Reconciliation: The common sense approach - by Bill Pastuszek

Bill Pastuszek, Shepherd Associates

Many reports contain language – sometimes labeled as “Reconciliation” – that have sentences similar to this common statement: “All Sales Comparables are weighed equally.”

In a perfect world, this may be true where the comps are so similar, so recent, and so close in location that there is no difference in their characteristics. Their prices might even be similar. Mostly, though, reconciliation is rarely a one sentence throwaway.

Reconciliations should not be an average of adjusted comparables – the average, the mean, a dangerous weapon indeed, even with large datasets, and certainly not with the small samples typically used in appraisals.

Appraisers deal in mostly small data sets where statistical analysis is not possible. The Masters of the Appraisal Universe would like real estate markets to be more orderly than they really are – and, for appraisers to have rational, consistent data, brilliant analysis, and perfect results in order achieve the squeaky clean quantitative orderliness desired.  Much of the time, however, “It just ain’t so.” An effective reconciliation will prove that.

Reconciliation is defined variously in different texts (not in USPAP, however) but comes down to arriving at a conclusion based on several different indications. Reconciliation is performed by an appraiser within each approach (USPAP): “reconcile the quality and quantity of data available and analyzed within the approaches used.” If the sales and cost approaches are developed, then some comments in each approach need to be made with regard to the strengths and weaknesses of the data in each approach.

For example, if your sales are all outside of the subdivision and there are none in the subdivision, that is part of the logic of your reconciliation and you might say something to the effect that if recent sales within the subdivision were available, these would further support the value.

There is also a final reconciliation (USPAP) where an appraiser reconciles the “applicability and relevance of the approaches, methods, and techniques used to arrive at the value conclusion(s).”

Another text notes that reconciliation criteria are those that “enable an appraiser to form a meaningful, defensible conclusion about the final value opinion.

The average of the adjusted prices of the comparables is not reconciliation.

Even in a one-approach appraisal, an appraiser needs to make the effort to discuss why the one approach is applicable and relevant. For example, an appraiser might write, “It is the one approach buyers and sellers rely upon.” The reconciliation also need to explain what methods and techniques are used to arrive at the value conclusion, e.g., a quantitative analysis was developed using both percentage and lump sum adjustments and the adjustments are based on (pick one or more) market study, matched pair techniques, regression, depreciated cost, and (yes) the appraiser’s judgment.

Here are some other examples. In the residential income approach, using actual rental comparables to arrive at market rent and providing intelligent commentary and analysis in the derivation of the GMRM are critical. Otherwise, the approach becomes a sterile exercise. The approach makes sense (the FNMA form devotes more than a page to the approach, so they must think it has some relevance): appraisers should give it more than a nodding glance.

Cost Approach. This approach tends to be pretty mechanical in most appraisals and is often incorrect. A proper reconciliation will discuss whether there is actual, specific, market cost data considered (as opposed to Marshall and Swift or whatever other cost service is relied upon) and a non-generic discussion of depreciation. For example, if the property has a pool but the market does not recognize the full cost of a pool, isn’t a deduction for superadequacy indicated? Similarly, a house on a busy street suffers external obsolescence to the improvements and probably a low land value. Some succinct on-point comments will suffice. The FNMA form requires support for the land value: this can be in the form of land comparables or a more indirect method, such as extraction or allocation. The support needs to be in the report and reconciled.

Sales Comparison. The client wants another comparable as your reconciliation gives weight to Sales #1 & 2 (but not to #3) because they have the fewest adjustments and are closest. This is a logical and defensible conclusion. So now you are faced with a dilemma: either go get more “comps” (quite silly, you already have them) or cave in and go back to “All comps weighted equal.” [sic]. You included the best comps, didn’t you? Now go and defend your opinion! It may be a case of all “comps weighted equal,” but #1 & 2 are just a little more equal!

Judgment, common sense, presentation and intelligent analysis of relevant data, and logical conclusions arising from the analysis are core concepts. Yes, appraisers can rely on these factors! They must! They are what attracted us to the profession in the first place. As professionals, we need to stick to those concepts and not give in to those who desire a falsely rational universe with everything always right down the middle. Appraisers apply logic to make sense of disorderly markets. We deal in opinions, evidence-based, informed opinions. Reconciliation represents the final part of the appraisal process. Consider that a reasoned, common sense reconciliation arises out of an orderly and focused analysis right from the beginning. And remember what Yogi said: “If the world were perfect, it wouldn’t be.”

Bill Pastuszek, MAI, ASA, MRA heads Shepherd Associates, Newton Mass.