Reconciliation and Report Presentation

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Chapter 11: Reconciliation and Report Presentation

I. Understanding Reconciliation in Appraisal

Reconciliation is the critical process where an appraiser analyzes and weighs the different value indications derived from various appraisal approaches to arrive at a single, credible opinion of value. It’s not a simple averaging of numbers; instead, it’s a reasoned judgment based on the reliability, relevance, and accuracy of each value indicator. Reconciliation represents the culmination of the appraisal process, bridging data analysis with professional expertise.

• A. Definition and Purpose: Reconciliation involves critically examining the strengths and weaknesses of each valuation approach (Sales Comparison, Cost, and Income) relative to the specific appraisal assignment and the characteristics of the subject property. The goal is to determine which approach or approaches provide the most reliable indication of value for the particular property and intended use. Reconciliation leads to either point or range value.
• B. Scientific Foundation: Reconciliation draws on principles of statistical weighting, error analysis, and decision theory. Although subjective judgment is involved, it should be grounded in a systematic evaluation of data quality and methodological soundness.

II. Factors Influencing the Reliability of Value Indicators

The reliability of a value indicator depends on several key factors that the appraiser must carefully assess.

• A. Amount of Data: Value indicators based on a larger, more detailed, and independently supported dataset are generally more reliable. This aligns with statistical principles where larger sample sizes lead to more accurate estimates of population parameters.
  1. Statistical Sampling: A larger statistical sample minimizes sampling error and provides a more representative picture of the market.
  2. Detailed Data: Value indicators are considered more reliable when they are derived from more detailed data.
  3. Independent Sources: Corroborating data from multiple, independent sources strengthens the validity of the value indicator.

• B. Accuracy of Data and Techniques: The accuracy of a value indicator depends on both the quality of the underlying data and the appropriateness of the appraisal technique used to derive the indicator.

  1. Data Verification: Verified data from reliable sources reduces the risk of errors and biases. Appraisers must use due diligence to ensure data accuracy. Verification methods include direct communication with parties involved in transactions, examination of official records, and cross-checking with multiple data sources.
  2. Technique Relevance: The chosen appraisal technique must be appropriate for the property type and the appraisal problem. For example, the income capitalization approach is generally not relevant for valuing single-family residences in owner-occupied markets.

• C. Relevance to the Appraisal Problem: The relevance of a value indicator to the specific appraisal problem is paramount. This is tied to the appraisal assignment’s purpose, intended use, and the characteristics of the subject property.

  1. Consistency with Assignment Terms: The value indicator must be consistent with the defined terms of the appraisal assignment (e.g., the definition of market value, the property rights being appraised).
  2. Appropriateness of Appraisal Technique: The appraisal technique must be appropriate for the property type and market conditions.
• D. Potential Errors: To assess the reliability of each value indicator, a thorough error analysis must be performed to verify that all calculations are accurate and all appraisal techniques have been applied consistently to the subject property and to all comparables.

III. A Scientific Approach to Value Indicator Analysis

To ensure a robust reconciliation process, appraisers should employ a structured analytical framework.

• A. Data Quality Assessment: Evaluate the quality of data used in each approach based on criteria such as:
  • Source Reliability: Assess the credibility and independence of data sources.
  • Verification Level: Determine the extent to which data has been verified and cross-checked.
  • Timeliness: Consider the age of the data and its relevance to current market conditions.
• B. Methodological Soundness: Evaluate the appropriateness of each appraisal technique based on the following criteria:
  • Applicability: Assess whether the chosen approach is suitable for the property type and market conditions.
  • Data Sufficiency: Determine whether sufficient data is available to support the approach.
  • Adjustment Reasonableness: Evaluate the reasonableness and supportability of any adjustments made in the approach.
• C. Statistical Weighting: Based on the data quality and methodological soundness assessments, assign weights to each value indicator reflecting its relative reliability. This aligns with statistical principles, where more reliable data receives greater weight in the overall estimate.
• D. Error Analysis: Conduct error analysis to assess the potential impact of errors or uncertainties in the data or assumptions used in each approach.

