Foundations of Appraisal: Reconciliation and Value Opinion

I. Understanding Reconciliation

Reconciliation is a critical step in the appraisal process, represent❓ing the appraiser’s synthesis of multiple value indicators into a single, well-supported opinion of value. It is not a mathematical❓ averaging but a reasoned judgment based on the appraiser’s experience and expertise.

A. Definition of Reconciliation:

• Reconciliation is the process of analyzing different value indicators (derived from different approaches, comparable properties, or units of comparison) to arrive at a single, supportable opinion of value.
• It also refers to the specific step within the appraisal process where the appraiser formulates that final value opinion.

B. Purpose of Reconciliation:

• To resolve disparities between different value indicators. These disparities can arise from:
  • Variations in comparable property data.
  • Differences in application of different appraisal techniques.
  • Using different units of comparison (e.g., price per square foot vs. price per room).

II. The Reconciliation Process: A Scientific Approach

Reconciliation is not an arbitrary process; it relies on a systematic review and analysis of data and reasoning.

A. Review and Verification:

1. Accuracy of Calculations: The appraiser must meticulously check all calculations for errors and correct them.
2. Consistent Application of Techniques: Appraisal techniques (Sales Comparison, Cost, Income) must be applied consistently to the subject property and all comparables. This ensures fair comparisons.
3. Assessment of Reliability: The appraiser must assess the reliability of each value indicator. This involves considering the amount of data, the accuracy of the data, and the relevance to the appraisal problem (discussed in detail below).
4. Inclusion and Analysis of Pertinent Data: All relevant data must be included and thoroughly analyzed. Omitting pertinent data can skew the final value opinion.
5. Compliance with Assignment Terms: The value indicators must be derived in accordance with the specific requirements and terms of the appraisal assignment.

B. Reliability of Value Indicators:

The reliability of a value indicator is a function of three key factors:

1. Amount of Data: A larger, more detailed, and independently supported dataset generally leads to a more reliable value indicator.

   • Example: A sales comparison approach based on 20 comparable sales is generally more reliable than one based on only 3 sales, ceteris paribus.
   • Reasoning: Statistical power increases with sample size. A larger sample better represents the population of comparable properties.
   • Experiment: Conducting a sensitivity analysis by iteratively removing comparable sales from a large dataset and observing the impact on the value indication can illustrate the importance of a large sample.
   • This principle aligns with the Law of Large Numbers in statistics.

2. Accuracy of Data and Techniques: The accuracy of a value indicator depends on:

   • The accuracy of the supporting data (verified and reliable sources).
   • The accuracy and appropriateness of the appraisal technique used.
     • Example: A value indicator derived using a regression model with a high R-squared value (indicating a good fit) is generally more reliable than one derived using a simple averaging technique.
     • Formula: R² = 1 - (SSR/SST), where SSR is the sum of squares of residuals and SST is the total sum of squares. R² represents the proportion of variance in the dependent variable (e.g., sales price) that is predictable from the independent variables (e.g., property characteristics).

3. Relevance to the Appraisal Problem: The relevance of a value indicator is determined by:

   • Its consistency with the terms of the appraisal assignment (e.g., definition of value, property rights appraised).
   • The appropriateness of the appraisal technique for the subject property type and market.
     • Example: The income capitalization approach is generally not relevant for appraising a single-family residence in a market dominated by owner-occupants. The sales comparison approach would be much more relevant.

C. Formula for Weighting
* It is not permissible to assign an exact percentage value or weight to the validity of any one method of determining property value. It is however permissible to acknowledge which value indicator best represents the data.
* To assign a weight would be misleading and ultimately harmful to the validity of the appraisal. This would be seen as using an improper influence to reach a predetermined result.

III. Reaching a Final Value Opinion

A. Appraiser’s Judgment as the Determining Factor:

• The appraiser’s judgment, based on experience, training, and a thorough understanding of the market, is paramount. Mathematical formulas or averaging must not be used in reconciliation.
• The appraiser must provide clear and logical support for the final value opinion, explaining why certain value indicators were given more weight than others.

B. Completing the Appraisal Report:

• The appraiser must clearly state whether the appraisal is “as is” or “subject to” certain conditions (e.g., repairs, alterations).
• Any conditions or extraordinary assumptions that affect the value opinion must be listed and explained.
• The appraisal report must identify all appraisal approaches used (even if some were given less weight).
• The report must reaffirm the purpose of the appraisal assignment.
• The final opinion of market value must be clearly stated as a single dollar amount (point estimate).
• The appraiser must sign and date the appraisal report, including their appraisal license or certification number.

IV. Point Estimate vs. Range Value

A. Point Estimate:

• The typical and preferred way to express an opinion of value is as a single dollar amount.
• Example: “The opinion of market value as of [date] is $300,000.”

B. Range Value:

• In some situations, an appraiser may provide a range of values, indicating the most likely interval within which the property’s value falls.
• This is less common than a point estimate and should only be used when the appraiser can justify the use of a range based on market conditions and data limitations.
• Example: “The opinion of market value as of [date] is between $290,000 and $310,000.”

V. Rounding Value Opinions

• Value opinions should be rounded to a level that is appropriate for the property type and the market. Stating values with excessive precision (e.g., $300,000.00) is generally inappropriate and may suggest a lack of understanding of market dynamics.
• For residential properties, rounding to the nearest $500 or $1,000 is typically appropriate. For higher-value commercial properties, rounding to the nearest $1,000, $5,000, or even $10,000 may be more appropriate.

VI. Ensuring Clarity and Understandability

• The appraiser has a responsibility to ensure that the appraisal report is easily understandable to a non-appraiser reader (e.g., a loan officer, a homeowner).
• Avoid jargon and technical terms whenever possible. Explain complex concepts clearly and concisely.
• Use clear and well-organized language. The report should flow logically and present the appraiser’s reasoning in a transparent manner.

VII. Critical Review and “Passing Muster”

• Before submitting the appraisal report, the appraiser should critically review their work.
• Consider: “Would this work pass muster in a critical review?”
• Review Appraiser: A review appraiser is tasked with reviewing a report, they will analyze every portion of the original report to determine validity.

VIII. Mathematical Formulas

While reconciliation isn’t based on averaging, formulas help analyze data:
* R² (Coefficient of Determination): R² = 1 - (SSR/SST)
* Net Operating Income (NOI): PGI - Vacancy & Collection Losses - Operating Expenses = NOI
* Capitalization Rate (Cap Rate): NOI/Value= Cap Rate