Reconciliation and final value opinion❓❓

Introduction

This chapter delves into the critical final steps of the Sales Comparison Approach: reconciliation and forming a final value opinion. This is where the appraiser synthesizes the data collected and analyzed to arrive at a single, supportable estimate of value. The importance of sound judgment and experience, as emphasized in the course description, cannot be overstated in this process. This chapter will equip you with the scientific understanding and practical skills to confidently navigate this crucial stage.

I. Understanding Reconciliation

A. Definition and Purpose

Reconciliation is the process of critically analyzing the various value indicators derived from the comparable properties, appraisal techniques, and units of comparison to arrive at a single, credible opinion of value for the subject property. It is not a mathematical averaging❓ of different value indicators.

B. Reconciliation in the Sales Comparison Approach

In the Sales Comparison Approach, reconciliation involves weighing the relative strengths and weaknesses of each comparable property’s adjusted sale price, based on their:

1. Amount of Data: A comparable sale supported by multiple independent sources and detailed data is generally considered more reliable. This relates to statistical principles, where larger sample sizes reduce the standard error and increase confidence in the estimate.

2. Accuracy of Data: How well the data has been verified and the relevance of the adjustment techniques employed. Accuracy is related to the concept of measurement error; minimizing this error is crucial for a reliable value indicator.

3. Relevance to the Appraisal Problem: How similar the comparable is to the subject property and how appropriate the appraisal technique is for the specific assignment.

C. Scientific Principles

The reconciliation process is grounded in scientific reasoning.
1. Critical Thinking: An appraiser must employ sound judgment and critical thinking skills to analyze the market data.
2. Logical Reasoning: Logical reasoning is employed to weigh the relative strengths and weaknesses of the various value indicators.

II. Key Factors in the Reconciliation Process

A. Data Verification and Accuracy

1. Calculation Verification: All calculations must be meticulously checked for accuracy. Errors in calculations invalidate the derived value indicators.

   • Example: If a comparable property’s adjusted sale price is calculated incorrectly due to an error in addition (e.g., \$250,000 + \$10,000 = \$265,000 instead of \$260,000), the resulting value indicator will be flawed.

2. Consistency in Application: Appraisal techniques must be applied consistently to the subject property and all comparables. Inconsistent application introduces bias and reduces the reliability of the value indicators.

   • Example: Using a different depreciation method for the subject property than for the comparables would introduce inconsistency.

B. Reliability of Value Indicators

The reliability of a value indicator is paramount in the reconciliation process. Reliability is dependent on:

1. Amount of Data: A larger statistical sampling of data, derived from more detailed data, and supported by several independent sources increases reliability.

   • Experiment: Imagine two sets of comparable sales. Set A includes 3 sales with limited information. Set B contains 10 sales with detailed verified information. Set B will be statistically more reliable.

2. Accuracy of Data & Techniques: The accuracy of the data and the technique used to derive the indicator is essential. This involves verifying data sources and assessing the relevance of the appraisal technique to the problem.

   • Formula: Reliability can be conceptualized as inversely proportional to the variance of the data. Higher variance (less accurate data) leads to lower reliability:

   • R ∝ 1/σ² (Where R = Reliability, σ² = Variance)

3. Relevance to the Appraisal Problem: The indicator must align with the terms of the appraisal assignment and the appraisal technique used must be appropriate.

   • Example: Using income capitalization for a single-family residence in a non-rental market would be irrelevant.

III. The Reconciliation Judgment

A. The Appraiser’s Role

The final choice of a reconciled value is an exercise of the appraiser’s judgment, supported by the evidence in the appraisal. Mathematical averaging is inappropriate. Instead, an appraiser reviews all data, calculations and reasoning contained in the entire appraisal and assesses the reliability of each value indicator.

B. Weighting Factors

1. Market Conditions: Current market trends and conditions significantly influence the weighting of value indicators.

   • Example: In a rapidly appreciating market, more recent sales❓ may be given more weight.

2. Property Characteristics: The degree of similarity between the subject property and the comparables is a critical factor.

   • Formula: Similarity can be quantified using a weighted scoring system based on key characteristics.

     • Similarity Score (SS) = Σ (Weighting Factor * Similarity Score for Each Characteristic)

     • Where Weighting Factor reflects the importance of each characteristic and Similarity Score reflects the similarity between the subject and comparable.

3. Data Reliability: Data from verified, reliable sources is given more weight than data from unverified or less reliable sources.

C. Justification and Support

The appraiser must clearly explain the reasoning behind the final value opinion, including which value indicators were given the most weight and why. This explanation must be supported by the evidence in the appraisal.
All pertinent data must be included and analyzed, and the value indicators must be derived in accordance with the terms of the appraisal assignment.

IV. Final Value Opinion

A. Point Estimate vs. Range Value

The final value opinion is stated as a single dollar amount, known as a “Point Estimate.” An alternative is the “Range Value,” which is an appraiser’s opinion of the range in which the property’s value is most likely to fall. Value opinions should be rounded.

B. Completing the Reconciliation Section of the URAR

The appraiser must complete the Uniform Residential Appraisal Report’s Reconciliation section, including:

1. Indicating if the appraisal was made “as is” or is subject to the property being altered.

2. Listing any conditioning factors.

3. Listing any appraisal approaches used.

4. Reaffirming the purpose of the appraisal.

5. Setting forth the opinion of market value and signing and dating the appraisal report, including his or her appraisal license or certification number.

C. Review and Understandability

An appraiser should review his or her work to insure that it is easily understandable to a non-appraiser reader.
All calculations must be checked for accuracy, and any mistakes corrected. The different appraisal techniques must be applied consistently to the subject property and to all comparables.

V. Ensuring Credibility and Avoiding Critical Review

A. Anticipating Critical Review

The appraiser should approach the appraisal process as if it will be subject to critical review, such as by a review appraiser. This involves ensuring the appraisal is well-supported, logically sound, and free of errors.

B. Checklist for Credibility

To ensure credibility and withstand critical review, the appraiser should:

1. Check for Errors: All calculations, data entries, and report formatting should be meticulously checked for errors.

2. Support Adjustments: All adjustments made in the sales comparison approach must be well-supported by market data and logical reasoning.

3. Address All Relevant Factors: All factors that could influence the property’s value, both positive and negative, must be addressed in the report.

4. Comply with USPAP: The appraisal must comply with all relevant requirements of the Uniform Standards of Professional Appraisal Practice (USPAP).

5. Clear and Concise Reporting: The appraisal report must be clear, concise, and easy to understand for a non-appraiser reader.

VI. Experiment

A. Objective

To illustrate the impact of varying data reliability on the final value opinion.

B. Procedure

1. Choose 3 comparable sales for a hypothetical property (the subject).
2. For each comparable, assign a reliability score (1-10) based on data source verification (county records = 10, unverified = 1).
3. Adjust each comparable sale using standardized adjustments.
4. Calculate a weighted average of the adjusted sale prices, using the reliability scores as weights.
5. Compare the weighted average to a simple average of the adjusted sale prices.

C. Expected Outcome

The weighted average (incorporating reliability) will likely differ from the simple average, demonstrating the importance of data reliability in the reconciliation process.

Conclusion

Mastering reconciliation and forming a final value opinion are critical skills for any real estate❓ appraiser. By understanding the scientific principles underlying these processes and applying sound judgment and experience, you can develop credible and supportable value opinions that will withstand critical review. This chapter has provided the framework for achieving this mastery, equipping you with the knowledge and practical skills to excel in real estate appraisal.