Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction

This chapter delves into the critical process of reconciliation and the formation of a final value opinion in property valuation. It is essential for appraisers to understand the scientific principles and methodologies involved in reconciling different value indicators derived from income capitalization and other appraisal techniques. As highlighted in the course description (“Mastering Property Valuation: Income & Reconciliation Techniques”), this chapter equips you with the skills to analyze various value indicators, refine your judgment, and ultimately, arrive at a credible and well-supported value opinion. This skill is crucial for informed decision-making in real estate and can be the difference between a good appraisal and one that is readily discredited.

II. Understanding Reconciliation

A. Definition and Scope

1. Reconciliation is the process of critically analyzing and weighing the reliability, relevance, and amount of supporting data associated with two or more value indicators to arrive at a single, supportable opinion of value. It is NOT a simple averaging of values. It also serves as the culmination of the appraisal process, where the appraiser reviews and integrates all data to determine a final value opinion.

2. Scientific Principles: Reconciliation draws upon principles of statistical inference and decision theory.
   - Statistical Inference: The appraiser uses statistical reasoning to evaluate the sample data available for each valuation approach, determining how well each sample represents the larger population of potential sales or income streams.
   - Decision Theory: The appraiser implicitly uses decision theory concepts to weigh the costs and benefits of relying on each value indicator, considering the potential risks associated with each.

B. The Importance of Judgement and Experience

1. Reconciliation depends heavily on the appraiser’s sound judgement and extensive experience in the local real estate market. These influence how the appraiser interprets the data, identifies relevant trends, and weighs the various value indicators.

2. Application to Course Description: Aligns with the goal of refining “appraisal judgement to provide credible value opinions.”

C. What Reconciliation IS NOT

1. Mathematical formulas or automated techniques (like simple averaging) are not substitutes for careful analysis and judgement. Averages can be misleading if the underlying data are not equally reliable.

D. Initial Review: Data Verification

1. Before reconciliation can begin, a meticulous review of all data, calculations, and reasoning is essential. This includes:
   - Verifying the accuracy of all calculations. Any errors must be identified and corrected.
   - Ensuring consistency in the application of all appraisal techniques, both to the subject property and to comparable properties.
   - Assessing the reliability of each value indicator based on supporting data.
   - Ensuring inclusion and proper analysis of all pertinent data.
   - Confirming that all value indicators are derived in accordance with the terms and conditions of the appraisal assignment.

III. Reliability of Value Indicators: A Scientific Perspective

A. Factors Influencing Reliability

1. Amount of Data: Value indicators are inherently more credible when derived from a more extensive statistical sampling of data, richer and more detailed data, and multiple independent sources. This is because larger samples reduce the likelihood of statistical error and increase the confidence level in the derived value.

2. Accuracy of Data: This factor relies on the extent of verification and the relevance of the appraisal technique to the specific valuation problem. Verification ensures that the data accurately reflect market transactions, while relevance ensures that the technique is appropriate for the property type and available data.

• Example: Suppose you are using the Sales Comparison Approach. If Comparable A’s sales price is verified directly with the buyer and seller, and the property is highly similar to the subject, it will likely be given more weight than Comparable B, whose sales price was only verified by a real estate agent and is less similar to the subject.

3. Relevance to the Appraisal Problem: The value indicator must align with the terms of the appraisal assignment and the appraisal technique used must be suitable for the property being valued.

• Example: If appraising an income-producing property, the Income Capitalization Approach should be given significant weight, provided the data supporting it is reliable. If appraising a unique property with few comparables, the Cost Approach might be given more weight, assuming accurate cost data is available.

B. Statistical Sampling and the Importance of Sample Size

1. Theory: In statistics, a larger sample size generally leads to a more accurate representation of the population from which the sample is drawn.
   - Equation: The standard error (SE) of the mean, a measure of the accuracy of a sample mean, is inversely proportional to the square root of the sample size (n):
   SE = σ / √n
   Where σ is the population standard deviation. This equation shows that increasing ‘n’ decreases the standard error, thus increasing the accuracy.

2. Practical Application:
   - Experiment: Simulate a market with 1000 properties, each with a true value. Draw multiple small (n=5) and large (n=30) samples of comparable sales. Calculate the mean value for each sample. Observe how often the mean of the larger samples is closer to the true average value of the market.

C. Assessing Data Accuracy through Verification

1. Theory: Data verification is a critical component of the scientific method. It involves corroborating information through independent sources to minimize bias and error.

2. Application: Appraisers must verify data from various sources such as sales contracts, tax records, and property inspections. Inconsistencies should be identified and resolved.

D. Relevance and Appraisal Techniques

1. Theory: The appropriateness of an appraisal technique depends on the characteristics of the property and the availability of data.

• The Sales Comparison Approach is best when there are numerous comparable sales in the market.

• The Income Capitalization Approach is most suitable for income-producing properties with reliable income and expense data.

• The Cost Approach is most reliable for new or unique properties where comparable sales or income data are limited.

IV. Reaching a Final Value Opinion

A. Supporting the Reconciled Value

1. The appraiser’s judgement is the determining factor in choosing a reconciled value. The choice of value should be supported by evidence in the appraisal report.

B. Reviewing the Entire Appraisal

1. Reaching an opinion of value requires a complete review of all data, calculations, and reasoning presented in the appraisal. The reliability of each value indicator must be carefully assessed.

C. Additional Data and Analysis

1. If necessary, gather additional data and perform additional analyses. This ensures the appraisal is as thorough and well-supported as possible.

V. Completing the URAR Reconciliation Section

A. Components of the URAR Reconciliation Section

1. Indicate whether the appraisal was made “as is” or “subject to” certain conditions (e.g., repairs or alterations). List any conditioning factors, appraisal approaches used, and reaffirm the purpose of the appraisal.

2. State the opinion of market value as either a point estimate (a single dollar amount) or a range value (a range within which the property’s value is likely to fall). Value opinions should be appropriately rounded.

B. Presentation and Clarity

1. Review your work to ensure that it is easily understood by a non-appraiser reader. The appraisal should be clear, concise, and logically organized.

VI. Alternative to Point Estimate

A. Definition and Use
A “Range Value” acknowledges the inherent uncertainty in valuation, providing a reasonable range.

VII. Checklist for Reviewing an Appraisal

A. Elements to Review

Purpose of the Appraisal
Ensure clearly defined purpose.

Market Data
Check all sources of market data.

Valuation Methods Used
Confirm appropriateness and correct application.

Reconciliation
Analyze that the final value is based on well-supported value conclusions.

Assumptions
Assess if are reasonable.

Statement of Compliance
Confirm with professional appraisal standards.

Clarity
Readability for intended users of the report.

VIII. Conclusion

Reconciliation is not a mere mathematical exercise; it is a critical thinking process that blends scientific methodology with appraisal expertise. By understanding the factors influencing the reliability of value indicators, rigorously verifying data, and applying sound judgement, appraisers can develop credible and defensible value opinions that withstand scrutiny from clients, reviewers, and legal challenges.