Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and final value❓ Opinion

This chapter builds upon the foundation of real estate valuation established in previous chapters, focusing on the crucial steps of reconciliation and forming a final, defensible value opinion. This process, while rooted in scientific principles, also necessitates the application of sound judgment and extensive experience, aligning with the course description emphasizing the blend of theory and practical application.

I. Introduction to Reconciliation

Reconciliation in real estate valuation is NOT simply averaging values from different approaches. It’s a critical analysis leading to a single, well-supported value opinion. This aligns with the course’s goal of achieving accurate valuations.

• Definition: Reconciliation is the process of critically analyzing the value indications derived from two or more approaches to arrive at a single, supportable value opinion. This applies to differing indicators arising from:

  • Different comparable properties (Sales Comparison Approach)
  • Different units of comparison (e.g., price per square foot, price per acre)
  • Different appraisal approaches (Sales Comparison, Cost, Income)

• Importance: The reconciliation process is crucial because:

  • It provides a reasoned justification for the final value opinion.
  • It demonstrates the appraiser’s understanding of the market and valuation principles.
  • It enhances the credibility and defensibility of the appraisal, crucial in a critical review.

II. The Reconciliation Process: A Scientific and Judgment-Based Approach

Reconciliation is a systematic process that combines both objective data analysis and the appraiser’s subjective judgment. While mathematics are used in calculating value indicators, Mathematical Averaging❓❓ is not used in reconciliation.

A. Review of Data, Calculations, and Reasoning

1. Accuracy Verification: All calculations from each approach must be meticulously checked. Mathematical errors must be corrected. This relates directly to the course’s emphasis on financial analysis techniques.

2. Consistency of Application: Appraisal techniques (Sales Comparison, Cost, and Income Approaches) need to be applied consistently across the subject property and all comparables. This requires a standardized approach to adjustments, capitalization rates, and cost estimations.

3. Reliability Assessment: The appraiser must carefully evaluate the reliability of each value indicator. This is NOT simply choosing the highest or lowest value. Reliability is based on the following:

   • Amount of Data:

     • A larger statistical sampling of data tends to produce more reliable results (relates to statistical relevance). The more transactions, the greater the reliability. A small sample size introduces the possibility of outliers unduly influencing results.
     • Detailed data provide a more nuanced understanding of the property and market.
     • Support from multiple independent sources increases confidence in the data.

   • Accuracy of Data:

     • Verified data is inherently more accurate. Verification should be documented.
     • Accuracy of the appraisal technique relies on its relevance to the property and the assignment (e.g., using income capitalization for a single-family residence is generally inappropriate, as mentioned in the book’s quiz).

   • Relevance:

     • Consistency with the appraisal assignment: The chosen indicator must align with the stated purpose of the appraisal (e.g., market value, insurance value).
     • Appropriateness of the technique: The appraisal technique must be suitable for the property type and market. This touches upon the concepts of highest and best use and market analysis highlighted in the course description.

4. Inclusion of All Pertinent Data: Omission of relevant data (e.g., recent comparable sales, significant property defects) can invalidate the reconciliation.

5. Compliance with Assignment Terms: All value indicators must be derived in accordance with the terms of the appraisal assignment, including definitions of value, property rights appraised, and intended use of the appraisal.

B. Weighing the Value Indicators

This is where the appraiser’s judgment and experience (highlighted in the book) become paramount. Consider the following example:

• Scenario:

  • Sales Comparison Approach: \$300,000
  • Cost Approach: \$280,000
  • Income Approach: \$250,000 (using a gross rent multiplier based on limited rental data)

• Reconciliation:

  • The Sales Comparison Approach relies on the most directly relevant market data (comparable sales). Assume that these comparables are recent, closely matched, and verified.
  • The Cost Approach is often less reliable for older properties due to the difficulty of accurately estimating depreciation.
  • The Income Approach, based on limited rental data for single-family homes, is the least reliable.

• Conclusion: The appraiser gives the Sales Comparison Approach the most weight. However, the Cost Approach lends support, suggesting a value in the upper \$200,000 range. The Income Approach is given the least weight due to the limitations of the data. The final reconciled value might be \$295,000, reflecting a slight consideration of the Cost Approach as a check on the Sales Comparison result.

C. Example: Experimenting with different Weights:

Imagine an appraiser assigned weights to the example numbers as follows.

Sales Comparison Approach: 300,000 * .60
Cost Approach: 280,000 * .30
Income Approach: 250,000 * .10

Weighted Average Value: 180,000 + 84,000 + 25,000 = 289,000

While this is an illustrative calculation of the final value, the process must be based on evidence in the appraisal rather than the numbers alone.

III. Final Value Opinion and Reporting

The final step is to form and clearly communicate the value opinion. This requires a clear and concise presentation of the reconciliation process within the appraisal report, adhering to the requirements of USPAP (Uniform Standards of Professional Appraisal Practice).

A. Point Estimate vs. Range Value:

• The appraiser must provide a point estimate: a single dollar amount representing the appraiser’s opinion of market value.
• The alternative is the range value.

B. Condition of Appraisal

• Indicate whether the appraisal was made “as is,” “subject to” repairs, or “subject to” hypothetical conditions. Clearly state the effect on value of the repairs or hypothetical condition.

C. Supporting Evidence:

• The report must clearly articulate the evidence supporting the reconciled value. This includes:
  • A summary of the strengths and weaknesses of each approach.
  • A clear explanation of the weighting given to each approach.
  • Justification for any adjustments made in the Sales Comparison Approach.
  • Support for the assumptions used in the Cost and Income Approaches.

D. Importance of Clear Communication

• The appraisal report must be understandable to a non-appraiser. Technical jargon should be minimized or clearly defined. This aligns with the book’s focus on clarity for the reader.
• The report should be structured logically and present the information in a clear and concise manner.

IV. Mathematical Formulas and Equations

The following equations summarize the basic concepts of value calculation:

• Sales Comparison Approach:

  • Adjusted Sale Price = Sale Price ± Adjustments for differences
  • Final Value Opinion = Weighted Average of Adjusted Sale Prices

• Cost Approach:

  • Value = Reproduction/Replacement Cost - Depreciation + Site Value

• Income Capitalization:

  • Value = Net Operating Income / Capitalization Rate
  • Gross Income Multiplier (GIM) = Sale Price / Gross Income
  • Value = Gross Income x GIM

V. Avoiding Errors That Could Discredit Your Work

• Ensure all calculations are accurate: Double-check everything.
• Be consistent in your application of appraisal principles.
• Thoroughly research and verify your data.
• Fully explain your reasoning: Don’t make unsupported assumptions.
• Be objective and unbiased.
• Write a clear, concise, and well-organized report.

By mastering the art and science of reconciliation, appraisers can provide credible, defensible, and accurate value opinions, meeting the expectations of clients and withstanding critical review. This process is a cornerstone of responsible and professional real estate valuation.