Why Am I Being Asked to Reconcile the Pending Contract to the Value?

This is Diana with ABC-The Appraiser’s Business Companion.  More and more appraisers are getting judged on their minimal to none reporting of the contract analysis.  More specifically the criticism has been geared toward the lack of reconciliation of the contract to the final value.  WHAT??????  We don’t reconcile our value to the contract; where is this coming from?

You are correct, we do not reconcile our value to the pending contract price.  But we are required, under Standard Rule 2-2 (a)(viii), to recognize the sufficiency needs of our clients.  In mortgage lending, especially residential mortgage lending, there is a minimal space for comment on a subject that has a major consequence to the lender’s risk assessment of the pending loan.  Consider the comment section in:

SR 2-2(a)(viii) “An Appraisal Report must include sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1. The amount of detail required will vary with the significance of the information to the appraisal.

The appraiser must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions, including reconciliation of the data and approaches, in accordance with Standards Rule 1-6.

When reporting an opinion of market value, a summary of the results of analyzing the subject sales, agreements of sale, options, and listings in accordance with Standards Rule 1-5 is required. If such information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required. If such information is irrelevant, a statement acknowledging the existence of the information and citing its lack of relevance is required.

Most of you are familiar with this comment but are you familiar with the comments in AO-1 (Subject: Sales History line numbers 34 thru 47)?

The requirement for the appraiser to analyze and report sales history and related information is fundamental to the appraisal process. Just as the appraiser must analyze the details of pending and recent sales of comparable properties, the appraiser must also take into account the various factors associated with all pending and recent sales of the subject property itself. This is not to say that the agreed price in a pending or recent sale of the subject property is necessarily representative of value as defined in the report, but the appraiser’s failure to analyze and report these facts may exclude important information from the sales comparison approach. Information pertaining to the current market status and the sales history of the subject property may also be useful information for the determination of highest and best use or the analysis of market trends.

Analysis of sales, offerings, etc., as referenced in Standards Rule 1-5, requires more than just stating the known facts about the transaction. Each pertinent factor should be examined individually, methodically, and in detail, to ascertain whether it has relevance to, or potential impact on, the transaction and potentially other assignment results, including the opinion of market value (if applicable). By examining (or evaluating) the specific details of all agreements of sale, options, or current listings on the subject property, and all sales that occurred within the prior three years, the appraiser gains valuable (or important) insights into market trends, property and buyer characteristics.

The act of reconciliation in the contract analysis isn’t to impact the value conclusion, its to help the client understand the risk of the asset.  Clients want to lend but history tells us that lending foolishly cost everyone.  The Savings and Loan Crisis and the Home Lending Crisis occurred in my lifetime, probably yours as well.  To reconcile the contract analysis is to reconcile your analysis as it relates to the market value, a very separate analysis.  For example, “The pending sale of $225,000 was listed for sale at $227,000 for 188 days.  The price the pending sale includes $5,000 concessions.  The terms and conditions were similar to other sales with concessions amounting to 2% being the range of concessions paid in 70% of the transactions taking place in the neighborhood. The market value concluded does not support the pending sale price, nor is it within the adjusted range of the comparable sales.”  Can you see the appraiser’s reasoning being imparted?  Can you understand in this reasoning how the pending price and contract analysis was reconciled to the conclusion of market value?

This is Diana Jacob and you’ve just had a Tip of the Week from ABC-The Appraiser’s Business Companion.