Chapter 11: Reconciliation

Relevance

-Don't get too fancy. Be precise. Be concise. Don't stick extra stuff in your report just to try to impress your client or other intended users. -Ask yourself does every item need to be included? Be painfully honest with yourself. Maybe you were bowled over with your own sparkling repartee, but does it really serve a purpose? -Don't throw in a GRM approach if it doesn't really make sense. Don't bother with a cost approach that will have marginal application on your subject property. Under the SCOPE OF WORK RULE you have the power to decide which approaches are relevant and which are not. Just explain your decisions to include or exclude approaches. -Be careful with your technical lingo. If you use technical terms, please define them in the report. Don't take a reader's competence in the real estate field for granted. -On the flip side, make sure any information that is relevant and germane is included. Is there a pre-existing, but currently nonconforming, use of the subject property? Explain the situation. What happens if the structure is partly or wholly destroyed? Can it be rebuilt? Under what conditions? Perhaps it may be appropriate and necessary to copy and include the appropriate section of the zoning ordinance in your appraisal report.

Ranking

Ranking of the comparable sales in order of desirability makes a logical and persuasive argument. If you remember, in our last example from several pages ago, the adjusted sales prices of the three comparable sales were: -Sale 1: $186,000 -Sale 2: $192,000 -Sale 3: $195,000 If we feel that the best sale was Sale 1 and the worst was Sale 3, then we want to resolve our final estimate towards the lower end of the value range. We may settle on $186,000, or $187,000, or $188,000. Conversely, if the two best sales seem to be Sales 2 and 3, we are drawn to the higher end of the range. Probably, we would think the support for these sales sufficient to choose a value between $192,000 and $195,000, with proper explanation.

Appropriateness

The final weighting in our value judgments will hinge somewhat on the appropriateness of our methodology. We need to ask ourselves: -Did we use the right techniques for that type of property? -Did we use techniques that mimic the perceptions of the marketplace? -Did we use techniques that our peers would use? -Did we employ those techniques properly? -Did we employ the proper methods of analyzing the data collected? -If there is an active market, did we employ a sales comparison approach? -If the property is fairly new and of standard construction, did we employ a cost approach? -If there is an active rental market, did we utilize an income capitalization approach?

Final Reconciliation (II)

Your final reconciliation is an important part of the appraisal process. It is the summing up of all you did. Lawyers make a final summation to the jury. The reconciliation is your summation to the jury. You have to sell your case to the client and intended users of your report. In many cases you will not have a conversation with your client. He or she will only read your report. This is your only chance to make yourself heard. In the reconciliation you need to reinforce your scope of work. You need to convince the reader that you did everything that was necessary to solve the problem. You need to take your reader by the hand and walk him/her down the same path you traveled on the way to your conclusion. The final reconciliation process consists of various items: -Review -Appropriateness -Consistency -Accuracy -Relevance -Quality of data -Quantity of data

Reconciliation

"A phase of a valuation assignment in which two or more value indications are processed into a value opinion, which may be a range of value, a single point estimate, or a reference to a benchmark value." In actuality, the process of reconciliation occurs at various points throughout the appraisal process. We make many choices along the way. We may reconcile one indication of value from various possible choices in arriving at estimates of: -Site value -Replacement costs -Depreciation -Vacancy rates -Market rents -GRM -Operating expenses - Taxes -Insurance

Rounding

"Expressing a number to the nearest thousandth, hundredth, tenth, one, ten, hundred, thousand, and so on as directed." Is the final opinion of value appropriately rounded? This means appropriately rounded for that magnitude of numbers. It might be marginally acceptable to leave a final opinion at $54,500; but a figure of $554,500 or $1,234,000 should probably be rounded to the closest thousand or closest five thousand dollars. You go along with the way the market thinks. In negotiating a purchase of a property, would someone typically offer to pay $554,500, or would they make an offer of $550,000 or $555,000? The same practice goes for rents. Tenants don't usually pay rents of $888 per month; they pay $850, $875, or $900. We need to round in order to avoid the perception that our final value opinion is a precise number. We do not wish to imply a precision that we do not possess.

