Reconciliation in Real Estate Appraisal

Definition

Reconciliation in Real Estate Appraisal is the process an appraiser uses to evaluate and integrate values derived from multiple valuation methods (such as the sales comparison approach, cost approach, and income approach) to form a final, credible opinion on the market value of the subject property. This step considers the reliability of the data, the appropriateness of each method related to the property type, and any necessary adjustments, concluding in a comprehensive value estimate.

Detailed Definition

Reconciliation is a critical phase in the appraisal process where the appraiser synthesizes various data points and value indications obtained from different appraisal approaches. Each approach offers unique perspectives and can suggest different values for the same property. The appraiser must judiciously examine the following aspects:

1. Applicability of Each Approach: Evaluate how relevant each approach is to the specific property and context.
2. Quality of Data: Consider the accuracy and pertinence of the data used in each valuation method.
3. Adjustments: Reflect on the extent and impact of any adjustments made for differences between comparable sales or other evaluation metrics.

Examples

Let’s consider an example to better understand reconciliation:

1. Property to be Appraised: Single-family home

After applying the three traditional approaches, the appraiser determines the following values:

• Sales Comparison Approach: $185,000
• Cost Approach: $189,000
• Income Approach: $184,000

In the reconciliation process, the appraiser:

1. Reviews the relevance and strength of each approach for the particular property.
2. Analyzes the data’s reliability and precision.
3. Considers the judgmental adjustments made for each approach.

Reconciled Value: Given that the sales comparison approach is generally deemed highly relevant for single-family homes and had minimal adjustment requirements, the appraiser reconciles the final market value estimate at $185,000.

Frequently Asked Questions (FAQs)

1. What is the purpose of reconciliation in real estate appraisal?

• The purpose is to merge value indications derived from various approaches into a final, endorsing market value estimate that reflects a well-reasoned judgment.

2. Which appraisal approaches are typically considered in reconciliation?

• The three primary appraisal approaches considered include the Sales Comparison Approach, the Cost Approach, and the Income Approach.

3. How does an appraiser decide which approach to rely on more during reconciliation?

• An appraiser assesses the relevance of each approach to the property type, the accuracy of the underlying data, and the necessity and plausibility of adjustments made to render a dependable valuation conclusion.

4. Is reconciliation required for all property appraisals?

• Yes, reconciliation is a crucial element of the appraisal process as it confirms the thoroughness and accuracy of the final market value estimate.

5. Can the final value be exactly the average of the approaches?

• Not necessarily. The final value reflects the appraiser’s professional judgment and may lean more on one approach depending on the specific circumstances and data quality.

Related Terms

• Sales Comparison Approach: A method of estimating property value based on the sale prices of comparable properties in the market.
• Cost Approach: A method that estimates property value by calculating the cost of constructing a similar structure, minus depreciation, plus land value.
• Income Approach: An appraisal method that estimates value based on the income-generating potential of the property.
• Market Value: The price at which a property would sell in an open market under normal conditions.

Online Resources

1. The Appraisal Foundation
2. International Valuation Standards Council (IVSC)
3. National Association of Realtors (NAR)
4. Uniform Standards of Professional Appraisal Practice (USPAP)
5. Appraisal Institute

References

1. Appraisal Institute. (2023). The Appraisal of Real Estate, 15th Edition.
2. International Valuation Standards Council. (2021). International Valuation Standards 2021.
3. The Appraisal Foundation. (2023). Uniform Standards of Professional Appraisal Practice.

Suggested Books for Further Studies

1. “Principles of Real Estate Practice” by Stephen Mettling, David Cusic, & Jane Somers.
2. “Real Estate Appraisal: From Value to Worth” by Tom Lennon.
3. “Mastering Real Estate Appraisal” by Dennis S. Tosh and David S. Tosh.

Real Estate Basics: Reconciliation Fundamentals Quiz