Reconciliation and Appraisal Reporting

Chapter: Reconciliation and Appraisal Reporting

Introduction:

This chapter delves into the critical final steps in the appraisal process, focusing on reconciliation and reporting. As highlighted in the course description, understanding architectural styles and their impact on value is crucial. This chapter will demonstrate how this understanding, coupled with sound appraisal techniques, culminates in a credible and well-supported value opinion, as well as, the proper report documentation.

I. Reconciliation: Synthesizing Value Indicators

Reconciliation is NOT a mathematical averaging. It involves critical thinking and weighing of the reliability and relevance of different data points.

A. Definition: Reconciliation is the process of critically analyzing multiple value indicators to arrive at a single, supportable value opinion. This opinion may be a point estimate or a range. It requires expert judgment.

B. Context: This process is applied when:
1. Values indicated by different comparable properties vary.
2. Different units of comparison (e.g., price per square foot vs. price per acre) produce differing results.
3. Multiple appraisal techniques (sales comparison, cost, and income approaches) are employed.

C. Principles:
1. No Averaging: Reconciliation does NOT involve simply averaging the results of different approaches or comparable sales. A simple arithmetic average is rarely the most supportable value opinion.
2. Data Review: A thorough review of all data, calculations, and reasoning behind each value indicator is paramount. Accuracy in calculations MUST be verified. Errors render the entire indicator unreliable.
3. Consistency: Appraisal techniques must be applied consistently across the subject property and all comparables. This requires:
* Uniform application of adjustments.
* Use of similar data sources and analytical methods.
4. Reliability Assessment: appraiser❓s must critically evaluate the reliability of each value indicator based on:
* Amount of Data: Indicators based on larger, statistically significant datasets, more detailed information, and multiple independent sources are generally considered more reliable.
* Accuracy: The accuracy of supporting data and the appropriateness of the technique employed are crucial. Verified data yields more accurate indicators.
* Relevance: Indicators must align with the appraisal assignment’s terms, the property type, and current market conditions.

D. Reliability Metrics:

The reliability ($R$) of a value indicator ($VI$) can be conceptualized (though not precisely quantified) as:

$R(VI) = f(A_d, A_t, R_e)$

Where:
* $A_d$ = Amount of supporting data
* $A_t$ = Accuracy of the technique used
* $R_e$ = Relevance to the appraisal problem
* $f$ is a function expressing the interrelationship of these factors, where each factor positively contributes to R.

E. Examples:

1.  **Sales Comparison:** Three comparables suggest values of \$250,000, \$260,000, and \$275,000. However, the \$275,000 comparable required significant adjustments due to differences in lot size and condition. In reconciliation, <a data-bs-toggle="modal" data-bs-target="#questionModal-72332" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">The appraiser</span><span class="flag-trigger">❓</span></a> might give more weight to the \$250,000 and \$260,000 comparables, even though they are lower, due to their superior comparability and the minimal adjustments needed.
2.  **Approach Weighting:** In appraising a single-family residence, the sales comparison approach is often given the most weight as it directly reflects market transactions. The cost approach serves as a check for reasonableness, particularly for newer properties. The income approach is typically not applicable to owner-occupied residences.
3.  **Addressing Styles and Value:** Given the course focus on architectural styles and compatibility, reconciliation *MUST* incorporate an analysis of how the subject's style (Cape Cod, Colonial, etc.) impacts its marketability and value relative to comparable properties. For example, if a contemporary-style home is situated in a neighborhood dominated by traditional Colonial homes, its market appeal might be limited, and this *MUST* be factored into the reconciliation process, potentially leading to a value adjustment. The reverse could also be true in certain markets.

F. Practical Application/Experiment:

1.  **Scenario:** Appraise a property using three different comparables.
2.  **Experiment:**
    *   Comparable 1: Close proximity, similar size, but needs significant condition adjustments.
    *   Comparable 2: Slightly farther away, smaller lot, but minimal adjustments.
    *   Comparable 3: Different architectural style, good condition, but significant location adjustments.
3.  **Analyze:** Quantify the adjustments and critically evaluate the relevance and reliability of each comparable.
4.  **Reconcile:** Justify the weighting assigned to each comparable, explaining why certain factors were deemed more influential in the final value opinion. The justification MUST explicitly link architectural style and compatibility with market preferences in the given neighborhood.

II. Appraisal Reporting: Communicating the Value Opinion

A. Definition: An appraisal report is a formal document communicating the appraiser’s findings, analysis, and conclusions to the intended users. It must be clear, concise, and non-misleading.

