Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction: The Scientific Foundation of Reconciliation

Reconciliation in real estate appraisal isn’t merely averaging figures; it’s a critical, scientifically grounded process of analyzing and weighing value indicator❓s derived from different appraisal approaches and comparable properties. This chapter will delve into the essential art of appraisal adjustments, equipping you with the knowledge to analyze property rights, financing nuances (including cash equivalency and non-standard financing), conditions of sale, post-sale expenditures, market fluctuations, and locational variances.

II. Core Principles of Reconciliation

• A. Definition: Reconciliation is the process of critically analyzing value indicators derived from multiple sources (sales comparison, cost, income capitalization) to arrive at a single, credible opinion of value.

• B. Role of Judgment: While data analysis is vital, reconciliation heavily❓ relies on the appraiser’s informed judgment and experience. Mathematical averaging❓❓ is specifically not used.

III. Data Analysis and Reliability Assessment

• A. Data Verification:

  1. All data used in value indicators must be meticulously checked for accuracy. This includes verifying sales data (prices, dates, conditions), cost estimates, and income/expense information.
  2. The accuracy of data depends on how well it has been verified.

• B. Consistency of Application:

  1. Appraisal techniques (sales comparison adjustments, cost calculations, income capitalization) must be consistently applied across the subject property and all comparables. This minimizes bias and enhances the reliability of comparisons.
  2. Example: When adjusting comparable sales for location, the appraiser should use consistent criteria and data sources for evaluating the desirability of each location.

• C. Reliability Factors: The reliability of a value indicator is directly proportional to:

  1. Amount of Data: Value indicators are more robust when based on larger, statistically significant sample sizes. Example: A sales comparison analysis using 5-6 well-researched comparable sales is generally more reliable than one using only 2.

  2. Accuracy of Data and Techniques: The precision of the underlying data and the appropriateness of the appraisal technique significantly impact reliability. Example: Using a discounted cash flow (DCF) model with well-supported income projections and discount rates will yield a more reliable income approach indicator.

     Mathematical Representation:
     Let R represent the reliability of a value indicator, D the amount of supporting data, and A the accuracy of the data and technique. A simplified representation could be:
     R ∝ D * A
     This shows that reliability increases with both the amount and accuracy of data.

  3. Relevance to the Appraisal Problem: The chosen appraisal technique and the resulting value indicator must be directly relevant to the appraisal assignment’s purpose and intended use. Example: The income capitalization approach is highly relevant for valuing income-producing properties but less so for non-income-producing residential properties.

  4. Relevance to the particular appraisal problem influences the appraiser’s judgment.

IV. The Science of Weighting Value Indicators

• A. Weighting Criteria: Assigning weight to different value indicators isn’t arbitrary. It’s based on the scientific assessment of their reliability, accuracy, and relevance.

  1. Sales Comparison Approach: Often given significant weight in residential appraisals due to its direct reflection of market transactions. However, its reliability decreases when substantial adjustments are required.
  2. Cost Approach: More reliable for newer properties where depreciation is less significant. Less reliable for older properties with significant functional or economic obsolescence.
  3. Income Capitalization Approach: Most reliable for income-producing properties with stable income streams. Requires careful consideration of vacancy rates, operating expenses, and capitalization rates.
     A final value opinion that is stated as a single dollar amount❓❓ is known as a point estimate.

• B. Mathematical Perspective (Not Averaging!): While not a direct calculation, consider a weighted average to conceptually illustrate the process:
  Value = (W_SC * Value_SC) + (W_Cost * Value_Cost) + (W_Income * Value_Income)
  Where:

  • Value is the final reconciled value.
  • Value_SC, Value_Cost, Value_Income are the value indicators from the Sales Comparison, Cost, and Income approaches, respectively.
  • W_SC, W_Cost, W_Income are the weights assigned to each approach, based on their assessed reliability.

V. Practical Applications and Experiments

• A. Experiment: Sensitivity Analysis

  1. Vary key assumptions within each appraisal approach (e.g., adjustment amounts in sales comparison, depreciation rates in cost approach, capitalization rates in income approach).
  2. Observe how these changes affect the final value indicators. This helps identify the most sensitive variables and informs the weighting process.
  3. Example: A small change in the capitalization rate significantly impacts the income approach value, indicating it might require a lower weight if the capitalization rate is uncertain.

• B. Case Study: Reconciling Conflicting Indicators

  1. Suppose the sales comparison indicates a value of $500,000,thecostapproach$480,000, and the income approach $520,000 for a small apartment building.
  2. The appraiser analyzes the data:
     • Sales comparison: Good data on comparable sales, but significant location adjustments needed.
     • Cost approach: Building is relatively new, minimizing depreciation concerns.
     • Income approach: Rental market is volatile, making income projections less certain.
  3. Based on this analysis, the appraiser might weight the cost approach more heavily (e.g., 40%), the sales comparison approach at 35%, and the income approach at 25%. This results in a reconciled value closer to the cost approach but still acknowledging the other indicators.

• C. Experiment: Adjustment Grid Analysis
  1. The Uniform Appraisal Dataset or UAD uses actual or chronological age stated in years. The UAD drop box does not permit the usage of effective age in this section.
  2. If the appraiser feels the effective age is a significant factor this should be reported in an addendum.

VI. Final Value Opinion and Report Completion

• A. Point Estimate vs. Range Value: Express the final value as a point estimate (single dollar amount). A range value can be used, but must be well-supported and justified within the appraisal report.

• B. URAR Reconciliation Section: Complete the Reconciliation section of the Uniform Residential Appraisal Report (URAR) accurately. Indicate appraisal type (“as is,” “subject to,” etc.), conditioning factors, approaches used, and reaffirm the purpose of the appraisal.

• C. Transparency and Justification: The most critical element is a clear, well-supported justification for the final value opinion. The appraisal report must explicitly explain why certain indicators were given more weight than others.

VII. USPAP Compliance and Ethical Considerations

• A. Competency Rule: Appraisers must possess the necessary knowledge and experience to competently perform the reconciliation process for the specific property type and market.

• B. Scope of Work Rule: The reconciliation process must be thorough and appropriate given the complexity of the appraisal problem. Insufficient analysis or superficial reconciliation is a violation of USPAP.

C. Jurisdictional Exception: the purpose of the JURISDICTIONAL EXCEPTION is to limit the potential adverse effects of local laws in terms of the applicability of the USPAP in the local jurisdiction. If a local law makes part of the USPAP unenforceable, the remaining parts are not affected.

VIII. Conclusion: The Art and Science of Valuation

Reconciliation represents the culmination of the appraisal process, blending scientific data analysis with informed judgment. Mastery of this skill requires a deep understanding of appraisal principles, rigorous data verification, and the ability to articulate a well-reasoned, credible final value opinion.