How do you reconcile between the value indications of the three approaches, or even between the range of value indication in even one approach? How you answer this is important since SR1-6 calls for us to answer both of these questions as part of our reconciliation.
USPAP has no specific requirements telling us how to reconcile these differences. It does require that we engage in such a reconciliation, as well as explain why. This blog will help your reach those goals.
One way to reconcile the separate value indication of the three approaches is to weight each one as a component of the final value opinion. If, for example, you felt the sales comparison was the best way to value the subject, you might give it 90% of the weight, with the other two at just 5% each. If there were relatively few sales, you might give the Cost approach the majority of the weight, with the other one or two approaches getting proportionately less. However you choose to weight them (as well as your explanation of why) is part of your scope of work.
Some appraisers object to “painting themselves into a corner” by attaching a specific weight to a single approach or a single comparable sale. That’s OK, too, since it’s OK to say that sale-X received the greatest weight, with sale-Z receiving the least, but with no more quantification that that. As with any reconciliation, it is also necessary to explain what market evidence persuaded you to take this step (i.e., explain why you took it).
Really, though, there is a lot more to a proper and persuasive reconciliation than what you read here.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 165 – How Do You Reconcile that Appraisal Report? You’ll be really glad you did!
This issue drives me nuts. Most residential appraiser’s (and many commercial appraisers as well) never really reconcile anything (including software vendors). Appraisal 101 teaches AVERAGING values, weighted or not, IS absolutely an INCORRECT technique for determining the final value. Appraisers are supposed to be reporting the market…have any of you ever seen a market participant use that technique? If not then neither should you.
Proper reconciliation technique involves analyzing the strengths and weaknesses of each approach then selecting one of the 2 or 3 approaches that are best supported by the data. I have observed appraisers using the weighted average technique but there never seems to be any explanation as to why the appraiser selects how the individual approaches are weighted. I have seen some appraisals with 50% or more differences between the value indications from each approach then average them and viola – the perfect value. What a load of crap. Sorry people but if you have a huge variation in your three approaches you MUST be missing something. Maybe one doesn’t apply, maybe there is external, economic or other obsolescence you are missing. At any rate, I urge all appraisers to turn off the weighted average feature in their software and start completing a proper reconciliation.
I would love to debate this issue and hear how others believe this technique is relevant.
Was partners with an appraiser who did commercial work. His reconciliation was: Cost Approach indicates …, Sales indicates … and Income … Nothing else.
Tried my best, to no avail, to explain there was more involved in a reconciliation than just stating what the approaches indicated.
Heads up, viola is something you play music with.