Value Reconciliation and Appraisal Reporting

Chapter Title: Value reconciliation❓❓ and Appraisal Reporting

Training Course: Mastering Residential Architectural Styles and Design Compatibility

I. Introduction to Value Reconciliation

A. Definition and Significance:
1. Reconciliation is the process by which an appraiser analyzes the various value indicators derived from different appraisal approaches, comparable properties, or units of comparison to arrive at a single, supportable opinion of value.
2. This process requires professional judgment and cannot be achieved by simply averaging the different value indicators.
3. A robust reconciliation process is critical for producing credible appraisal reports that withstand scrutiny from review appraisers, lenders, and other stakeholders.
4. In addition to producing a final opinion of value, the appraiser also completes the Uniform Residential Appraisal Report’s (URAR) Reconciliation section, which is a key step to finalization.

B. The Role of Judgment and Experience:
1. The appraiser’s expertise, understanding of market dynamics, and analytical skills are essential for effectively weighing the reliability and relevance of each value indicator.
2. Reconciliation is not a mathematical process; it relies on critical thinking to synthesize data and form a reasoned conclusion.

II. Scientific Theories and Principles Underlying Reconciliation

A. The Principle of Substitution:
1. This fundamental economic principle states that a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute.
2. Reconciliation applies this principle by comparing various value indicators and selecting the one that best reflects the market’s perception of available substitutes.
3. Mathematical Representation:

Let $V_s$ = Value of the subject property

Let $V_c1, V_c2, ... V_cn$ = Adjusted values of comparable properties

Then, according to the Principle of Substitution:

$$V_s \approx min(V_c1, V_c2, ... V_cn)$$

  (The value of the subject property will tend towards the lowest adjusted value of comparable properties, assuming they are equally desirable substitutes.)

B. Statistical Analysis and Reliability:
1. Value indicators based on larger and more accurate datasets are generally considered more reliable.
2. Appraisers should use statistical measures (e.g., standard deviation, coefficient of variation) to assess the dispersion of value indicators and identify outliers.
3. Example: Consider two sets of comparable sales.
a. Set A: 3 sales with a mean adjusted price of $300,000 and a standard deviation of $10,000.
b. Set B: 10 sales with a mean adjusted price of $305,000 and a standard deviation of $5,000.
c. Set B is likely more reliable due to the larger sample size and lower standard deviation, indicating less variability in the data.

C. Weighting of Value Indicators:
1. The appraiser must assign weights to each value indicator based on its reliability, relevance, and accuracy.
2. This weighting process is subjective but must be supported by evidence and reasoning in the appraisal report.
3. Formula for Weighted Average:

 Let \(w_i\) = weight assigned to value indicator *i*

 Let \(V_i\) = value indicated by value indicator *i*

 Then, the reconciled value \(V_R\) is:

 \[ V_R = \frac{\sum_{i=1}^{n} (w_i \cdot V_i)}{\sum_{i=1}^{n} w_i} \]

    (Where the sum of all weights \(w_i\) should ideally equal 1.)

III. Practical Applications and Related Experiments

A. Experiment: Sensitivity Analysis of Adjustments:
1. Purpose: To understand how changes in adjustments to comparable properties affect the final value❓ indication.
2. Method:
a. Select 3-5 comparable sales.
b. Establish a base set of adjustments for each comparable based on market data.
c. Systematically vary the adjustments (e.g., location, condition, size) by ±5% or ±$1,000.
d. Calculate the resulting range of adjusted sale prices and observe how the range changes.
3. Result: This experiment demonstrates the importance of accurate adjustments and helps identify which adjustments have the greatest impact on value.

B. Case Study: Reconciling Disparate Value Indicators:
1. Scenario: Appraising a single-family home where the sales comparison approach indicates a value of $400,000, while the cost approach suggests $420,000, and the Income Approach❓❓ (based on potential rental income) indicates $380,000.
2. Analysis:
a. Sales Comparison Approach: Review the quality and comparability of the sales data. Check for any unverified information or market changes since the sales occurred.
b. Cost Approach: Assess the accuracy of the cost estimates and depreciation calculations. Verify the land value separately.
c. Income Approach: Evaluate the reliability of the rental income and expense estimates. Ensure the capitalization rate is appropriate for the risk.
3. Reconciliation:
a. If the sales comparison data is well-supported and recent, it may be given more weight.
b. If the property is not typically rented, the income approach may be given less weight.
c. If the cost approach is based on reliable data and the property is relatively new, it may support the sales comparison approach.
4. Conclusion: The appraiser might reconcile to a value of $405,000, emphasizing the sales comparison approach with support from the cost approach.

IV. Factors Influencing the Reliability of Value Indicators

A. Amount of Data:
1. Larger Statistical Sampling: Value indicators are more reliable when derived from a greater number of data points.
* Example: An analysis based on 20 comparable sales is generally more reliable than one based on 3 sales.
2. Detailed Data: Indicators derived from more detailed and verified data are more trustworthy.
* Example: Verified square footage from building plans is more reliable than estimated square footage from tax records.
3. Independent Sources: Value conclusions are strengthened when supported by multiple, independent sources.
* Example: Confirming sales data with both the buyer and seller.

B. Accuracy of Data:
1. Verification: Data must be thoroughly verified to ensure accuracy.
* Example: Confirming comparable sales details (e.g., sale price, concessions, physical characteristics) with the parties involved.
2. Relevance: Appraisal techniques should be appropriate for the specific appraisal problem.
* Example: Using the income capitalization approach for a single-family home in a non-rental market is generally less relevant.

C. Relevance to the Appraisal Problem:
1. Consistency: The value indicator must be consistent with the appraisal assignment’s terms.
* Example: Appraising the fee simple interest when the assignment requires valuing a leasehold interest would be inconsistent.
2. Appropriateness of Technique: The appraisal technique used must be suitable for the property type and market conditions.
* Example: The cost approach is most reliable for new or unique properties where market data is limited.

V. Appraisal Reporting

A. Completing the URAR Reconciliation Section:
1. Indicate whether the appraisal was made “as is” or “subject to” certain conditions or alterations.
2. List any conditions or extraordinary assumptions that affect the value conclusion.
3. Summarize the appraisal approaches used (sales comparison, cost, income) and their respective value indications.
4. Reaffirm the purpose of the appraisal.
5. State the final opinion of market value as a point estimate (single dollar amount) or a range value (if appropriate).

B. Clarity and Understandability:
1. The appraisal report should be easily understandable to a non-appraiser reader.
2. Use clear and concise language, avoid jargon, and provide thorough explanations of the reasoning behind the value conclusion.

VI. Conclusion

Value reconciliation is a critical step in the appraisal process, requiring the appraiser to synthesize diverse data and exercise sound judgment. By understanding the scientific theories and principles underlying reconciliation and applying practical techniques, appraisers can produce credible and defensible value opinions.