When two approaches produce widely divergent indications, Standards require the appraiser to:
Correct Answer
C) Analyze the divergence rather than simply average it
Investigate divergent indications and reconcile the quality and quantity of data and the approaches’ applicability and relevance. A supported reasoned weighted calculation can be appropriate; an unexplained average, automatic rejection of the lower indication or client-preferred selection cannot substitute for analysis.
Why This Is the Correct Answer
Option C is correct because USPAP requires the appraiser to reconcile the quality and quantity of data available and analyzed within the approaches used, and the applicability and relevance of those approaches. Divergent indications must be investigated and explained. A supported, reasoned weighting can be appropriate, but an unexplained average is not reconciliation.
Why the Other Options Are Wrong
Option A: Report both without any reconciliation
Option A reports both indications without any reconciliation. USPAP requires reconciliation of the approaches used, so presenting two numbers without analysis falls short.
Option B: Discard the lower of the two divergent indications
Option B discards the lower indication. Choosing based on which number is lower is arbitrary; the appraiser must weigh data quality and the approaches' relevance.
Option D: Adopt the approach the client prefers
Option D adopts the approach the client prefers. Letting the client's preference choose the result undermines impartiality and skips the required reconciliation.
Explain the Gap
When indications diverge, find and explain the reason for the gap before choosing a final value.
How to use: Use this when a question describes approaches producing very different results.
Exam Tip
Answers that average without explanation, drop a number by size or follow the client's choice do not meet the reconciliation requirement.
Common Mistakes to Avoid
- -Averaging divergent indications without analysis
- -Dropping the lower indication because it seems low
- -Letting client preference choose the final approach
Concept Deep Dive
Analysis
This question tests what reconciliation requires when approaches produce very different indications. USPAP requires the appraiser to reconcile the quality and quantity of data within the approaches and the applicability and relevance of the approaches. Wide divergence calls for analysis of why the indications differ, not a mechanical average or arbitrary selection.
Background Knowledge
Reconciliation is the final step in developing a value opinion. The appraiser considers which approach best reflects how market participants price the property, how reliable each approach's data is, and why indications differ, such as from data errors or obsolescence not captured in the cost approach.
Real-World Application
A cost approach gives a value far above the sales comparison indication for an older home. The appraiser investigates, finds unmeasured functional obsolescence, and gives the sales comparison approach most weight with an explanation.
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