensure that the work will pass muster. If it won’t, don’t send it.