Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction: Setting the Stage for a critical review❓

The appraisal process culminates in a single, defensible opinion of value. This chapter focuses on the critical steps of reconciliation and final value opinion, emphasizing the appraiser❓’s judgment, experience, and the need for a rigorously supported conclusion. Remember, whether you are appraising a complex partial interest in a cooperative or a simple fee simple estate, the soundness of your reconciliation will be scrutinized. As the book content suggests, imagine your work being reviewed by a highly critical review appraiser looking for any weaknesses in your logic or supporting data. If your work cannot stand up to this critical examination, it is not ready.

II. Understanding Reconciliation: Beyond Simple Averaging

Reconciliation is not a mathematical averaging of different value indicators. It is a nuanced process of analyzing multiple value indicators to arrive at a single, well-supported opinion of value. This is crucial, especially when dealing with complex partial interests like easements, liens, shared ownership interests, condominiums, PUDs, cooperatives, and timeshares, where differing legal and financial factors can significantly impact value.

• A. Definition: Reconciliation is the step in the appraisal process where the appraiser analyzes two or more value indicators to arrive at a single, supported opinion of value. This can involve reconciling values from:
  • Different comparable properties (Sales Comparison Approach).
  • Different units of comparison (e.g., price per square foot vs. price per buildable acre).
  • Different appraisal approaches (Sales Comparison, Cost, and Income Capitalization).
• B. Importance of Judgment: Reconciliation hinges on the appraiser’s judgment and experience in evaluating the reliability and relevance of each value indicator.
• C. Initial Review: The reconciliation process begins with a comprehensive review of all data, calculations, and reasoning that led to the various value indicators.
  1. Accuracy Check: All calculations must be meticulously checked for accuracy. Errors, if present, must be corrected. The following formula can be used to check the mathematical calculations:
     Adjusted Sale Price = Sale Price +/- Adjustments
     If the formula is found to be false, then there has been a calculation error.
  2. Consistent Application: All appraisal techniques (Sales Comparison, Cost, Income) must be applied consistently to the subject property and all comparable properties. Inconsistent application introduces bias and weakens the reliability of the indicators.
  3. Reliability Assessment: The appraiser must critically assess the reliability of each value indicator. This involves considering the amount of data, the accuracy of the data, and the relevance of the data and the technique to the specific appraisal problem.
  4. Comprehensive Data Inclusion: All pertinent data must be included in the analysis and appropriately analyzed. Omitting relevant information can lead to a misleading conclusion.
  5. Adherence to Assignment Terms: The value indicators must be derived in accordance with the terms of the appraisal assignment. Deviating from the defined scope of work invalidates the results.

III. Reliability of Value Indicators: A Scientific Approach

The reliability of a value indicator is directly proportional to the quality and quantity of the underlying data and the appropriateness of the applied technique. A scientific mindset dictates rigorous examination of these factors.

• A. Amount of Data: Value indicators based on a robust dataset are generally more reliable.
  1. Statistical Significance: Indicators derived from a larger statistical sampling of data are more statistically sound. A larger n reduces the potential for bias from outliers. The standard error of the mean (SEM) can be calculated to quantify the uncertainty:
     SEM = σ / √n
     where σ is the population standard deviation (estimated by the sample standard deviation) and n is the sample size. A smaller SEM indicates higher reliability.
  2. Detailed Data: Indicators based on more detailed data are preferred. For example, a direct sales comparison based on a full operating history of an income property is more reliable than one based solely on advertised rents.
  3. Independent Sources: Indicators supported by several independent sources are considered more credible. Corroborating data strengthens confidence in the conclusion.
• B. Accuracy of Data and Technique: The accuracy of a value indicator relies on both the accuracy of the supporting data and the relevance of the technique used to derive the indicator from that data.
  1. Data Verification: Data accuracy is contingent on how well it has been verified. Direct confirmation from buyers and sellers is preferable to reliance on secondary sources.
  2. Technique Relevance: The accuracy of the appraisal technique is directly related to its relevance to the appraisal problem. The Income Capitalization Approach is less relevant for vacant land than it is for a stabilized apartment building.
• C. Relevance to the Appraisal Problem: The relevance of a value indicator is paramount.
  1. Consistency with Assignment Terms: The indicator itself must be consistent with the terms of the appraisal assignment (e.g., defining the property rights being appraised).
  2. Appropriate Technique: The appraisal technique used to derive the indicator must be appropriate for the type of property and the purpose of the appraisal. As the book content notes, using the Income Capitalization Approach to value vacant land would be inappropriate.
  3. Property Type Relevance: For example, using the income capitalization approach for a single-family residence, while technically possible, is generally less relevant and reliable than the sales comparison approach due to the lack of readily available and reliable rental income data. However, when appraising a condominium, PUD, cooperative or timeshare, sales comparison is usually most reliable, and when appraising manufactured homes, additional amenities, lease terms and parks amenities, among other aspects, would affect valuation and must be considered.

IV. The Appraiser’s Judgment: The Determining Factor

The choice of a reconciled value must be demonstrably supported by the evidence presented in the appraisal. This is particularly crucial when appraising fractional interests in real estate, as factors beyond simple pro-rata ownership impact value.

