Appraisal Reconciliation and Reporting

Chapter 11: Appraisal Reconciliation and Reporting

This chapter delves into the critical final stages of the appraisal process: reconciliation and reporting. We will explore the scientific principles behind these steps, emphasizing the appraiser’s judgment, data analysis, and adherence to established standards.

I. Reconciliation: Weighing Value Indicators

Reconciliation is the process of critically analyzing the value indications derived from different appraisal approaches (sales comparison, cost, income) and arriving at a single, supportable opinion of value. This is NOT a simple averaging of values.

• A. Purpose: To synthesize the results of multiple analyses into a coherent and well-reasoned final value estimate.

• B. Importance of Judgment: Reconciliation relies heavily on the appraiser’s expertise, experience, and understanding of the specific market and property. Mathematical Averaging❓❓❓❓ is explicitly discouraged as it ignores the varying reliability and relevance of each value indicator.

• C. Reconciliation as a Review Process:

  • 1. Data Verification: A thorough review of all data, calculations, and reasoning is essential. Mathematical errors must be identified and corrected.
  • 2. Consistency: Ensure that appraisal techniques are applied consistently across the subject property and all comparables. This reduces bias and strengthens the validity of comparisons.
  • 3. Reliability Assessment: Evaluate the reliability of each value indicator based on the quantity, accuracy, and relevance of the data used.
  • 4. Data Sufficiency: Verify that all pertinent data has been included and thoroughly analyzed. Omissions can lead to inaccurate conclusions.
  • 5. Assignment Compliance: Confirm that all value indicators are derived in accordance with the terms and conditions of the appraisal assignment.

II. Factors Influencing Value Indicator Reliability

The reliability of a value indicator is directly proportional to the quality and quantity of supporting data, as well as the appropriateness of the appraisal technique employed.

• A. Data Quantity:

  • 1. Statistical Significance: Value indicators based on larger statistical samples are generally more reliable due to reduced sampling error. For example, a sales comparison approach utilizing a larger pool of verified comparable sales is preferable.
  • 2. Data Detail: Value indicators derived from more detailed data sets are more reliable. Detailed cost data for a property’s construction is preferable to generalized cost estimates.
  • 3. Independent Verification: A value conclusion gains reliability through support from multiple independent sources. Data from different MLS services or verified with principals to a transaction is considered preferable.

• B. Data Accuracy:

  • 1. Verification: Data accuracy hinges on thorough verification. Verification is a process to either find or produce evidence that a piece of information is correct or true. Confirmed sales data from direct contact with involved parties is preferable to unverified information.
  • 2. Technique Appropriateness: The accuracy of an appraisal technique is determined by its relevance to the specific appraisal problem. For example, the income capitalization approach is generally not appropriate for single-family residences in an owner-occupied market.

• C. Relevance to the Appraisal Problem:

  • 1. Consistency: The value indicator must align with the terms of the appraisal assignment (e.g., the defined market value definition).
  • 2. Technique Suitability: The chosen appraisal technique must be appropriate for the property type and market conditions. The income capitalization approach is applicable to income-producing properties, but not to vacant land or single-family residences in a non-rental market.

III. Supporting the Reconciled Value Opinion

The final value opinion must be logically supported by the evidence presented in the appraisal report.

• A. Appraiser’s Judgment: The appraiser’s reasoned judgment❓ is the ultimate determining factor in selecting the final value.

• B. Point Estimate vs. Range Value:

  • 1. Point Estimate: This presents a single dollar amount as the appraiser’s opinion of value. It is the most common form of reporting.
  • 2. Range Value: This provides a value range within which the property’s value is most likely to fall. A range value is infrequently used.

• C. Mathematical Representation:

  • While averaging is discouraged, mathematical analysis can inform the appraiser’s judgment. The weighted average, considering the reliability of each indicator, can be utilized.

  • Let:

    • VI_i = Value Indicator from approach i (e.g., sales comparison, cost, income).
    • W_i = Weight assigned to value indicator i (0 ≤ W_i ≤ 1, and ΣW_i = 1).
    • V_reconciled = Reconciled Value.
      The weighted average is then: V_reconciled = Σ (VI_i * W_i)

IV. Reporting the Final Value Opinion

The final step is to clearly and concisely communicate the reconciled value opinion in a well-organized appraisal report.

• A. Uniform Residential Appraisal Report (URAR) Completion:

  • 1. Property Condition: Indicate whether the appraisal is “as is” or “subject to” specified conditions (repairs, alterations).
  • 2. Conditioning Factors: List any extraordinary assumptions or hypothetical conditions that influence the appraisal.
  • 3. Appraisal Approaches: Explicitly identify the appraisal approaches used (sales comparison, cost, income) and their relevance to the value conclusion.
  • 4. Purpose Reaffirmation: Restate the purpose of the appraisal.
  • 5. Market Value Opinion: Clearly state the opinion of market value as a dollar amount.
  • 6. Appraiser Signature and Credentials: The appraiser must sign and date the report, including their appraisal license or certification number.

• B. Clarity and Understandability: The report should be easily understandable to a non-appraiser reader. Avoid jargon and clearly explain the reasoning behind the value conclusion.

V. Practical Examples and Exercises

• A. Example 1: Reconciling Sales Comparison and Cost Approaches

  • Scenario: Appraising a single-family residence in a market with limited recent sales data. The sales comparison approach yields a value indicator of \$350,000, while the cost approach indicates \$375,000.
  • Reconciliation: The appraiser determines that the sales comparison approach is less reliable due to the limited data. The cost approach is given more weight due to more current cost data. The appraiser also considered the depreciation estimate of the cost approach, along with the URAR report that property conformed to the neighborhood. The final reconciled value is \$370,000.

• B. Example 2: “As Is” vs. “Subject To” Appraisal

  • Scenario: A property requires significant repairs (leaky roof, damaged foundation) to meet minimum safety standards.
  • “As Is” Appraisal: The appraiser provides a value based on the property’s current condition, factoring in the cost of repairs.
  • “Subject To” Appraisal: The appraiser provides a value assuming the repairs are completed to a specified standard, based on a hypothetical condition. The report must clearly state the hypothetical condition and its impact on the value conclusion.

VI. Chapter Summary

This chapter has emphasized the importance of sound judgment, thorough data analysis, and clear communication in the final stages of the appraisal process. Reconciliation is not a mechanical averaging but a critical evaluation of value indicators to arrive at a credible opinion of value. The final report must be well-supported, transparent, and understandable to its intended audience.