• E. Example Scenario and Experiment:

  Scenario: An appraiser is valuing a commercial property using the Sales Comparison, Cost, and Income approaches.
  Data Quality Assessment: The appraiser assesses the data quality for each approach, assigning a score from 1 to 5 for each of the criteria.
  1. Sales Comparison Approach: The appraiser identified and analyzed three comparable sales, all of which were verified.
  * Source Reliability: Verified data from real estate records (score 5).
  * Verification Level: Verified with agents involved in the sales (score 5).
  * Timeliness: Sales occurred within the last six months (score 5).
  2. Cost Approach: The appraiser used a cost estimating manual to estimate the reproduction cost of the building, depreciation was estimated based on the age-life method.
  * Source Reliability: Cost Estimating Manual (score 4).
  * Verification Level: Used the age life method (score 2).
  * Timeliness: Utilized current local cost data (score 4).
  3. Income Approach: The appraiser used the direct capitalization method based on current market conditions in the neighborhood.
  * Source Reliability: Verified data from local brokers and building owners (score 4).
  * Verification Level: Verified with local brokers and building owners (score 4).
  * Timeliness: Utilized current data (score 5).

  Methodological Soundness Assessment: The appraiser assesses the Methodological Soundness for each approach, assigning a score from 1 to 5 for each of the criteria.
  1. Sales Comparison Approach: Sales occurred in the neighborhood and were easily comparable.
  * Applicability: Suitable for this type of property and market conditions (score 5).
  * Data Sufficiency: Sufficient data (score 5).
  * Adjustment Reasonableness: All adjustments were reasonable and well-supported (score 5).
  2. Cost Approach: Cost estimation manual had a moderate degree of accuracy, and depreciation was estimated using the age-life method.
  * Applicability: Not suitable for this type of property and market conditions (score 2).
  * Data Sufficiency: Not sufficient data (score 2).
  * Adjustment Reasonableness: All adjustments were somewhat supported (score 3).
  3. Income Approach: Income approach was a typical, valid method.
  * Applicability: Suitable for this type of property and market conditions (score 5).
  * Data Sufficiency: Sufficient data (score 5).
  * Adjustment Reasonableness: All adjustments were reasonable and well-supported (score 5).

  Weighting:

  *Sales Comparison: [4,5,5] + [5,5,5]= 29 points / 54 total points = 54%
  
  *Cost Approach: [4,2,4] + [2,2,3] = 17 points / 54 total points = 31%
  
  *Income Approach: [4,4,5] + [5,5,5] = 28 points / 54 total points = 52%
  
  *The appraiser will give the greatest weight to the income and sales comparison approaches, as they yield the more valid information in the current scenario.
  

IV. Report Presentation

The appraisal report is the final product of the appraisal process, and its presentation is crucial for conveying the appraiser’s opinions and conclusions clearly and effectively. The report must be well-organized, logically structured, and easy to understand for the intended users.

• A. Organization and Clarity: The report should follow a standard format, with clear headings and subheadings, and a logical flow of information.
• B. Transparency of Reasoning: The appraiser’s reasoning and judgment must be clearly articulated and supported by the data and analysis presented in the report. The reconciliation section is the most critical area in the appraisal to verify and explain conclusions to the reader.
• C. Compliance with USPAP: The report must comply with all applicable requirements of the Uniform Standards of Professional Appraisal Practice (USPAP).
• D. Use of Visual Aids: Charts, graphs, maps, and photographs can enhance the clarity and impact of the report.
• E. Completing the Uniform Residential Appraisal Report’s Reconciliation section:
  • The appraiser indicates if the appraisal was made as is or is subject to the property being altered.
  • Any conditioning factors are listed.
  • Any appraisal approaches used are listed.
  • The purpose of the appraisal is reaffirmed.
  • The opinion of market value is set forth and the appraiser signs and dates the appraisal report, and includes his or her appraisal license or certification number.

V. Critical Review and Quality Control

Before finalizing the appraisal report, the appraiser should conduct a thorough self-review to ensure accuracy, completeness, and compliance with USPAP. This review should include checking all calculations, verifying data sources, and ensuring that the report is free of errors and omissions. It is also helpful to consider how the appraisal will appear to a review appraiser. If a review appraiser will look for any opportunity to discredit the appraiser’s reasoning and conclusion, the appraiser must be prepared.