Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Understanding Reconciliation

Reconciliation is a critical step in the appraisal process, representing the appraiser’s synthesis of data and judgment to arrive at a single, defensible opinion of value. It’s not a simple averaging of different value indicators❓, but a weighted analysis considering the reliability and relevance of each.

A. Definition and Purpose:

• Reconciliation involves analyzing two or more distinct value indicators derived from different approaches, comparable properties, or units of comparison. The goal is to reach a single, supportable opinion of value for the subject property.
• It’s the point where the appraiser reviews all collected data, analysis, and reasoning, ultimately forming a final value opinion.

B. Scope and Application:

• Reconciliation is essential when using multiple appraisal approaches (sales comparison, cost, income) or when different comparable properties suggest varying values.
• It applies across different units of comparison (e.g., price per square foot vs. price per room).
• The process starts with reviewing all data, calculations, and reasoning that support each value indicator.

C. The Role of Judgment and Experience:

• Reconciliation relies heavily on the appraiser’s professional judgment and experience. It’s a qualitative, not quantitative, process.
• Mathematical formulas or averaging techniques are inappropriate for reconciliation.

II. Factors Influencing the Reliability of Value Indicators

The reliability of a value indicator is paramount in the reconciliation process❓. Appraisers must evaluate each indicator based on the following criteria:

A. Amount of Data:

• Value indicators are more reliable❓ when based on:
  1. A larger statistical sampling of data (e.g., more comparable sales).
  2. More detailed data (e.g., in-depth property information).
  3. Support from multiple independent sources.

B. Accuracy of Data and Techniques:

• Accuracy depends on:
  1. Verification of supporting data. Data must be meticulously verified.
  2. Relevance of the appraisal technique to the problem. Use the most appropriate technique for the subject property and assignment.
     • For example, using the income capitalization approach for a single-family residence is generally less relevant than the sales comparison approach.

C. Relevance to the Appraisal Problem:

• Relevance is influenced by:
  1. Consistency with the terms of the appraisal assignment.
  2. Appropriateness of the appraisal technique.
     • The choice of technique should align with the property type and market conditions.

III. The Reconciliation Process: A Step-by-Step Guide

The reconciliation process involves careful review, analysis, and judgment to arrive at a credible value opinion.

A. Data Review and Verification:

1. Accuracy Checks: All calculations must be rigorously checked for errors. Correct any mistakes.
2. Consistency: Ensure consistent application of appraisal techniques to the subject property and all comparables.
3. Data Inclusion: All pertinent data must be included and analyzed.

B. Assessing Reliability:

1. Amount of Data: Evaluate the quantity and quality of data supporting each value indicator. Larger, more detailed datasets generally provide greater confidence.
2. Accuracy of Techniques: Evaluate the accuracy of data supporting the value indicators. The accuracy of the data depends on the appraiser’s verification.
3. Relevance of Techniques: Assess the relevance of each technique to the specific appraisal problem.

C. Weighing Value Indicators:

1. Identify Strengths and Weaknesses: Determine the strengths and weaknesses of each value indicator based on the data, accuracy, and relevance assessments.
2. Assign Weights: Assign weights to each value indicator based on its relative reliability. Indicators with more supporting data and higher accuracy should receive greater weight. Note: weights are not expressed numerically, but rather influence the appraiser’s judgment.
3. Justification: Document the rationale for assigning weights to each value indicator.

D. Deriving a Final Value Opinion:

1. Judgment-Based Reconciliation: Use professional judgment to reconcile the weighted value indicators into a single value opinion. The process is not based on averaging.
2. Supporting Evidence: The final value opinion must be supported by the evidence presented in the appraisal report.