B. Key Elements:
1. Clear Identification: Accurately identify the property, property rights appraised (fee simple, leasehold, etc.), the purpose of the appraisal, and all intended users. USPAP requires identifying all Intended Users by name or by type.

2.  **Scope of Work:** Explicitly define the scope of work undertaken, including the extent of data research, verification, and analysis. Document any extraordinary assumptions or hypothetical conditions. *The appraiser, NOT the client, determines the scope of work.*
3.  **Data Presentation:** Present all relevant data in a clear and organized manner, including:
    *   Property description (architectural style, size, condition, etc.).
    *   Neighborhood analysis (market trends, amenities, etc.).
    *   Comparable sales data (adjustments, sources, etc.).
    *   Cost and income data (if applicable).
4.  **Analysis and Reasoning:** Provide a detailed explanation of the appraisal methodology, the rationale for selecting specific comparables, and the reasoning behind all adjustments.
    *   **Support with Evidence:** All adjustments and value conclusions must be supported by market evidence. Unsupported statements are unacceptable.
5.  **Reconciliation:** Clearly explain the reconciliation process, justifying the weighting assigned to different value indicators and the final value opinion.
6.  **Certifications and Limiting Conditions:** Include all required certifications, affirming compliance with USPAP and disclosing any limiting conditions that might affect the appraisal's reliability.
7.  **Point Estimate or Range:** State the final value opinion as either a single dollar amount (point estimate) or a value range. Value opinions should be rounded appropriately.

C. Uniform Residential Appraisal Report (URAR):

The URAR is the standard form used for most single-family residential appraisals for mortgage lending purposes. Key sections to complete accurately include:

1.  **Subject Section:** Accurately identify the property address, legal description, and property rights appraised.
2.  **Contract Section:** Analyze the sales contract (if applicable) for any concessions, personal property included, or unusual terms that might affect value.
3.  **Neighborhood Section:** Describe the neighborhood boundaries, characteristics, and market conditions, providing supporting data.
4.  **Site Section:** Describe the site dimensions, zoning, utilities, and any adverse conditions (easements, encroachments, etc.).
5.  **Improvements Section:** Provide a detailed description of the property's architectural style, condition, materials, and features.
6.  **Sales Comparison Approach Section:** Present the sales comparison grid with detailed information on comparable sales, adjustments, and the reconciliation process.

D. Examples of Best Practices in Reporting:
Clearly linking value to Architectural Styles and Home Design characteristics:
1. Scenario: A Cape Cod home is being appraised in a neighborhood with a mix of architectural styles.
2. Poor Reporting: “The subject property is a Cape Cod style home. Comparable 1 is similar. No adjustments were made for style.” (This is insufficient!)
3. Improved Reporting: “The subject property is a Cape Cod style home. While Comparable 1 is also a Cape Cod, market data indicates a slight preference for this style in this particular neighborhood due to historical preservation efforts and design consistency. Based on recent sales of similar homes, a positive adjustment of \$5,000 was applied to Comparables of a different style to reflect this market preference.” (This shows understanding!)
Reporting Non-Conforming design or style, poor functional utility, or inferior condition may cause deterioration in value:
1. An appraiser is to note if there are any physical deficiencies that might affect the livability, or structural integrity of the residence.
2. Does the property conform to the neighborhood? As noted in a prior chapter, nonconforming properties will possibly not be as desirable or achieve as high a value as conforming properties.

E. Examples of common problems in appraisal reporting:
* Inadequate descriptions: The use of descriptions such as poor, fair, average, or good and also inferior, similar, or superior have been replaced by the new numerical descriptions in the UAD, such as Q1, Q2, Q3 etc.
* Failure to Provide Data Sources
* Mathematical Errors
* Unsupported Adjustments

III. Peer Review and Critical Analysis:

A. Concept: Before submitting a report, appraisers should conduct a self-review, considering how the work will be viewed by a review appraiser or other qualified professional.
B. Question: Will the work pass muster in a critical review? If it won’t, don’t send it!

IV. Conclusion:

Reconciliation and appraisal reporting are the culminating steps in the valuation process. A sound reconciliation process yields a credible value opinion, while a well-written report effectively communicates that opinion to the intended users. By adhering to USPAP, incorporating market data, and clearly justifying all conclusions, appraisers can uphold the integrity of the profession and ensure that their reports provide reliable information for informed decision-making.