Real Estate Appraisal: Chapter 11 Reconciliation and Final Value

Real Estate Appraisal: Chapter 11 Reconciliation and Final Value

Estimate Flashcards *ReconciliationAn appraiser develops several different indicators of the subject property's value.Those indicators may be derived by analyzing data from different comparable properties, or by using different units of comparison or different appraisal techniques.Different value indicators serve as cross-checks against each other.Large discrepancies between different value indicators tell the appraiser that she has failed to consider some important value influence, or perhaps made an error in a mathematical calculation.The greater the number of value indicators, the greater the understanding of the market forces affecting the subject property's value, and the more reliable the final value estimate.But even when the value indicators all fall within a narrow range, they will rarely (if ever) be exactly the same.In the reconciliation step of the appraisal process, the appraiser analyzes the data and reasoning that went into the value indicators in order to arrive at a single indication of value.Reconciling Values From Different Comparables Reconciling values indicated by different comparable properties is very common in appraisals.The sales comparison method is considered reliable only if data are available from a number of comparable properties.Consequently, reconciliation is required virtually every time an appraisal uses comparable sales data.Appraisers may reconcile comparable property values

in order to derive:An indicator of unit price (price per total

property, price per square foot, etc.) for the subject property in the sales comparison approachAn indicator of land or site comparison approachAn indicator of unit cost (such as cost per square foot) in the cost approachAn income multiplier or capitalization rate for the subject

property in the income approachExample:Using the sales

comparison approach to value, an appraiser analyzed 3 comparable sales. The resulting adjusted sales prices of the 3 comparables were:Comparable #1: $285,200Comparable #2: $281,500Comparable #3: $287,300To obtain a single indicator of value from the sales comparison approach, the appraiser must reconcile the 3 different values indicated by the comparables.The act or process of developing an opinion of value; an opinion of value (USPAP definition).A form of appraisal

practice.Automated Valuation Model

Range ValueRounding The process of estimating value on the basis of income from a single period, usually one year.The formula for

direct capitalization is:Income ÷ Capitalization Rate =

ValueorIncome x Multiplier = Value Discounting *The Reconciliation ProcessReconciliation is not a mathematical process.No formulas are involved, and appraisers should never attempt to reconcile value indicators by averaging or by using other similar mathematical techniques.Reconciliation calls for judgement and experience on the part of the appraiser.The appraiser must evaluate all of the evidence supporting the different value indicators, giving weight to the indicators that, based on the evidence, are the most reliable and

relevant.Reconciliation involves two steps:1. Reviewing the

processes that led to the different value indicators2. Making the reconciliation judgement Value Indicator Criteria1. Amount of data2. Level of accuracy3. Relevance A piece of data or a derived conclusion (such as the adjusted sales price of a comparable) that is relevant to the value of the subject property in an appraisal.Yield Capitalization Assessing the Reliability of Value Indicators The reliability of a particular value indicator is a critical factor in the reconciliation process.The greater the reliability, the more weight that indicators receives.The

reliability of a value indicator depends on 3 factors:1. The

amount of data supporting the indicator2. The level of accuracy of the indicator3. The relevance of the indicator to the appraisal problem Situations Requiring Reconciliation1. Different comparable properties2. Different units of comparison3. Different appraisal techiques The monetary relationship between properties and those who buy, sell, or use those properties (USPAP definition).The theoretical worth of something, expressed in terms of something else, usually money.Value Indicator Reconciling Values From Different Appraisal TechniquesThe 3rd situation that may require reconciliation occurs when different appraisal techniques generate different value indicators.An obvious example of this situation is the final value estimate, where the appraiser must reconcile the value indicators from the different approaches to value.But reconciling values from different techniques can also occur within a single approach to value.In the income approach an appraiser may need to reconcile values obtained by direct capitalization and yield capitalization (discounting).Amount of DataAll other things being equal, a value indicator is considered more reliable when it is supported by more data.In the sales comparison approach to value, a value indicator

supported by data from sales of twenty comparable properties is more reliable than a value indicator that is based on only 3 comparables.In this case, the greater amount of data represents a larger slice of "sampling" of the market.According to statistical theory, a larger sampling results in a lower margin of error; it is more reliable.The amount of data supporting the value indicators is relevant on 3 levels.First, value indicators are more reliable when they are supported by data tat represent a larger sampling of the market.Second, a value indicator's reliability depends

on the level of detail of the data supporting it.Example:In

the cost approach to value, a building cost estimate derived by the unit-in-place method is generally considered more reliable than an estimate based on cost per square foot of building area, due to the relatively higher level of detail required by the unit-in-place method. A more detailed cost estimate using the quantity survey method would be considered even more reliable.Finally, a value indicator is considered more reliable when it is supported by several different independent sources, as compared to an indicator

derived from a single source.Example:An appraiser who

has estimated the value of a site by the sales comparison approach may also employ allocation or extraction to obtain a second, independent indicator of site value.If the two separate value indicators are reasonably similar, the reliability of the site value estimate is enhanced.Whether a final value estimate is stated as a point estimate or range value, it is customary to round the figures to reflect