Reconciliation and Final Value Opinion

Chapter: Reconciliation and Final Value Opinion

Introduction

This chapter delves into the critical final stages of the property appraisal process: reconciliation and the formulation of the final value opinion. Building upon the foundational site and building analysis skills acquired in previous modules of “Property Appraisal Essentials: Site and Building Analysis,” this chapter provides a scientific and practical understanding of how appraisers synthesize disparate value indicator❓s❓ into a cohesive and well-supported conclusion. A poorly reconciled appraisal is an invitation for critical review. This chapter provides the knowledge and tools necessary to ensure defensibility and credibility in this crucial aspect of appraisal practice.

I. Scientific Foundations of Reconciliation

The reconciliation process is rooted in the scientific method, specifically in the realm of statistical inference and decision theory.

• A. Statistical Inference: The reconciliation process draws upon principles of statistical inference to evaluate the reliability and validity of different value indicators. Value indicators derived from various appraisal approaches (sales comparison, cost, income) are treated as estimates of the true, unknown value of the property. The appraiser must assess the potential for error associated with each estimate, considering factors like sample size, data accuracy, and the appropriateness of the analytical technique.
• B. Decision Theory: Decision theory provides a framework for making informed judgments when faced with uncertainty. Reconciliation involves weighing the evidence from multiple sources and selecting the value indicator(s) that best align with the appraisal problem. The appraiser acts as a decision-maker, carefully considering the risks and benefits associated with different value estimates.

II. Reconciliation: A Detailed Examination

Reconciliation involves analyzing the data, calculations, and reasoning that led to the different value indicators.

• A. Purpose: Reconciliation is the process of:
  • Analyzing two or more different value indicators.
  • Reaching a single, supported opinion of value.
  • Reconciling values indicated by:
    • Different comparable properties (sales comparison approach❓❓).
    • Different units of comparison (e.g., price per square foot, gross rent multiplier).
    • Different appraisal techniques (Sales Comparison, Cost, and Income Approaches).
• B. Principles:
  1. Accuracy Verification:
     • All calculations must be meticulously checked for mathematical errors.
     • Corrected errors must be clearly documented.
     • Example: Recalculate adjustments made in the Sales Comparison Approach to ensure accurate adjusted sales prices.
  2. Consistency in Application:
     • Appraisal techniques (Sales Comparison, Cost, and Income) must be applied uniformly to the subject property and all comparables.
     • Example: Utilize the same depreciation method (e.g., straight-line) for all comparable properties in the Cost Approach.
  3. Reliability Assessment:
     • The appraiser must rigorously evaluate the reliability of each value indicator, considering:
       • Amount of data.
       • Level of accuracy.
       • Relevance to the appraisal problem.
     • Example: A value indicator derived from a large sample of verified sales is generally more reliable than one based on a limited number of unverified transactions.
  4. Data Inclusion and Analysis:
     • All pertinent data must be included in the appraisal report and analyzed thoroughly.
     • Example: If significant environmental factors exist, they must be described and their potential impact on value discussed.
  5. Adherence to Assignment Terms:
     • Value indicators must be derived strictly in accordance with the terms of the appraisal assignment.
     • Example: If the assignment requires an opinion of market value❓, the appraiser must not use an alternative definition of value.

III. Factors Influencing Value Indicator Reliability

The reliability of a value indicator is directly❓ proportional to:

• A. Amount of Data:
  1. Statistical Significance:
     • Value indicators are more reliable when based on a larger statistical sampling of data.
     • A larger sample size reduces the margin of error in the value estimate.
     • Mathematical Representation: If n is the sample size, the standard error (SE) is inversely proportional to the square root of n:
       SE ∝ 1/√n
  2. Data Detail:
     • Value indicators derived from more detailed data are generally more reliable.
     • Detailed data allows for more precise adjustments and reduces the impact of outliers.
     • Example: Detailed construction specifications in the Cost Approach can result in a more precise cost estimate than relying on broad generalizations.
  3. Independent Sources:
     • Value indicators are more reliable when supported by several independent sources.
     • Reduces the risk of bias or error associated with a single data source.
     • Example: Confirming sales data with both the buyer, seller, and county records increases reliability.
• B. Accuracy of Data and Technique:
  1. Data Verification:
     • The accuracy of data depends on how well it has been verified.
     • Verification reduces the risk of errors and inaccuracies that can distort value indicators.
     • Experiment: Conduct a sensitivity analysis by varying key data inputs (e.g., comparable sales prices) to determine the impact on the final value opinion.
  2. Technique Relevance:
     • The accuracy of the appraisal technique depends on the relevance of the technique to the problem.
     • Using an inappropriate technique can lead to unreliable value indicators.
     • Example: The Income Approach may not be relevant for a single-family residence with no rental history.
• C. Relevance to the Appraisal Problem:
  1. Assignment Consistency:
     • The indicator itself must be consistent with the terms of the appraisal assignment.
     • If the assignment requires market value, the value indicator must reflect market forces.
  2. Appropriate Technique:
     • The appraisal technique used to derive the indicator must be appropriate for the property type and appraisal problem.
     • Example: The Sales Comparison Approach is typically the most reliable indicator for residential properties.