E. Examples of Practical Application:

1. Scenario: Appraising a single-family home using sales comparison and cost approaches.
   • The sales comparison approach yields a value of \$300,000.
   • The cost approach yields a value of \$280,000.
   • After reviewing the data, the appraiser finds the comparable sales are recent and closely match the subject. The appraiser determines the depreciation estimate in the cost approach is highly subjective.
   • The appraiser gives more weight to the sales comparison approach, concluding a final value opinion of \$300,000.
2. Scenario: Appraising a commercial property using the sales comparison approach with three comparable sales.
   • Comparable 1: Adjusted sales price \$500,000 (recent sale, excellent location, some dissimilar features).
   • Comparable 2: Adjusted sales price \$480,000 (older sale, good location, very similar features).
   • Comparable 3: Adjusted sales price \$520,000 (recent sale, average location, similar features).
   • The appraiser determines Comparable 2 is the most similar in terms of features.
   • The appraiser gives the most weight to Comparable 2 due to its similarity and adjusts it slightly upward based on the positive adjustments made to comparable sale 2 to arrive at a final value opinion of \$490,000.

F. Mathematical Considerations (Illustrative):

While not directly used in reconciliation, statistical concepts can inform the appraiser’s understanding of data reliability.

1. Weighted Average (Illustrative): This is for illustrative purposes ONLY. Never use this technique in real life.
   • Let V1, V2, Vn be the value indicators.
   • Let W1, W2, Wn be the corresponding weights (representing the appraiser’s subjective assessment of reliability).
   • Weighted Average = (W1 * V1 + W2 * V2 + ... + Wn * Vn) / (W1 + W2 + ... + Wn)
   • This is not used in practice; it is only provided as a mathematical example of how weights could influence an average.

IV. The Final Value Opinion

The final value opinion represents the appraiser’s best estimate of the property’s market value.

A. Forms of Value Opinion:

• Point Estimate: A single dollar amount representing the appraiser’s opinion of value.
  • Example: \$250,000
• Range Value: A range within which the property’s value is most likely to fall.
  • Example: \$240,000 - \$260,000

B. Precision and Rounding:

• Value opinions should be rounded to reflect the inherent imprecision of the appraisal process.
• Rounding conventions vary, but generally rounding to the nearest \$100 or \$1,000 is appropriate for most residential appraisals.

C. Completion of Appraisal Reports:

• The appraiser completes the reconciliation section of the appraisal report.
• Indicate if the appraisal was made “as is” or “subject to” specific conditions (e.g., repairs).
• List any extraordinary assumptions or hypothetical conditions.
• Reaffirm the purpose of the appraisal.
• State the opinion of market value (point estimate or range value) and the effective date of valuation.
• Sign and date the appraisal report, including appraisal license or certification number.

D. Self-Review and Clarity:

• The appraiser should review the entire appraisal report to ensure it is easily understandable to a non-appraiser reader.
• The reasoning and conclusions should be clearly articulated.
• Consider if the work would withstand critical review by another appraiser.

V. Practical Applications and Related Experiments

A. Experiment: Comparable Sales Analysis:

1. Objective: To understand how different comparable sales influence the final value opinion.
2. Procedure:
   • Select a subject property.
   • Gather data on five or more comparable sales.
   • Analyze and adjust each comparable sale.
   • Reconcile the adjusted sales prices, giving varying weights to different comparables based on similarity, data reliability, and market conditions.
   • Observe how changes in the assigned weights affect the final value opinion.
   • Document the rationale for assigning different weights.
3. Analysis:
   • Which comparables had the greatest influence on the final value opinion? Why?
   • How did different adjustments impact the value indicators?
   • What factors contributed to the reliability of each comparable sale?

B. Scenario: Appraising a Mixed-Use Property:

1. Objective: To practice reconciling value indicators from different appraisal approaches.
2. Procedure:
   • Select a mixed-use property (e.g., retail space with apartments above).
   • Apply the sales comparison approach to the retail space.
   • Apply the income capitalization approach to the apartments.
   • Apply the cost approach to the entire property.
   • Reconcile the three value indicators, considering the strengths and weaknesses of each approach in the context of the property type and market conditions.
3. Analysis:
   • Which appraisal approach provided the most reliable value indicator? Why?
   • What factors influenced the weighting of each approach?
   • How did the characteristics of the property and market influence the reconciliation process?

These practical exercises provide hands-on experience in applying the principles of reconciliation and refining the appraiser’s judgment.