Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction

This chapter delves into the crucial stage of the appraisal process where diverse value indicators are analyzed and synthesized to arrive at a single, well-supported opinion of value. This step, known as reconciliation, is paramount in ensuring a credible and reliable appraisal, particularly in federally related transactions governed by FIRREA and USPAP. As emphasized throughout this course, mastering real estate appraisal involves navigating complex appraisals, understanding regulatory frameworks, and confidently assessing property values. Reconciliation embodies all these aspects, requiring sound judgment, thorough analysis, and adherence to established standards.

II. Understanding Reconciliation

Reconciliation is more than just averaging values; it’s a comprehensive analytical process. It’s the process of critically weighing and considering different value indications (derived from various appraisal approaches or comparable properties) and forming a reasoned, supported conclusion about the most probable value of the subject property.

• Key Aspects of Reconciliation:

  • Analyzing multiple value indicators (e.g., from sales comparison, cost, and income approaches).
  • Evaluating the reliability and relevance of each indicator.
  • Justifying the weighting assigned to each indicator.
  • Arriving at a single point estimate or a narrow range of value.
  • Clearly explaining the reasoning behind the final value opinion.

A. Reconciliation within the Appraisal Process:

The reconciliation process often serves as the culmination of an appraisal, where the appraiser synthesizes all gathered data and analyses to form a final opinion of value. However, it’s also used internally within each appraisal approach:

• Sales Comparison Approach: Reconciling adjusted values of different comparable properties.
• cost approach❓: Reconciling depreciated cost with site value.
• Income Approach: Reconciling value indications from different income capitalization methods.

B. Why Not Simply Averaging?

Mathematical averaging of value indicators is explicitly discouraged by USPAP. Averaging implies that all indicators are equally reliable, which is rarely the case. Reconciliation demands critical judgment to determine which indicators are most relevant and accurate for the specific appraisal problem.

III. Factors Influencing the Reliability of Value Indicators

The reliability of each value indicator is crucial in the reconciliation process. It determines the weight the appraiser assigns to that indicator in arriving at the final value opinion. Several factors influence reliability:

A. Amount of Data:

Value indicators based on more extensive and detailed data are generally more reliable:

1. Statistical Significance: A larger sample size of comparable sales or income data reduces the impact of outliers and provides a more representative picture of the market.

   • For example, consider two appraisals of a residential property. One uses three comparable sales, while the other uses ten comparable sales in the immediate neighborhood, all verified. The appraisal with ten comparable sales will generally yield a more reliable value indicator.
     2. Detailed Data: More detailed data on comparable properties, including thorough verification of sales terms, physical characteristics, and market conditions, increases reliability.
     3. Independent Sources: Value indicators supported by multiple independent sources❓❓ (e.g., verified sales data, cost manuals, market surveys) are more credible.

B. Accuracy of Data and Techniques:

The accuracy of a value indicator is determined by:

1. Verification of Data: Data must be thoroughly verified to ensure its accuracy. Verification involves confirming information with reliable sources (e.g., buyers, sellers, brokers, public records).

   • Example: Verifying the sale price of a comparable property by reviewing the recorded deed and confirming the terms of sale with the buyer and seller.
     2. Relevance of Appraisal Technique: The chosen appraisal technique must be appropriate for the property type, market conditions, and appraisal assignment.

   • Example: The income capitalization approach is generally most relevant for income-producing properties (e.g., apartments, office buildings) and less relevant for single-family residences.

C. Relevance to the Appraisal Problem:

Even with ample and accurate data, a value indicator may be unreliable if it’s not relevant to the specific appraisal problem:

1. Consistency with Assignment Terms: The value indicator must be consistent with the defined scope of work, intended use, and definition of value.

   • Example: If the appraisal assignment requires an opinion of market value, a value indicator based on investment value to a specific buyer would be less relevant.
     2. Appropriateness of Appraisal Technique: The technique must be suitable for the property type and market conditions.

   • Example: Using the cost approach for a historic property may be less reliable due to difficulties in accurately estimating depreciation.

D. Mathematical Representation

The amount of data, A, the accuracy of the data, X, and the relevance of the appraisal technique, R can be mathematically represented in a simple ratio:

Reliability Index (RI) = (A * X)/R

Where RI indicates the Reliability Index of a value indicator; a higher RI reflects a more reliable value indicator.

IV. Reconciliation Techniques and Considerations

A. Qualitative Analysis:

Reconciliation often involves qualitative judgment based on experience and market knowledge.

1. Identifying Key Value Drivers: Determine which property characteristics have the greatest impact on value in the subject market.
2. Comparing Comparables: Critically evaluate the comparable properties concerning these key value drivers.
3. Weighting Value Indicators: Assign more weight to value indicators derived from comparables that are most similar to the subject property concerning the key value drivers.

B. Quantitative Analysis:

Quantitative analysis can supplement qualitative judgment.

1. Sensitivity Analysis: Evaluate how changes in key assumptions (e.g., capitalization rate, vacancy rate) affect the value indicators.
2. Statistical Analysis: Use statistical tools (e.g., regression analysis) to identify patterns in market data and estimate the impact of various factors on value.

C. Consistency and Logic:

The reconciliation process must be logical, consistent, and supported by the evidence in the appraisal. The appraiser’s reasoning must be clearly explained, allowing the intended users to understand how the final value opinion was derived.

V. Practical Application and Related Thought Experiments

Example 1: Reconciling Sales Comparison and Cost Approaches

An appraiser is appraising a new single-family home. The sales comparison approach indicates a value of \$350,000, while the cost approach indicates a value of \$360,000.

• Experiment: The appraiser re-examines the market data and determines that the sales comparison approach is based on several recent sales of similar new homes in the same subdivision. The cost approach, however, relies on cost data from a national manual, which may not fully reflect local construction costs. The appraiser also notes that the cost approach does not fully account for entrepreneurial profit, which is likely to be lower for new homes in a competitive market. Based on this analysis, the appraiser gives more weight to the sales comparison approach and concludes that the market value is \$352,000.
  RI (Sales Approach) = (8 * 9) /1 ; RI = 72
RI (Cost Approach) = (6 * 7)/ 2; RI = 21

VI. USPAP Compliance and Reporting

A. Reconciliation Section of the URAR:

The Uniform Residential Appraisal Report (URAR) includes a specific reconciliation section where the appraiser summarizes the value indicators and explains the reasoning behind the final value opinion. The appraiser must:

• State the values indicated by each approach used (sales comparison, cost, income).
• Indicate whether the appraisal was made “as is” or subject to repairs or alterations.
• Reaffirm the purpose of the appraisal.
• Set forth the opinion of market value.

B. Supporting Documentation:

The appraisal workfile must contain documentation supporting the reconciliation process, including:

• Data sources.
• Calculations.
• Analysis of comparable properties.
• Explanations of adjustments.
• Reasoning behind weighting assigned to each value indicator.

C. Clarity and Transparency:

The appraisal report must be clear, concise, and easily understandable to a non-appraiser reader. The appraiser’s reasoning must be transparent, allowing the intended users to understand how the final value opinion was derived.

VII. Conclusion

Reconciliation is a critical skill for real estate appraisers, requiring sound judgment, analytical rigor, and adherence to USPAP standards. It represents the synthesis of data and analysis into a credible and well-supported opinion of value, crucial for informed decision-making in real estate transactions. Mastering reconciliation is essential for appraisers to excel in their profession and confidently assess property values, especially in federally related transactions.