• A. Support by Evidence: The appraiser’s judgment is the determining factor, but it must be demonstrably rooted in the analyzed data and logical reasoning. Avoid arbitrary decisions.
• B. Justification: The final value opinion must be explicitly justified, referencing the specific data and analysis that support the conclusion. This is critical for defensibility.

V. Reaching the Final Value Opinion: A Holistic Review

The process of reaching a final value opinion mirrors the reconciliation process, extending to encompass the entire appraisal.

• A. Comprehensive Review: The appraiser reviews all data, calculations, and reasoning contained within the entire appraisal report.
• B. Reliability Reassessment: The reliability of each value indicator is reassessed in the context of all available information.
• C. Additional Data Collection and Analysis: If necessary, additional data is collected, and further analysis is performed to strengthen the support for the final opinion.
• D. Addressing Reconciliation Section on the Uniform Residential Appraisal Report (URAR): Appraisers use the URAR to present if the appraisal was made “as is,” or is “subject to” repairs or alterations, list any conditioning factors, list the approaches used, reaffirm the purpose of the appraisal, and set forth the opinion of market value. Finally, they sign and date the report, and include the appraisal license or certification number.

VI. Point Estimate vs. Range Value: A Matter of Certainty

The final value opinion is typically expressed as a “Point Estimate,” a single dollar amount representing the appraiser’s opinion of market value. However, in certain situations, a “Range Value” may be more appropriate.

• A. Point Estimate: The standard is to provide a single dollar amount.
• B. Range Value: An alternative approach is to provide a value range, reflecting the appraiser’s opinion of the range within which the property’s value is most likely to fall. This acknowledges inherent uncertainty in the appraisal process.
• C. Justification for Range Values: If a range value is used, the appraiser must clearly justify the reasoning behind it. This should be done when valuing partial interests, as such can be more difficult to ascertain.
• D. Rounding: All value opinions, whether point estimates or range values, should be appropriately rounded to avoid a false impression of precision.

VII. Clear and Understandable Reporting: Communicating to Non-Appraisers

The ultimate goal is to produce an appraisal report that is easily understandable to a non-appraiser reader.

• A. Clarity and Conciseness: The appraisal report should be written in clear, concise language, avoiding unnecessary jargon.
• B. Logical Flow: The report should follow a logical flow, guiding the reader from the initial problem definition to the final value opinion.
• C. Supporting Documentation: All data, calculations, and reasoning should be transparently presented and adequately supported by documentation.

VIII. Practical Applications and Examples

• Example 1: Easement Valuation:
  An appraiser is tasked with valuing a property encumbered by a utility easement. The Sales Comparison Approach is utilized, and the comparable properties are then thoroughly analyzed to identify similar sales with and without similar easements. Paired Data Analysis shows that properties with similar easements trade for 10% less. During the reconciliation, the appraiser gives considerable weight to this analysis, explaining clearly why they concluded that a 10% discount accurately reflects the easement’s impact.
• Example 2: Shared Ownership Interest:
  An appraiser is asked to value a 25% share in a jointly owned property. While a simple pro-rata calculation might suggest 25% of the overall property value, the appraiser recognizes that the minority shareholder lacks control over property management and disposition. The appraiser researches sales of similar minority ownership interests and finds that they typically trade at a discount due to the lack of control. In reconciliation, this analysis is given significant weight, resulting in a value opinion lower than the pro-rata share.
• Experiment: Sensitivity Analysis:
  When valuing an income-producing property using the Income Capitalization Approach, conduct a sensitivity analysis by varying the capitalization rate within a reasonable range. This shows the impact of this key variable on the final value opinion and highlights the importance of supporting the chosen capitalization rate with solid market data.

IX. Mathematical Formulas and Equations: Reinforcing the Analysis

While reconciliation isn’t pure math, sound calculations underpin the entire process. Some formulas helpful in the reconciliation process include:

• A. Adjustment Calculations: The basic formula to calculate adjusted sales prices can be expressed as:

  Adjusted Sale Price = Sale Price +/- Adjustments

• B. Statistical Analysis: Calculate the standard deviation (σ) of the adjusted sale prices of comparable properties to understand the spread of the data:

  σ = √[ Σ (xᵢ - μ)² / (N-1) ]

  Where:

  • xᵢ is each individual data point (adjusted sale price).
  • μ is the sample mean (average of adjusted sale prices).
  • N is the number of data points (number of comparable sales).

  A smaller standard deviation indicates a more consistent set of comparable sales, lending more confidence to the reconciled value.

• C. Weighted Average: If some indicators are deemed more reliable, a weighted average can be used, but the rationale for the weights must be clearly explained:

  Weighted Average Value = (Weight₁ * Value₁) + (Weight₂ * Value₂) + ... + (Weightₙ * Valueₙ)

  Where:

  • Weightᵢ represents the weight assigned to each value indicator (sum of weights must equal 1).
  • Valueᵢ represents the value of each indicator.

X. Conclusion: The Enduring Power of Judgement and Transparency

The reconciliation process and final value opinion are the culmination of the appraiser’s skills and experience. By applying a rigorous, data-driven approach, and transparently documenting the reasoning behind your judgment, you produce a credible and defensible appraisal, particularly in the valuation of complex partial interests in real estate.