Paint a Picture with Words
The reconciliation is precisely the place we want to avoid any boilerplate…
A common complaint among couples is a lack of communication. “He should have known I wanted that bracelet for my birthday” “She should have known I wanted to have sushi for dinner” “She should be more considerate of my feelings”, etc. How are we supposed to know these things? Are we mind-readers? It would be much easier if we would somehow communicate our wishes with our partners, without having to come right out and say something, but at the same time, it takes away from the spontaneity of the moment, receiving that beautiful bracelet without asking, or having made reservations as a surprise for your partner, at that new Japanese restaurant everyone is talking about. If we want to get it right however, we need to communicate with each other and express what is important to us.
Appraisers relationships with their clients has similarity with other relationships, but mainly in that we have to really communicate with each other to avoid misunderstanding. This goes for the engagement of services and why we are being hired in the first place, and also goes for communicating our assignment results. In this article, the focus is on the reconciliation section of a written report.
Within the reconciliation, we address the different approaches to value we considered and why we considered them, as well as the ones we did not use and why. We also discuss the relevancy and adequacy of the data within each approach that we included. Therefore, if we only used the sales comparison approach, and we have an appraisal where five sales made up the primary indicators for the analysis, and one of those sales was the most reasonable and relevant, we would want to address the reason why. Ideally, we want to address how each sale that we are using compares to the property being appraised, in both the ways that they are similar, and how they differ. It would be rare to have a group of sales that are all equal in level of similarity and dissimilarity, therefore it is also uncommon that each sale would have the same level of applicability for comparison purposes.
For example, in this made up scenario, we are appraising a 1,200 sqft single story house built in 2000 on a five-acre site. The house is modular construction with standard features and the five-acre site is open and mostly pastoral, but with a 30×40 pole barn with three horse stalls, and a three-acre pasture. There were five available sales that were relevant in this analysis, including a similar 1,200 sqft, modular single-story house built in 2001 on four-acres and containing a 40×60 pole barn with five horse stalls and two fenced acres. The other houses were on varying site sizes, from three to ten acres, and two others had pole barns. Three were stick built of similar quality and two were modular houses similar to the subject, including the most similar property. All were but one of these properties was built in the 1980’s to the mid 1990’s. The most similar sale had the lowest gross adjustments, as would be expected with this type of scenario. Without getting into the weeds of the adjustment process, take the following sales:
- Sale 1, 1,200 sqft modular/ 2001 on 4-acres/40×60 pole barn, $200,000
- Sale 2, 1,100 sqft ranch/1980 on 3-acres without a barn, $170,000
- Sale 3, 1,500 sqft modular/1985 on 5-acres with 50×60 pole barn, $220,000
- Sale 4, 1,000 sqft ranch/1990 on 10-acres with 30×40 PB, $220,000
- Sale 5, 1,200 sqft ranch/1995 on 5-acres without a barn, $180,000
Before any adjustment, it is clear that sale 1 is most similar to the subject property. As such, the value of the subject is likely to be closest to this sale. The unadjusted sales price range of the comparables is between $170,000 and $220,000, which is fairly wide at 29.41%. It would not be unexpected however, with acreage and barns thrown into the mix. Hopefully after completing the analysis and supporting the adjustments made, the adjusted range is narrower, perhaps in this instance from $190,000 to $209,000 (10%). From there it would be simple to explain how sale 1 has the greatest similarity and was weighted most heavily, and that the inferior properties, those with similar acreage but older houses and no barns (sales 2 and 5) sold as high as $180,000, setting a logical lower limit of the value range. Those sales that were superior due to greater acreage, and/or size of the barns (sale 3 and 4) sold for $220,000, setting the upper end of the range.
Without making any adjustments it is pretty compelling if the opinion of value is around $200,000, but if the opinion of value is $220,000, or $180,000, there is going to be more explanation needed as to how the adjustments were supported and why the higher or lower end of the value range was chosen. In the event the market is increasing, or declining, discussion of changing market conditions, and support thereto, could be sufficient added information. In the event that pole barns are a highly desired feature, over and above acreage, discussion of this as well as the cost to construct one would be relevant.
Think of the reconciliation section of the report as the place where you can take the analysis and thought process and tie it all together in one neat little bow, which helps the client understand why you are where you are in the valuation. This is where our judgement and thought process can shine, and where we are different from algorithms and bits and bytes. The more complex the valuation problem, the more descriptive we likely have to be.
In this made up, simple example, we could have a reconciliation such as:
The reconciliation is precisely the place we want to avoid any boilerplate… The above description can be a guideline for how to handle complex properties as well, as one or two sales will be more similar to the subject than the others, even if completely disparate, we still have to find a way to explain how they are the best we have. The reconciliation is precisely the place we want to avoid any boilerplate, or the unfortunately ubiquitous “all sales are the best available and weighted equally”, even if the range of value is 40 or 50% before and after the adjustment process. Although the sample above may be considered “overkill”, the idea is to paint a picture with our words. If a camera failure resulted in the need to submit the appraisal report without any photographs, how could we paint a picture of the problem and the solution with words? This would be an extremely interesting exercise, but not far removed from the days before digital photography, when we were very limited with photo exhibits placed in an appraisal report for delivery.
The description above would be roughly equivalent to telling your loved one that you would really like that beautiful bracelet you saw on sale for your birthday and how lovely it would look on your wrist, or that as much as you like Chinese food, you are hankering for some sushi. Of course, you could abbreviate it and just say “I want that bracelet” “take me out for sushi”, but even though that gets the point across, it does not do it in a way that provides warm feelings and could be thought of as harsh and demanding. Like it or not, we still have an element of customer service that we need to provide, and words do matter.
End note –
As an aside, while the current version of lending appraisal forms do not have sufficient space for communicating a robust summation, these forms are in the process of being reconsidered. If possible, we do need to have our collective voices heard related to how they are developed, including the expandable capability that was floated before the 2005 iterations that we are now using.