Reconciliation

Key Takeaways

• Reconciliation is the last analytical step of an appraisal, where the appraiser weighs the value indications from the approaches used into a single supported opinion of value.
• Reconciliation is not averaging. The appraiser gives the most weight to the approach resting on the best data for that property and that intended use, and explains the reasoning.
• Reconciliation also happens inside a single approach, when several adjusted comparable sales point to slightly different figures that must be resolved into one indication.
• Washington uses the word a second way that is unrelated to appraising: the monthly three-way reconciliation of a firm's real estate trust account, which is the designated broker's duty under WAC 308-124E-105.

What It Means

Reconciliation is the final analytical step in an Appraisal. The appraiser develops value indications from the approaches that apply to the assignment, and those indications rarely land on the same number. Reconciliation is where the appraiser accounts for the spread and settles on one supported opinion of value.

The key point is that reconciliation is judgment, not arithmetic. The appraiser does not add the indications and divide. Instead the appraiser asks which approach rests on the strongest data for this property, in this market, for the use the report is written for. A three-bedroom house in a subdivision with a dozen recent closed sales is best explained by the Sales Comparison Approach. A newly built or specialized building with no comparable sales leans on the Cost Approach. An apartment building bought for the rent it produces leans on the Income Approach.

Reconciliation also happens at a smaller scale. When five adjusted comparables produce five slightly different values, the appraiser reconciles those into one indication for that approach first, then reconciles across the approaches at the end.

How It Works in Washington

In Washington, appraisers are certified and regulated under chapter 18.140 RCW, and WAC 308-125-200 sets the yardstick: "The standard of practice governing real estate appraisal activities will be the edition of the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation in effect on the date of the appraisal report." Reconciliation is therefore not local custom. The way a Washington appraiser weights the approaches, and the explanation given for that weighting, are measured against USPAP as it stood on the report date.

Brokers need to know where their own work stops. RCW 18.140.020(6) does not preclude a Washington real estate licensee from issuing a broker price opinion, but when that opinion is written and goes to someone other than a prospective seller, buyer, lessor, or lessee as the only intended user, it must carry a statement that it "is not an appraisal as defined in chapter 18.140 RCW," and it "may not be used as an appraisal in conjunction with a federally related transaction." A broker price opinion prepared for a listing conversation and a reconciled appraisal prepared for a lender are different products under different rules.

Example

Marguerite, a Washington certified appraiser, values a 1,950 square foot rambler in Yakima for a lender.

Her sales comparison approach, after adjusting four closed sales in the same subdivision, indicates $415,000. Her cost approach starts with replacement cost new of $448,000, subtracts $61,000 of accrued depreciation on the 22-year-old improvements, and adds a $35,000 site value: $448,000 minus $61,000 plus $35,000 equals $422,000. She develops no income approach, because nothing comparable in the neighborhood rents.

In reconciliation she writes down why the two differ. All four comparables closed within the last five months, sit in the same subdivision, and needed gross adjustments under 4 percent, so the sales comparison indication is well supported. Her depreciation estimate on a 22-year-old house is the softest figure in the file, which makes the cost approach the weaker indication here.

She reports $415,000 and explains the weighting. She does not report $418,500, the average of the two indications, and the report says exactly why she did not.

Common Mistakes and Exam Traps

• Reconciliation is not an average. The answer that adds the value indications and divides by the number of approaches is the standard distractor on this question.
• Reconciliation is the appraiser's own final step. It is not the lender's review, the underwriter's decision, or a negotiation with the client.
• Reconciliation within one approach comes before reconciliation across approaches, and both carry the same name. Read which level the question is asking about.
• Washington has a second, unrelated meaning. The monthly three-way reconciliation of a real estate trust account under WAC 308-124E-105 is a designated broker's bookkeeping duty, not an appraisal step.