Reconciliation Criteria

"The criteria that enable an appraiser to form a meaningful, defensible conclusion about the final value opinion. Value indications are tested for the appropriateness of the approaches and adjustments applied, the accuracy of the data, and the quantity of evidence analyzed." -It talks about a "meaningful, defensible conclusion about the value opinion." Our whole quest after accepting an assignment is to arrive at a conclusion of value. Your client has a real estate problem. You are there to provide the answer, i.e., your opinion of value. It does need to be supported and defensible. It can't be just "off top of your head". Standards Rule 1-6 of USPAP states the whole process clearly. SR 1-6 states: "In developing a real property appraisal, an appraiser must: (a) reconcile the quality and quantity of data available and analyzed within the approaches used; and (b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s)."

Adjustments

A theoretically perfect comparable would require no adjustment. It is the exact same house, same age and condition, right next door or across the street from the subject, and sold yesterday under all conditions requisite for a fair sale. The comparable sold for $187,750, therefore, that has to be the value of the subject property. We almost never find this! In fact, it is quite rare to find a comparable sale so similar that it doesn't need adjustment. Every time we make an adjustment it means there is a significant measurable difference between the comparable and the subject property. More adjustments means there are more differences. Also, every time you make an adjustment, there is a possibility of making an error in that adjustment. We said on the previous page that we can look to the number of adjustments that are made to each comparable and rank them that way. A better way is to look at the magnitude of the adjustments as evidenced by the net and gross adjustment totals. The type of adjustment also matters. Take a close look at what you did in the sales grid. When analyzing comparable sales, pay more attention to adjustments made in the upper part of the grid, i.e., the adjustments that are above the room count line. The items in the grid below the room count line are pretty straightforward and relatively easy to adjust for differences. One sale has a garage and the subject doesn't, or the subject has a deck and the comparable has a screened porch. The items in the upper part of the grid are more subjective, intangible and harder to quantify. For example: -Sale or financing concessions -Date of sale/time -Location -View -Design/style -Quality -Condition If you had to make large and/or numerous adjustments in those areas, your value conclusion may be suspect. It also means that you owe it to the client to make a detailed explanation of those adjustments.

Final Opinion of Value

Every assignment is unique. There is not just one way to arrive at this final reconciliation of value. We need to apply logic, reasoning, and a good deal of common sense. We might employ some limited statistical analysis, depending on the quantity of the data. We embark on a process similar to the one we used when reconciling at the end of the sales comparison approach. Only here, we are analyzing the strengths and weaknesses of each approach instead of each comparable sale. -Which approach is strongest for that type of property? -Which approach is weakest? -If more than one approach is used, do they support each other? -If they differ, why do they differ? -Do the approaches used make sense in light of the: -Scope of work? -Intended use? -Intended user? -Definition of market value?

Quantity of Data

Make sure you have an adequate amount of data. If you don't have an adequate amount of reliable comparable sales, you cannot perform the sales comparison approach. If you feel that your comparable sales are a little shaky, you may need to investigate and process more sales. Maybe you will have to analyze four, five, or more sales. If you don't think the three primary sales provide adequate support for your value conclusion, seek refuge in a wider sampling of the market. Explain in the report that you couldn't find sales of properties that were very similar to the subject in all aspects, because of its unusual style, size, age, lot size, or whatever. However, you were able to find one sale that was very similar in style, another that was the same size and another that was about the same age, etc., and you are confident that you have utilized the most similar sales that were available. -Do you have enough land sales to accurately estimate the site value? -Do you have enough rental comparables to be able to accurately estimate the market rent of the subject? -Do you have enough sales to formulate a GRM? -Have there been enough recent sales to come to a conclusion of the local market trends? -Have there been enough recent sales to enable you to determine if there is a need to make an adjustment for market conditions?

