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Real Estate Rate of Return Reconciliation

Real Estate Rate of Return Reconciliation

In determining the value of a Property, appraisers employ the use of many techniques and put into consideration a range of factors. During the process of appraisal, the different approaches used may result in different value indications.

The appraiser then reconciles the differences in all of these values to achieve an ultimate value estimate that can be used.

Simply put, reconciliation is a process whereby an appraiser examines a property making use of different methods to determine its most accurate value.

How Does Reconciliation Work?

Reconciliation is not a process that requires any formulas or mathematical methods. It mainly relies on the judgment and experience of the appraiser.

However, one method which should never be used by an appraiser is the averaging comparable sales approach which refers to a situation where different comparable values are analyzed by an appraiser, and their average value is derived.

This method is flawed because it does not involve a particularly detailed process and therefore might result in inaccurate values.

Reconciliation follows two major steps:

  • A review of the processes via which the different value indicators were derived
  • Arriving at a reconciliation judgment

Reconciliation and Real Estate Appraisals

Reconciliation has the following uses in the appraisal of real estate properties:

To Reconcile Values From Different Comparable

This is a very common use of reconciliation in appraisals. For it to work, there has to be available data from several comparable properties.

Four different approaches used in appraisals are:

  • Sales comparison approach
  • Site comparison approach
  • Cost approach
  • Income capitalization approach

Comparable property values could be reconciled by the appraiser to determine any of the following for the subject property:

  • Under the sales comparison approach, an indicator of unit price
  • Under the site comparison approach, an indicator of land
  • Under the cost approach, an indicator of unit cost
  • Under the income approach, capitalization rate

To Reconcile Values From Different Units of Comparison

Reconciliation is also applicable in cases where different units of comparison are used, which occurs mostly in the sales comparison approach.

If an appraiser uses different units to determine different value indicators for the subject property, eventually, he must reconcile the values obtained from the different units to arrive at a single indicator.

To Reconcile Values From Different Appraisal Techniques

Another circumstance during an appraisal that might require reconciliation is when different appraisal approaches are used to create different value indicators.

For example, if an appraiser uses the income approach, cost approach and income capitalization approach during an appraisal, the value indicators that are generated have to be reconciled for a final value to be derived.

Importance of Reconciliation in Appraisals

Below are some reasons reconciliation is important in property appraisals:

Determinant of Value

Abuse is inevitable for a property whose value is not known. It is therefore important for property owners/managers to determine the value of their properties.

Reconciliation plays a huge role in determining the value of real estate properties, and since it is a reliable process, the final result can always be trusted to be accurate.

It is also important to ascertain if property is yielding at current values. For instance, if you acquire a property for $1 million, delivering a 6% return, then at market rate the property is valued at $2 million, however, it delivers only 3% return, this would imply that property is yielding below current values.

Reasonable Sales/Rental Price

Reconciliation prevents you from running at a loss while leasing out or selling your property by providing you with a price estimate.

After the value of the subject property has been determined, the manager can then make a reasonable decision on the amount of money to be charged on the property.

Execute Necessary Changes

Perhaps your property appraisal has been completed, and the value of your property is not as high as you would like it to be, during the process of reconciliation, information would have been gathered on similar properties of higher value and the features that make them stand out.

You could make use of this information to effect the necessary changes in your property to increase its value.

Conclusion

Reconciliation plays a salient role in the appraisal of real estate properties, and therefore should be carried out with diligence, a high level of experience, and a sense of responsibility.

As a property owner/manager, make sure that you commit the appraisal of your property to professionals, to get a worthy estimate.

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