Richard J. Conti, ASA, ARM
Senior Appraiser, Conti Appraisal Service, Chief Assessor at City of Taunton,
MA, and Associate Broker, Conti Real Estate
Abstract: Valuation standards of USPAP and IVS state that the appraiser or valuer[i] should reconcile the quantity and quality of data. This article offers an enhancement to the Standards, based on a statistical model to do so. This article explores the types of variables used in statistics which the personal property appraiser or valuer faces in a valuation assignment. It then offers how the appraiser or valuer might incorporate those variables in a narrative report’s reconciliation of value as a conclusion as a more credible and defendable report.
[i] The term appraiser is generally used North America; valuer in the rest of the world.
Reconciliation is the final step in the appraisal process, resulting in the final opinion of value. The reconciliation step involves an analysis of (1) the relative appropriateness of the approaches applied; (2) the accuracy of the data collected and calculations made in each approach; (3) the quantity of data available for each approach; and (4) the consistency in the manner in which the approaches to value are applied.
Much has been discussed and printed on the role of logic in an appraisal report, for good reasons. True premises and conclusions used in the reconciliation argument supporting the concluding value gives the appraiser or valuer the opportunity to be most convincing.
The appraiser or valuer can add to the impact of logic by weaving statistical methods used for quality improvement which they inadvertently collected as they faced the value decision. In each report, the author will develop an analysis of the item being valued, the choices leading to the accuracy of the description and the data collected and the choice of calculations made in each approach. With tangible property, the analysis is not necessarily numerical. The author could be more convincing if the choices made (variables) are disclosed and explained to the reader.
In statistics a variable is an attribute in the sample population. In appraising or valuing tangible property, a variable is a property characteristic.[i] That property characteristic is what drove the data collection in a market approach. Decisions about that property characteristic were made while selecting the data for the analysis. Those decisions are variables. Variables can be quantitative (objective amounts) and qualitative (subjective) and the typical appraisal reader does not know much about them. However, readers of narrative appraisal reports want to know how the appraiser or valuer identified variables and how they contributed to the valuation decision. If the variable is critical to the valuation, the reader wants to know the options that were available to the appraiser or valuer to make the decision. This is especially true if the reader is a lawyer or judge.
[i] Lanmon, Dwight., Evaluating Your Collection. The Fourteen points of Connoisseurship, Winterthur Museum
There is a process to including statistical methods used for quality improvement in an appraisal or valuation report:
Throughout the process the appraiser or valuer makes decisions based on education and experience. Keeping track of these decisions is important because they identify the variables of the assignment. Variables—developed for statistical analysis and adapted for appraisal practice—come in quantitative data (amounts) and categorical data (groupings). Some value characteristics could fall into more than one variable.
Quantitative variables important to an appraisal will be discrete — with limited options — or continuous — with unlimited options. These two quantitative variables provide various influences on value decisions that the appraiser or valuer must explain to the reader of the appraisal report. Quantitative variables are in the identification and data analysis stages of the report. Quantitative variables are the choices made by the author to define the item and its value.
Discrete variables provide limited options. A discrete variable might be the weight, measurement, or number of an item. Variable options that affect the valuation are most relevant. The author should identify them and relate what impact they have on the valuation and how they should be considered in a reconciliation. Information about discrete variables, woven into a report’s logical argument, will support the appraisal process and value opinion.
Every discipline has particular discrete variables that influence a valuation decision. For the personal property appraiser or valuer, examples of quantitative discrete variable depend upon the subject assets. Variables for appraising or valuing hallmarked silver, would include the weight, measurement, number of the item and the identifying marks which tell the appraiser or valuer much of how to proceed to a value. For the Gems and Jewelry discipline, variables would be the four Cs of a diamond (cut, color, clarity, and carat weight). For the Real Property appraiser or valuer, variables for valuing improvements on land would include materials, age, square feet, and number of rooms. For the MTS appraiser or valuer, number, age, materials, use or function and the quality of construction may be the variables. For the Business Valuation appraiser or valuer looking at real property improvements that has income generation, the most frequently used discrete variables would be potential gross income, effective gross income, and net operating.
In all appraisal disciplines, the expertise is in the interpretation of the data. It is the weaving of explanations and discussions of the variables into logic that makes a great reconciliation.
A continuous variable may be grade, craft techniques, color, or age. Typically, the variable is a number that is measurable and non-finite and so, unlike the distinct variable, has a wide range of options, with unlimited choices and is subject to interpretation by the report. Here, the appraiser’s experience and training come through in the process of investigating, analyzing, and verifying the item, creating a tight knit of unique ingredients and explaining why any variable was selected. A reconciliation that discusses the important continuous variables by leading the reader through an interpretation of the value characteristics becomes a very convincing argument and is a great read. Tell your reader how you interpreted a continuous variable.
