Reconciliation (Part One)
Often misunderstood and sometimes overlooked but an essential step required in a real property appraisal is the reconciliation. To understand the reconciliation process lets first look at the definition of “reconciliation”.
Reconciliation: The last phase of any valuation assignment in which two or more value indications derived from market data are resolved into a final opinion, which maybe either a final range of value or a single point estimate.
An understanding of that definition makes it easy to see the importance of the reconciliation. An appraisal report could contain up to three indicated values; the value developed by the sales comparison approach, the cost approach and the income approach.
How the appraiser came to the final opinion of market value from the results of the completed approaches to value is the heart of a meaningful final reconciliation.
Most appraisers are aware of the reconciliation between the three approaches to value but fail to reconcile other areas where two or more value indicators are resolved into a final opinion of value, such as in the sales comparison approach, where the appraiser
has, at a minimum, three adjusted sales prices that has led him or her to a value conclusion for this approach. The logic behind this sales comparison value conclusion must be explained in that reconciliation.
To better understand the overall concept of the reconciliation, this module touches on what USPAP and Fannie Mae require regarding the reconciliation.
The key points of the reconciliation process regarding USPAP are:
· In developing a real property appraisal, an appraiser must a) reconcile the quality and quantity of the data available and analyzed with the approaches used and b) reconcile the applicability and relevance of the approaches, methods and techniques
used to arrive at the value conclusion(s). Standards Rule 1-6
· The exclusion of the sales comparison approach, cost approach, or income approach must be explained. Standards Rule 2-2
Fannie Mae’s guidance for the reconciliation is similar;
· reconcile the reasonableness and reliability of each applicable approach to value,
· reconcile the reasonableness and validity of the indicated values,
· reconcile the reasonableness of available data,
· select and report the approach or approaches that were given the most weight.
To follow USPAP, the appraiser must first reconcile the quality and quantity of the data available. Appraiser’s know that bad data in equals bad data out. Is there enough rental data to develop a credible income approach (quantity of data)? Does the difficulty
in accurately determining the physical depreciation of a sixty-five year old dwelling make the value indicated by the cost approach less reliable (quality of the data)? These questions must be addressed in the reconciliation.
The next step is to address how each of the three approaches applies to the subject. Sometimes an intended user requires the development of specific approaches to value. Is the cost or income approach relevant for this assignment to develop a credible opinion
of market value? If not, add comments supporting why an approach is not relevant, even if it was developed. Was it do to the lack of data or the quality of the data analyzed? If more than one approach was developed, the reconciliation must contain the logic
behind the appraiser’s opinion of market value. What weight was given to each approach in developing the final opinion of market value? How did the appraiser get to the final opinion of value after analyzing the three approaches?
If any of the three approaches were excluded, the reconciliation must identify and explain why.
As you can see, there are multiple reconciliations completed in an appraisal report. It is important for the appraiser to first reconcile each individual approach. Then, he or she must reconcile the multiple approaches into a final opinion.