IV. Supporting the Reconciled Value

The chosen reconciled value must be supported by the evidence presented in the appraisal report.

• A. Appraiser Judgment: While data and analytical techniques are important, the appraiser’s judgment is the determining factor in the reconciliation process. This underscores the importance of experience and thorough understanding of appraisal principles.
• B. Clear Explanation: The reconciliation section of the appraisal report must clearly explain how the appraiser weighed the different value indicators and arrived at the final opinion of value. This explanation should be transparent, logical, and supported by market evidence.
• C. Justification: The appraiser must justify the weight given to each value indicator, explaining why some indicators were given more weight than others. This justification should be based on the reliability, accuracy, and relevance of each indicator.

V. Reaching an Opinion of Value

Reaching an opinion of value and reconciling value indicators are essentially the same process.

• A. Data Review: The appraiser must review all data, calculations, and reasoning contained in the entire appraisal report.
• B. Reliability Assessment: The reliability of each value indicator must be rigorously assessed.
• C. Additional Data and Analysis: If necessary, additional data must be collected, and additional analysis performed to refine the value opinion.
• D. Avoiding Averaging: Do NOT simply calculate the average of the different indicators. Evaluate the reliability of the different indicators. The appraiser must state which comparables were given the most weight in the reconciliation process and explain why.

VI. Completing the Appraisal Report

The appraiser must complete the Reconciliation section of the Uniform Residential Appraisal Report (URAR).

• A. Indication: Indicate whether the appraisal was made “as is” or is “subject to” the property being altered or repaired.
• B. Conditioning Factors: List any conditioning factors that affect the value opinion (e.g., required repairs, environmental issues).
• C. Approaches Used: List all appraisal approaches used (Sales Comparison, Cost, Income).
• D. Assignment Purpose: Reaffirm the purpose of the appraisal.
• E. Value Opinion: Set forth the opinion of market value as a point estimate. The appraiser must sign and date the appraisal report and include their appraisal license or certification number.

VII. Point Estimate vs. Range Value

• A. Point Estimate: The opinion of value should be stated as a single dollar amount (the point estimate).
• B. Range Value: The “range value” is an alternative expression of value, indicating the range in which the property’s value is most likely to fall. This is less common but may be appropriate in certain situations where market data is limited or highly variable.
• C. Rounding: Value opinions should be rounded to reflect the inherent uncertainty in the appraisal process. Avoid expressing the value to the nearest dollar.

VIII. Ensuring Understandability

The appraisal report should be easily understandable to a non-appraiser reader.

• A. Clear Language: Use clear, concise language and avoid technical jargon whenever possible.
• B. Organized Presentation: Present the data and analysis in a logical and organized manner.
• C. Supporting Documentation: Include all supporting documentation (maps, photographs, data sources) to allow the reader to follow the appraiser’s reasoning.

IX. Practical Applications and Related Experiments

• A. Sensitivity Analysis: Conduct a sensitivity analysis to assess the impact of varying key assumptions on the final value opinion.
• B. Data Verification Experiment: Select a sample of comparable sales and conduct a thorough data verification exercise, contacting all relevant parties (buyers, sellers, brokers, county records). Compare the verified data to the original data and assess the potential for error.
• C. Mock Review: Have a colleague review your appraisal report and provide feedback on the clarity, logic, and support for the final value opinion.
• D. Scenario Analysis: Develop different market scenarios (e.g., rising interest rates, economic recession) and assess the impact on the value opinion. This demonstrates the appraiser’s understanding of market dynamics.

X. Conclusion

Reconciliation is a critical process that requires a combination of scientific rigor, analytical skill, and sound judgment. By understanding the underlying principles of reconciliation and adhering to the guidelines outlined in this chapter, appraisers can produce credible and defensible value opinions that withstand critical review.