Reconciling Indicated Value with the Sales Comparison Approach

Instructor: Traci Cull
Appraisal prices are not merely opinions; they must be reconciled. This lesson will cover ways that appraisers can justify and reconcile their adjusted sales price.

Reconciliation and the Appraisal

Jack the appraiser has been doing appraisals for 25 years. He knows the market forwards and backwards. When he pulls his comparable properties, he looks at them and comes up with a price that fits his property. Someone has questioned Jack's price and said it was merely an opinion. Jack must now reconcile the appraisal. Ideally, during an appraisal, the appraiser comes up with the closest competing comparable properties and then compares those individually to the property at hand.

Once an appraiser has completed his or her appraisal, there are two separate things that must be reconciled; he or she must:

  1. Reconcile the quantity and quality of data available and analyze with whatever specific approach was used.
  2. Summarize all the information that was used, which appraisal methods were used and analyzed, as well as the reasoning to support all the conclusions.

Why are these things important? In a sales comparison approach to valuing property, the piece of property in question is compared to other properties with similar characteristics and features that have been recently sold. Many adjustments must be made to a property because there are rarely identical comparable properties available. Final appraisal values must be validated. They cannot just be an opinion by the appraiser. Therefore, there must be a reconciliation of the numbers to arrive at the final price.

Let's look at Jack's property. Let's say that he compares a large number of properties to the property at hand and narrows it down to the four closest. They are at the following prices: $185,000; $190,000; $195,000; and $200,000. Jack says that the value of $190,000 is the closest with the least amount of adjustments. Can he just say I am choosing $190,000 for my value? No. He can say that he arrived at that number from a paired sales analysis; however, he needs to reconcile the amount for it to be truly acceptable. Reconciliation is the fusing together of the valuation method to reach a supportable conclusion. Just blindly stating a value and stating that adjustments were made is insufficient.

How would Jack go about reconciling to that value? He reconciles to the most competitive sale and adjusts his value to that. The appraiser must include notes about the current listing, what other offerings are available, recent sales and listings, etc. The reconciliation must identify why a particular sale is given more weight than another.

Steps of Reconciliation

The first step of reconciling the quality and quantity of the available data requires analyzing depreciation, construction costs, and comparable sales. If there is not sufficient data available (low quantity) to reconcile here, the appraiser may need to do more research.

The second step of reconciliation involves applying appropriate weights to the comparable properties based on specific approaches. Sometimes more weight may be placed on a price that is derived from a sales comparison approach. Sometimes it may be from an income approach, and some from a cost approach. If the appraiser here finds that the most accurate representation comes from the sales comparison approach, then he would give those comparisons more weight. Giving the why behind those weights is very important.

How does the appraiser weigh one price more heavily than another? He looks at different weighting parameters such as:

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