Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction

This chapter, “Reconciliation and Final Value Opinion,” is crucial for mastering appraisal reports, particularly the Uniform Residential Appraisal Report (URAR). We will delve into the process of synthesizing value indicators obtained from different appraisal approaches and comparable properties to arrive at a credible final value opinion, fulfilling the course’s objective of creating comprehensive and compliant reports that meet industry standards. The material in this section builds on previously learned material and introduces mathematical concepts for the calculation of the final value opinion. This process demands sound judgment, experience, and a rigorous review of all data and methodologies. Mathematical formulas or techniques (such as averaging) are not used in reconciliation.

II. Reconciliation: Synthesizing Value Indicators

A. Definition and Purpose

Reconciliation is the process of critically analyzing the value indications derived from two or more appraisal approaches (sales comparison, cost, and income) and/or different comparable properties to arrive at a single, supportable opinion of value. This step is crucial for ensuring the credibility and defensibility of the appraisal, as it demonstrates the appraiser’s ability to synthesize complex data and exercise sound judgment.

B. Key Principles

• Not a Mathematical Averaging: Reconciliation is not a simple averaging of the value indicators. It is a qualitative analysis where the appraiser assigns varying degrees of weight to each indicator based on its reliability and relevance.
• Judgment and Experience: The final value opinion is ultimately a product of the appraiser’s professional judgment❓ and experience.
• Critical Review: The process starts with a meticulous review of all data, calculations, and reasoning used to derive the various value indicators.

C. Factors Influencing Reliability

The reliability of a value indicator is paramount in the reconciliation process. Key factors that contribute to reliability include:

1. Amount of Data: Value indicators based on larger statistical samples, more detailed data, or multiple independent sources are generally considered more reliable.

   • Example: An indicator derived from ten comparable sales is typically more reliable than one based on only three sales, ceteris paribus.

2. Accuracy of Data and Techniques: The accuracy of the supporting data and the appropriateness of the appraisal technique employed are crucial. Data verification is essential.

   • Experiment: To evaluate data accuracy, trace the information from its source (e.g., public records) to the appraisal report, noting any discrepancies. Then calculate the impact of each discrepancy on the value.

3. Relevance to the Appraisal Problem: The value indicator must be consistent with the appraisal assignment’s purpose and the appraisal technique must be appropriate for the property type.

   • Example: The income capitalization approach would be least relevant in appraising a single-family residence unless it is a rental property.

D. Mathematical Support for Value Adjustments

While reconciliation isn’t about averaging, mathematical analysis is essential in the underlying appraisal approaches. For example, in the sales comparison approach, adjustments to comparable sales prices are often calculated as percentages of the sales price to reflect differences in property characteristics:

• adjustment amount❓❓ (A) = (Comparable Sales Price (CSP)) * (Percentage Adjustment (%Adj))

  A = CSP * (%Adj)

  • Example: If a comparable sale has a sales price of $300,000 and requires a 5% upward adjustment for a superior view, the adjustment amount would be: A = $300,000 * 0.05 = $15,000.
  • Adjusted Sale Price (ASP) = Comparable Sales Price (CSP) +/- Adjustment Amount (A)

  ASP = CSP +/- A

  III. Final Value Opinion: Articulating the Conclusion

A. Deriving the Final Opinion

The final value opinion is a single dollar amount (point estimate) or a range of values that represents the appraiser’s best estimate of the property’s market value. This opinion should be:

• Supported by Evidence: Clearly supported by the data and analysis presented in the appraisal report.
• Defensible: Able to withstand scrutiny and critical review.
• Understandable: Easily understood by a non-appraiser reader.

B. Point Estimate vs. Range Value

• Point Estimate: A single dollar amount representing the appraiser’s opinion of value. It implies a high degree of confidence in the estimate.
• Range Value: A range within which the property’s value is most likely to fall. It acknowledges the inherent uncertainty in the appraisal process and is often used when market conditions are unstable or data is limited.

C. Rounding the Value Opinion

Value opinions should be rounded to reflect the level of precision inherent in the appraisal process. Rounding to the nearest $100 or $1,000 is generally appropriate for residential properties.
Example: If the three adjusted sale prices of comparable properties are: $295,000, $305,000, and $310,000, then the final value opinion should be in the range of $300,000 - $310,000.

D. Addressing Potential Errors and Omissions

It’s essential to take out Errors and Omission insurance to cover mistakes and/or missed information.

IV. Completing the URAR Reconciliation Section

The URAR form provides a specific section for reconciliation. This section requires the appraiser to:

1. Indicate the Appraisal Type: Specify whether the appraisal is “as is” or “subject to” certain conditions (e.g., repairs, alterations).
   • Hypothetical condition or an extraordinary assumption, the effect on value must be spelled out to the client in an addendum.
2. List Conditioning Factors: Identify any conditions that affect the value opinion.
3. Identify Appraisal Approaches Used: Indicate which appraisal approaches were developed and relied upon.
4. Reaffirm the Purpose of the Appraisal: Briefly restate the purpose of the appraisal.
5. Set Forth the Opinion of Market Value: Clearly state the final value opinion (point estimate or range value) and the effective date of the appraisal.
6. Sign and Date the Appraisal Report: Include the appraiser’s signature and appraisal license or certification number.

V. Ensuring Understandability

The appraisal report should be easily understandable to a non-appraiser reader. To achieve this, the appraiser should:

• Use clear and concise language.
• Avoid jargon and technical terms whenever possible.
• Provide adequate explanations and supporting data.
• Organize the report logically and use headings and subheadings to guide the reader.

VI. Critical Review Considerations

Appraisers must always assume that their work will be subject to critical review. To ensure that the appraisal report is defensible, the appraiser should:

• Maintain a complete and well-organized work file.
• Document all data sources and verification efforts.
• Clearly explain all assumptions and limiting conditions.
• Address all relevant market factors.
• Develop a supportable value opinion that is consistent with the data and analysis presented in the report.

By adhering to these principles and guidelines, appraisers can produce credible and defensible appraisal reports that meet industry standards and enhance their professional credibility.