A Must Read for Real Estate Appraisers...


Reconciliation of Value (c) 2007 Leigh Pollet


Real estate appraisals are (finally-once again) undergoing greater scrutiny thanks to the current mortgage-crisis-mode-market. One aspect of that scrutiny centers on the question of how appraisers arrive at and justify their final value “estimate”.

Ever larger numbers of appraisers appear to becoming more lax in their preparation of reports and in adhering to the appraisal process. However, with the “new” Limiting Conditions in effect, the LC has passed liability for an appraisal on to a larger end-user group. If appraisers are not yet finding that they need to justify their valuation position to an increasing number of clients, they soon will be.

In the name of expediency and closing ever greater volume, appraisers and lenders justified less then quality and supportable work, and less then appropriate and defensible reconciled value, by noting that rising real estate values covered all sins – including less then appropriately addressed value estimates. That scenario is changing rapidly.

Reconciliation by definition is the final resolution, the bringing together of the valuation methodology, to arrive at a supportable, final conclusion. What has been promulgated through the years, and is the only methodology to withstand the rigors of court cases, is based on a directed value estimate leaning on a specific adjusted value of the most competitive sale, individually, to the subject.

In other words, the reconciliation of value of the Sales Comparison Approach (the Market Approach) should gravitate to the adjusted value of a specific sale comparable (adjusted) which offers the most appropriate (adjusted) characteristics of value (individually) to the subject, of the sales offered for consideration in the report, and appropriately supported by the other adjusted values.

In this manner, the appraiser has (theoretically) reviewed and compared the best available competing sales to the subject, selected the most appropriate of those sales, and then individually compared them to the subject. That is a trend that appraisers have been gravitating away from.  

Appraisers (are supposed to) apply adjustments for pertinent differences, to sales comparables, individually, comparing each factor to a competing factor of the subject property. This is supposed to appropriately account for those pertinent differences, especially those that impact market derived value, between each sale, individually, and the subject. To arrive at a supportable final value estimate, we must have accurate data applied appropriately for these factors. That data is then supposed to be reconciled individually for each sale, resulting in an adjusted value for the sale that reflects an alternative substitute for the subject if the subject were replaced by that sale.

This is repeated for all of the sales comparables applied in the valuation, resulting in their adjusted values. These adjusted values are supposed to reflect and convey a value estimate which is supposed to be as accurate and market driven as possible.

These competing sales are supposed to offer an alternative to the subject if the subject were not available for sale (Theory of Substitution) and the comparables were offered as an alternate choice to a “typical” open market, arms-length purchaser.

Ideally, each appraisal would garner “market driven” adjustments from a paired sales analysis to justify each adjustment applied. Realistically, this happens far too infrequently. For the average appraiser to conduct a paired sales analysis for each 1004 completed would result in astronomical fees, excruciatingly lengthy turn-around times and probably not too different (and well within accepted tolerances) an end result from their “experience-gathered-and-applied” market adjustments. But those “market-experience” adjustments are still not quantifiable factors.

More and more reports with value estimates are being grabbed from anywhere within the range of adjusted values – and sometimes from without. There is no attempt at a true direction, no attempt at justification of the value estimate, just a number placed on the form.

For example: three adjusted values are: $150,000; $155,000 and $165,000. The sale with the least adjustments, with bracketed primary characteristic focus points or extremely competitive points or a near “matched pair” happens to be the bracketed value at 155,000. Sounds like a good direction for the appraiser to head for a value estimate, right? So why would an adjusted value be, say $157,000? Many appraisers answer, because that is what they feel it is worth.
Theoretically, let’s take this appraisal to court – with just the above data to consider. Add a second appraisal that justifies its value estimate, using the exact same data but offering a value at any one of the adjusted values, but for this argument, going to the $155,000 (adjusted) sales price.

Appraiser 1 is at the $157,000 value. Appraiser 2 is at $155,000. #2 can justify his value decision by pointing to the sale with a defined adjusted value from the three sales. Sale 2 offers the most competitive value indicators, individually to the subject and this is recognized by the adjusted value as compared to the subject. In a more detailed valuation, this would be recognized by a paired sales analysis. Therefore, the appraiser reconciled to that particular and most competitive sale with its adjusted value as identified by that adjusted value as compared to the subject. Whereas appraiser one offered a “reconciled” value estimate based upon what he feels it is worth from the value range – with no defining support for that value.

That is not the definition of “reconciliation of value” – just a blind opinion with no essential supporting documentation. Why wouldn’t an appraiser want to present the best possible and most supported value direction on a 1004 (if he/she would in a “narrative”)?

Generally speaking, a court would almost always toss out the first appraisal as an unsupported opinion of value, while accepting the second as a (better) supportable opinion of value.

Appraisers need to treat a 1004 or any form report as a condensed version of a narrative, and  offer the best and most supportive data and reconciled approach to a value opinion; a reconciled value that is able to defend itself. That defense is a resolved value based upon the most competitive sale, adjusted to the subject and then the reconciled value selected to that particular sales’ adjusted value (supported by the other (two) sales). Not an (unsupported) value grabbed from anywhere in the adjusted value range.


Mr. Pollet has been an appraisal professional since 1980. He currently serves as a chief regional appraiser for one of the nations largest lenders; prior to this position, he was the CEO and founder of a firm bearing his name for over 11 years until selling the company. Before that, he served at several major financial institutions as a corporate officer and chief appraiser.


This article is owned by Mr. Leigh Pollet  (c) 2007. This article may be reproduced as long as it is reproduced in its entirety and the author and copyright are clearly displayed.