For the personal property report writer, continuous variables can be graphed, and such a graph can bring a report to life. The $/square inch of a painting with a discussion of the mean, median, standard deviation and coefficient of variation have been discussed to exhaustion. Sales ratios of auction estimates to sales prices have also been included in many a magazine article and valuation report. Sales adjusted for time are a quantitative variable and because inflation is not a constant it is a continuous variable.[i]
[i] US Bureau of Labor and Statistics Consumer Price Calculator https://data.bls.gov/cgi-bin/cpicalc.pl
In addition to quantitative variables, there are qualitative variables known in statistics as categorical variables. These are groups of attributes, not actual numbers of things but a category of them. They can be binary (yes or no), nominal (no difference) or ordinal (ranked). Ordinal has been the subject of many a book on an appraiser or valuer’s bookshelf. A critical categorical variable is the market, which sets the item being valued into a particular rating. All ordinal variables should be explained by the way the market reacts to the variable.
In personal property attribution, condition, craft technique, finish, ornament, style, and material could be quantitative. Also, a school of art such as Barbizon or Hudson River can easily be seen as categorical and qualitative, as would Edwardian, Victorian, or Continental.
A market reaction to a qualitative variable is important in an appraisal report and should be included in the reconciliation. The reconciliation can go beyond the items described in the report by placing perspective of the class. Every narrative appraisal report— either in the reconciliation or the asset description—should contain a discussion of the qualitative variables. This discussion is an opportunity for you to display your expertise regarding the assets you have valued—the reason you got the assignment. Do your best to make your experience and knowledge obvious without stating it directly (ipse dixit).
An appraisal or valuation addressing a marital dissolution, an estate facing equitable distribution, an insurance claim on a loss, all have readers wanting closure on the valuation discussions. It is why they chose an appraiser or valuer, an independent professional opinion, an expert who can apply the variables to the conclusion.
A reconciliation is the final step in the appraisal process and the perfect place to discuss how the variables relate to the appraisal and to the valuation’s intended use, giving the reader an opportunity to follow the author’s knowledge and expertise of the subject. The appraiser or valuer can display market expertise if the variables are part of the problem and display statistical expertise if the variables are explained to solve the valuation problem. This applies best in describing the accuracy of the data collected because decisions were made, variables were narrowed, some data found was left out and some data has more weight than others due to the variables. Additionally, the research may have been expanded to increase the quantity of data due to a variable. Let’s consider some examples, first with property characteristic variables driving the accuracy of the data:
“We restricted some variables in the data collection to increase, statistically, the confidence in our results. The data collected was restricted to the past three years due to the trending changes in the market explained in the Market Section of this report. The data collected was also restricted to sales in the Northeastern region of the United States because there is evidence of a regional market, also detailed in the Market Section of this report.”
“We restricted some variables in the data collection to increase, statistically, the confidence in our results. Only works by the artist of the same scene were considered in the data as he produced many of them with minor modifications and they form a data set, in this case, 15 sales.”
“We restricted some variables (time, location of sale and number of auction bidders) in the data calculations to increase, statistically, the confidence in our results. We sought the median in the sales then calculated the standard deviation.”
I have read many appraisal reports without any mention of why potentially useful variables were not selected. Worse, the selected variable may be identified and dismissed in a single sentence, such as: “The cost approach utilized a 50% depreciation [in a hospital appraisal] because the facility was constructed in the 1950s.”
USPAP and IVS do not have enough armament to express my discontent. This explains nothing. I might have a different reaction to this appraiser’s justification of depreciation if he had instead written: “The cost approach is a continuous variable and typically used for new construction where the cost of goods used to build are purchased at market prices.”
The problem is that due to interpretation of depreciation, the cost approach variable is less reliable over time. The reconciliation did not discuss this variable in enough detail to educate the reader. In this example the appraiser used the cost approach because he wanted to compare at least two approaches for a value conclusion. He had sales and used the sales approach. The third approach, the income approach, was not possible because the report was being written to be used in a trial and hospital management would not disclose finances which could become public record.
For the report reviewer, inclusion of a variable discussion makes the review easier to review because the thought process is exposed. For the readers or intended users of the appraisal report, it can provide important clarification of the appraisal process and a deeper confidence in the appraiser’s expertise. It might also make the reconciliation narrative longer.
The next time you write a report, take a moment to reflect on the variables you faced in the assignment and see if they made it into your reconciliation. If not, consider re-writing it. When rewriting, remember that per US copyright law, if your report has more than 1% of AI content, you do not have ownership of the report.
Richard J. Conti, ASA, ARM, owner and principal appraiser at Conti Appraisal Service, is an accredited personal property appraiser and Chief Assessor at City of Taunton, MA. An ASA since 2004 and a Past President of the Boston Chapter ASA, he currently serves as Chair of the ASA International Marketing Committee and the ARM Discipline Board and is a Co-Editor of the ARM E-journal. Email rick@contiestates.com
[1] The term appraiser is generally used North America; valuer in the rest of the world.
[2] Lanmon, Dwight., Evaluating Your Collection. The Fourteen points of Connoisseurship, Winterthur Museum
[3] Sack, Albert., The New Fine Points of Furniture, Crown Publishers, NY
[4] US Bureau of Labor and Statistics Consumer Price Calculator https://data.bls.gov/cgi-bin/cpicalc.pl