I work in a bank reviewing appraisals. I recently received an appraisal that looked odd to me. Comp #1's adjusted sales price was $242,580, Comp #2 $230,610 and Comp #3 $231,140. The final value given to the subject was $242,580. I asked the appraiser how she came to that conclusion, and the response she put in the report was "A USPAP CHANGE, WE ARE NO LONGER USING A WEIGHTED AVERAGE OF THE COMPS, WE NOW CHOOSE A COMP BASED ON FACTORS THAT MAKE IT THE MOST CONSISTANT WITH THE SUBJECT, SUCH AS SQUARE FOOT, LOCATION, LOT SIZE, CONDITION, AMENITIES, NEIGHBORHOOD, NET AND/OR GROSS ADJUSTMENT, AS I HAVE DONE AND STATED WHY I CHOSE COMP ONE TO SUPPORT THE VALUE CONCLUSION." When I called and spoke with her, she told me USPAP does not permit averaging (I agree), it does not mention weighted averaging (I agree), and this was the method used way back when that her office has recently decided to go back to.
I am very curious to hear other appraisers opinion on this.
I'd say you are both wrong to a degree.
It isn't that the USPAP doesn't allow averaging; the reconciled value can be an average.
It is that the USPAP requires the appraiser to reconcile the data. Rote (simple math averaging) is frowned upon if that is the only process used.
Here is the relevant passage from the USPAP:
The appraiser is wrong in her claim that there has been a change to the USPAP in this regard. What is more likely is that her office has decided it no longer rely simply on what the software's indicated value is by use of a weighted average.
I have three comparables that adjust to $590, $600, and $610k. All three in my opinion are equally good indicators of value. In theory, I could pick anyone if they are equally good. Baring some reason (like a significantly rising market), I may select what I think is the logical price-point given this range; which could be $600k.
$600k is the average. $600k is my reconciled price point. I could, in my reconciliation summary, say "I considered all three comparables to be equally reliable indicators of value for the subject; I gave no one comparable any more significant consideration than another, and I reconciled my point value to $600k."
There; that is a reconciliation which happens to be the average. No USPAP violation because I've applied my judgment and explained myself rather than just adding up the three numbers and dividing by three.
The "weighted average" process has a logic of its own. Using a weighted average, more consideration is given to comparables that require the least $ amount of adjustments. This can make sense in many cases; the one comparable with the lowest adjustments is presumed to be the most similar to the subject. However, that logic can breakdown quickly. In my opinion, the easiest adjustment to support is market conditions. If I have a model match to my subject that sold across the street 9 months ago for $500k, and my market has been appreciating, it may warrant a $50k (10%) adjustment for market conditions. I have two other comparables which are more recent, not the same model, and their combined adjustments are in the $25k to $30k range. Relying on the weighted average, those two non-model match comparables would be given more consideration than the model match comparable because the total adjustments were greater.
In my reconciliation, I may give the model match house most consideration and reconcile to its adjusted sale. My reason for doing so is that it is the most similar to the subject in all physical elements of comparison; the only adjustment required was for market condition differences, which I would fully support in my market analysis.
Alternatively, I may have three comparables, one of which is most similar to the subject and requires few adjustments, the other two that bracket the subject on the superior/inferior scale and require larger adjustments. The adjusted range is $475k, $485k, and $505k, with $485k being the most similar. Using the weighted average method, this comparable would be given most consideration in the software's calculation; I may conclude to it or close to it, and this may match the weighted-average indication.
The appraiser is correct (IMO) that in the reconciliation, she should cite the reasons why a or a set of comparables is more reliable than another or the rest. Those things such as size, location, etc., would be a reasonable selection criteria to choose which comp(s) to give most consideration to.
To summarize, simple averaging is not a sufficient reconciliation, although it can be the result of the reconciliation.
Likewise, weighted averaging is not a sufficient reconciliation, although it has a stronger logic for arguing that should be the case and, it may very well be the result.
Averaging should not be the reconciliation process. But, averaging can be the result once the reconciliation process is complete.
