Reconciliation and Final Value Opinion

Chapter 11: Reconciliation and Final Value Opinion

I. Introduction: The Scientific Foundation of Reconciliation

Reconciliation in real estate appraisal is not simply averaging values. It is a rigorous, evidence-based process that leverages scientific principles of statistical analysis, decision theory, and market analysis to arrive at a credible final value opinion. This chapter will explore this process in depth, connecting it to the core principles of architectural styles and home design and how those features impact real estate value within the course context of “Architectural Styles and Home Design: A Comprehensive Guide”.

• Core Concept: Architectural style is a design variable that impacts the functional utility, aesthetic appeal, and overall marketability of a property. Reconciliation considers these impacts across various valuation approaches.

II. The Reconciliation Process: A Scientific Framework

Reconciliation can be defined as:
* Analyzing two or more different value indicators, reached by different data❓ (comparable properties), different methodologies (units of comparison), and/or different valuation techniques (sales comparison, cost approach, income approach), to arrive at a single, supportable opinion of value.

• Mathematical Analogy: The process is akin to solving a system of equations where each equation (valuation approach) provides a potential solution (value indicator), but the optimal solution must satisfy all equations to a degree consistent with their reliability.

A. Data Validation and Weighting:

1. Data Accuracy: This involves applying principles of statistical quality control. Data must be checked for errors, outliers, and inconsistencies. Verification from multiple independent sources is critical.

   • Example: An appraiser confirms square footage of a comparable property using both tax records and MLS data. Discrepancies prompt further investigation.

2. Data Relevance: Data must be relevant to the subject property and consistent with the terms of the appraisal assignment. Relevance is assessed based on market studies, expert opinion, and established appraisal practices.

3. Sample Size and Statistical Power: The amount of data is significant because value indicators are considered more reliable when: they are based on a larger statistical sampling of data; they are derived from more detailed data; or they are supported by several independent sources. A larger sample size generally leads to a higher statistical power, making the value indicator more robust.

   • Formula: Statistical Power = 1 - β, where β is the probability of a Type II error (failing to reject a false null hypothesis).

4. Assigning Weights based on Reliability: Not all value indicators are created equal. Weight is assigned based on the amount, accuracy, and relevance of the data. The higher the reliability, the greater the weight. This is based on decision theory.

   • Formula: Weighted Average Value = (W1 * V1) + (W2 * V2) + … + (Wn * Vn), where W is the weight assigned to each value indicator (V), and the sum of all weights equals 1.

   • Example:

     • Sales Comparison Approach Value = $300,000 (Weight = 0.6)
     • Cost Approach Value = $280,000 (Weight = 0.2)
     • Income Approach Value = $310,000 (Weight = 0.2)
     • Reconciled Value = (0.6 * $300,000) + (0.2 * $280,000) + (0.2 * $310,000) = $296,000

B. Consistency and Assignment Terms:

1. The appraisal technique used to derive the indicator must be appropriate. The indicator itself must be consistent with the terms of the appraisal assignment.

2. All pertinent data must be included and analyzed, and applied consistently to the subject property and to all comparables.

   • All calculations must be checked for accuracy, and any mistakes corrected.

C. Appraiser’s Judgment and Experience:
* Important Fact: Mathematical formulas or techniques (such as averaging) are NOT used in reconciliation.
* The appraiser’s judgment must be the determining factor. The choice of a reconciled value should be supported by the evidence in the appraisal.

III. Practical Application: Reconciliation in Home Design Valuation

A. Scenario: An appraiser is valuing a Victorian-style home located in a neighborhood with a mix of architectural styles. The home has been renovated to incorporate modern amenities while preserving its original character.

B. Value Indicators:

1. Sales Comparison Approach: Based on comparable sales of similar Victorian homes in the area, adjusted for differences in size, condition, and features. Architectural appeal is a crucial element.

2. Cost Approach: Based on the cost to reproduce the home, accounting for depreciation and the value of the land. Construction costs will be higher due to the complexity of the Victorian style.

3. Income Approach: Based on the potential rental income of the property, adjusted for vacancy and expenses. Market rent will reflect the desirability of the home’s architectural style.

C. Reconciliation:

1. The appraiser determines that the Sales Comparison Approach is the most reliable indicator, as it directly reflects market preferences for Victorian homes in the area.

2. The Cost Approach provides a useful check on the reasonableness of the Sales Comparison Approach, but is given less weight due to the difficulty of accurately estimating depreciation on older homes.

3. The Income Approach is given the least weight, as rental income is not the primary driver of value for this type of property.

4. The appraiser reconciles the value indicators, considering the strengths and weaknesses of each approach, to arrive at a final value opinion. The judgment must be the determining factor.

D. Experiment:

1. Objective: To quantify the market value impact of architectural style.

2. Method:

   • Select a sample of homes with similar size, location, and condition.
   • Categorize homes by architectural style (e.g., Victorian, Colonial, Modern).
   • Perform regression analysis to determine the price premium or discount associated with each style.

IV. Reconciliation in the Uniform Residential Appraisal Report (URAR)

A. The appraiser indicates if the appraisal was made as is or is subject to the property being altered.

B. Any conditioning factors are listed.

C. Any appraisal approaches used are listed.

D. The purpose of the appraisal is reaffirmed.

E. The opinion of market value is set forth and the appraiser signs and dates the appraisal report, and includes his or her appraisal license or certification number.

V. Point Estimate vs. Range Value

• Point Estimate: The opinion of value of an appraised property is stated as a single dollar amount.

• Range Value: An alternative to the Point Estimate 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.

VI. Review and Understandability

An appraiser should review his or her work to ensure that it is easily understandable to a non-appraiser reader.
* Will the work pass muster in a critical review? If it won’t, don’t send it!