Sales Comparison Approach (Reconciliation)

Once we make the adjustments in the sales comparison approach, and are trying to reconcile to an indicated value, we need to seriously analyze the sales data. We need to address the quantity and the quality of the data. We should ask ourselves questions such as: -How many comparable sales are there? -How many adjustments are made to each? -What are the gross and net percentages for each comparable? -What is the absolute value of adjustments for each comparable? -Which is the best comparable? Why? -Which is the worst comparable? Why? -How reliable were the sources that supplied the data? -Which sales sold most recently? -Do the sales bracket the subject value? We should have reasons for choosing what we consider to be the best comparable(s). We should have enough logic behind that statement that we can defend that in our report. As a matter of fact, that kind of reasoning needs to be summarized in our report or in the addendum to the report.

Consistency

Please check your report for consistency. To be effective, an appraisal must hang together. It must exhibit internal consistency. -Do the trends in supply/demand, values and marketing times correspond with the economic conditions that are described in the neighborhood section? -Do all the data and conclusions used throughout the report reflect the same highest and best use? Does the same GLA appear in all sections of the report? -Do the dimensions in the sketch enable one to come to the same conclusion about the GLA? -If there is finished or partly finished below grade space, is it treated logically and consistently throughout the report and when comparing the comparable properties? -Does the description of the interior and exterior condition correlate with the condition as described in the sales grid and with the estimate of depreciation in the cost approach (if developed)? -Are actual and/or effective ages applied consistently? -Do the improvements described and valued in the sales grid and cost approach coincide with the improvements as shown in the sketch and in the photographs? -Does the amount of depreciation in the cost approach coincide with estimates of effective age and remaining economic life reported?

Accuracy

We are not expected to be absolutely perfect, but appraisers are expected to exhibit due diligence and, as it says in Standards Rule 1-1(c) of the 2020-2021 USPAP, "Not render appraisal services in a careless or negligent manner..." -Review all your math calculations. -Make sure you did employ the correct mathematical procedure or formula. Sometimes you may not quite remember it properly, particularly if it is a procedure you do not use frequently or that you have not used recently. -Please check your spelling. You may be a bad speller, or a good speller who is not a great typist. Again, try to have someone else look it over. It is hard to catch your own mistakes. Spell check programs work great but can only catch misspelled words, not misused words. Cat is a properly spelled word, but it doesn't make much sense when you meant to say "can" or "cap."

Review

We need to undertake an internal review when we get to this stage of the appraisal. We need to do some soul-searching. This is the last chance to check our conclusions before they leave our hands. We need to review the entire process including our scope of work. -Was the scope of work adequate, given the intended use and intended users? -Did we correctly employ the scope of work that we said we would perform? -Were any changes in the scope of work necessary along the way? -Were the steps logical? -Were our data sources and methods of collection and verification adequate? -Did we review the math and double check the calculations? -Did we explain formulas and calculations in an appropriate manner?

Reconciliation Process

When you are completing an appraisal, think about this reconciliation process and then summarize your thought process in the section of the URAR that says "Summary of Sales Comparison Approach." -Be persuasive -Be succinct -Be positive -Be direct I have reviewed too many appraisals where the appraiser used boilerplate and platitudes, and did not provide any meaningful insight into the reconciliation process. Please don't use statements such as this for your entire reconciliation: -"All the sales supported the subject." -"The sales price was well supported by the comparable sales." -"I placed emphasis on all sales equally." -"The sales indicated a value of $200,000." -"All the sales were good comps."

Quality of Data

You need to really feel comfortable with the data you gathered. It needs to be confirmed or verified. Again, ask yourself some questions, and give honest answers. -Should I really go back and check some other data sources? -Should I try to verify some of the information with a second or third source? -Should I try again to talk with a party to the transaction, who was unavailable earlier? -How much of the data was gathered from first-hand or primary sources? -Do a gut check - does it all feel right? -Would I be comfortable if I had to defend my appraisal in court with the information I have now? -Do I have more confidence with the data in one approach than the other(s)? -Did I have to make unusually large adjustments? -Were there unusual characteristics of the subject property, and if so, did I explain them clearly?