Reconciliation in Real Estate: Definition & Use

Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

Learning to appraise a property requires looking at many different factors to determine the value of the property. Reconciliation is an important aspect of reaching the property's value.

What Is Reconciliation?

Appraisers use many techniques to determine the best value of a home. There are many factors they must consider, such as how much similar homes have recently sold for, features of the home, the cost to replace the home, the demand for homes in the area, the neighborhood the home is in, and other relevant factors. When an appraiser uses many different ways to look at the property's value to determine the appraised value, he or she has used the process of reconciliation. While there is not a specific formula to valuation when using reconciliation, values are considered and are part of the process to come to the total estimated value.

Different Comparable Properties

To reconcile value by comparable properties, the appraiser must look at other homes that have recently sold in the area and determine a value for your home based on how your property compares to the other homes.

You are interested in learning more about appraisals and are working with Brent, an appraiser, to understand how he determines property values. He ask you to look through the MLS to find properties similar to a home you just listed that have recently sold. The home is 10 years old, has 3 bedrooms, 2 baths, and is just over 3200 square feet (s.f.) When you start looking in the MLS you find two similar homes.

Home A is 3500 s.f., has 3 bedrooms and 2 baths, and is 8 years old. It is in excellent condition and has new carpet throughout the house. This house sold for $249,000 or $71.14 per square foot.

House B is 2900 s.f., has 4 bedrooms and 2 baths, and is 14 years old. This house needed some work and the lot was smaller than House A. The house was sold for $195,000 or 67.24 per square foot.

Your home is in good condition, has a lot that is similar to home A. The appraiser takes these factors into consideration and determines the value of your home is $225,000 or 70.31 per square foot.

Different Units of Comparison

You are now learning about commercial property appraisal. Brent explains that when you appraise office buildings and other commercial property you'll use units of comparison, the process of dividing the property into units that can be reasonably compared.

Some of the units you may use are acres of land unless under an acre than it is measured by square feet. Large buildings are often valued by the square feet of the property. Hotels are often appraised by the number and type of rooms available. Self-storage facilities are priced by the number and size of the units. Apartment complexes are often valued by the number of units and the number of one, two, or three, bedroom apartments.

There may be other factors that are considered, such as age of the building(s), condition, location, etc. Brent explains that the more experience you have with appraisals, the easier it will be to evaluate the additional factors and determine the value.

Brent is appraising a hotel. You tag along to see how he figures the values. First, he determines the different types of rooms: king, two-queens, and suites. Brent places a value on each type of room. Kings are valued at $50,000, double queen rooms are valued at $60,000, and suites are valued at $100,000. He then multiples the number of king rooms times $50,000, the number of double queens times $60,000, and the number of suites at $100,000. Here's what he gets:

Kings $50,000 27 Units $1,350,000

Queens $60,000 36 Units $2,160,000

Suites $100,000 10 Units $1,000,000

The value of the rooms $4,510,000

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