Definition of "Reconciliation"
What is reconciliation in real estate?
Both aspiring appraisers and wannabe real estate agents know the definition of reconciliation in real estate. In appraisal, it refers to the process of assessing the three major approaches - the market comparison, the cost approach, and the income approach - to arrive at an estimate of the value of the subject property being appraised.
Many may mistake reconciliation for the process of calculating an average price at the end of the appraisal. Reconciliation is indeed the final step in a real estate appraisal, but it focuses on the approach most suitable for the type of property involved. So, the sales comparison will be taken into consideration if the price of a single-family house has to be established. The cost approach is more suitable for unique properties such as churches and stadiums, while the income approach is generally used for investment properties such as malls and office buildings.
Each approach will generate a slightly different number, so the appraiser must rely on his/her experience, intuition and judgment to explain the differences and choose the final value of the property. While most home prices are estimated as a single dollar amount, there are cases when a range is also acceptable, which means that a property’s value is somewhere within that range.
The appraisal is not complete without the report of defined value. This can be presented as a form report or a narrative report. The form is also known as the Uniform Residential Appraisal Report Form (URAR) or the Fannie Mae form - as preferred by most mortgagees. The narrative report is usually used in commercial real estate and contains more details than the form report.
So, reconciliation is just a phase of the appraisal process. Of course, it is included in the total cost of the appraisal. According to the Appraisal Institute, the valuation process consists of eight steps. This means that reconciliation takes only 12.5% of the whole procedure.
Example of reconciliation
In the city of Scottsdale Arizona, the real estate appraisal cost is lower for residential properties and higher for commercial properties. An appraiser may charge anywhere between $250 - $500 for dwellings, while the valuation of commercial properties costs between $2,000 and $10,000. Through reduction to absurdity, the cost of reconciliation alone would be in the $31.25 - $62.5 range for a residential property. However, it’s very unlikely that this cost will ever be included separately in the appraiser’s invoice.
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