ACI’s 2016 Compliance Series
As we develop new products for appraisers, compliance with industry standards is always front and center. Our objective is to help improve appraisal quality and provide efficiencies to the process. Everybody wins by connecting industry needs with appraisal reporting techniques through technology, industry guidance, and practical advice. This is ACI’s contribution to the industry – and we hope you find it informative and helpful. Enjoy.
The term “balance the checkbook” is a bit of a misnomer in that you are not “balancing” the checkbook. Rather, you are reconciling the balance in the checkbook with the balance on your bank statement. You are checking one number against another.
When appraisers hear the word “reconcile” they typically think of the final reconciliation, where the indicated values of the individual approaches are reconciled into the final opinion of value. But the appraisal process involves more reconciliation than just the three approaches. A typical appraisal report is full of opinions and conclusions, and most of those opinions and conclusions involve some degree of reconciliation of the supporting data.
It’s becoming more common for appraisers to be asked to reconcile the contract price with their opinion of value, especially when there’s a significant difference between the two. This triggers the question: “Does USPAP require an appraiser to reconcile the contract price with the opinion of value?”
And the answer is: “It depends on who you ask.” Some appraisers will answer “Yes, it says so in USPAP” while others say “No, it’s not a USPAP requirement.” Still others say you should reconcile if the situation warrants it. Let’s go to the source and take a look at Standards Rules 1-5 and 1-6
Standards Rule 1-5
When the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business:
(a) analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal; and
(b) analyze all sales of the subject property that occurred within the three (3) years prior to the effective date of the appraisal.
Standards Rule 1-6
In developing a real property appraisal, an appraiser must:
(a) reconcile the quality and quantity of data available and analyze within the approaches used; and
(b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s).
Standards Rule 1-5 is pretty clear. It says we need to analyze the sales contract. And it adds the admonishment in the Comment to make sure the associated Standards Rule 2-2 is followed, which essentially says the appraiser must summarize the information analyzed and the reasoning that supports the analysis. So far so good.
But now we come to Standards Rule 1-6, which is where the “must reconcile” folks get the idea that the sale price needs to be reconciled with the value opinion. Oddly enough, it’s also where the “don’t need to reconcile” crowd finds support for their contention, as 1-6 doesn’t actually mention the sales contract. The “must reconcile” group will counter that it does mention “approaches, methods and techniques” and coming on the heels of 1-5, it surely must cover the sales contract under either “methods” or “approaches” as the sales contract is an important data point in the sales comparison approach.
To resolve this issue, we need to go back in time, before Standards Rule 1-6 existed. Standards Rule 1-6 was added to USPAP in the 2003 version.
You may remember that during your 7-hour USPAP update classes, one of the first things the instructor usually covers is a section near the front of the USPAP book that talks about the revisions to the current edition. Each revision is listed along with the rationale for the change. Here’s what the 2003 version of the revisions page had to say about the (then) newly-minted Standard Rule 1-6:
Standard Rule 1-6
This new Standards Rule was added to clearly demonstrate that reconciliation is a separate component of the appraisal process rather than a function within the analysis of the sales history.
So I don’t need to reconcile the sales contract with the opinion of value then, right? Well, that depends on how much risk you want to take. Given the way things work, any disgruntled homeowner, seller, or real estate agent can file a complaint with your State Regulatory Agency, regardless of actual merit. In most cases, the State will review the entire report, not just the part of the report related to the complaint. If any USPAP violations are found, you know what happens, and it’s usually not good for the appraiser.
One reason for reconciling the contract price and opinion of value is the belief it’s a USPAP requirement and that you don’t know what a State Board might do. In other words, better safe than sorry. Another reason for reconciling price and opinion is that it’s good business, especially in cases where a significant difference exists between the two. If a buyer and seller agreed to a price in circumstances consistent with the definition of market value, it’s not unreasonable for a client to question why the price is different than the value.
It’s not like reconciliation of price and opinion of value is time consuming or difficult. The most common situation is that the price and opinion of value are the same or not significantly different. A simple comment such as the following should suffice: “The contract price and opinion of value are the same (or ‘not significantly different’) and no reconciliation is necessary.” Alternately, you may wish to say that the contract price falls within the range of value indicated by the comparables and provides additional support for the opinion of value.
The second most common situation is when there is a significant difference and you were able to determine why. Your comment might read: “The opinion of value is $7,000 less than the contract price. The difference is likely attributable to the $6,000 in seller’s concessions and a significant amount of personal property enumerated in the sales contract analysis on page X.”
Sometimes you just can’t account for the difference. A good reconciliation for such circumstances might be to recognize the difference, explain there is no readily apparent reason for it, and then discuss the quality of the comparables and stress how well the comparables support the opinion of value.
In summary, reconciling the contract price and opinion of value may not be a USPAP requirement, but if your State Board thinks it is, it might as well be. Besides, many clients either want it or at least appreciate it, so why not?
This concludes the five-part series on sales contract analysis. If you enjoy these blogs and have ideas for future topics, email them to firstname.lastname@example.org.