The influence of a decision support tool on real estate valuations

Abstract

An appraisal task involves the rendering of market value, an unobservable and hypothetical construct. Direct feedback against this objective is typically not possible, so alternative feedback such as confirmation of previous appraised values may be employed. This may alter the appraiser’s perception of the valuation objective leading to divergence from the appraisal normative model. The real estate literature suggests appraisers have been susceptible to the influence of previous appraised values, often resulting in biased valuations. This research focuses on the efficacy of a decision support tool in eliminating or subduing this bias in the appraisal process.

Keywords:

• appraisal smoothing
• anchoring behaviour
• decision support
• heuristic

Notes

1. The Appraisal Institute’s formulation of the normative model was a result of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989, contained in the Real Estate Appraisal Reform Amendment or Title XI of Public Law 101–73.

2. The idea that appraisers lack confidence in their valuation judgments has been discussed in the real estate literature. Geltner (1989) contends that appraiser’s lack of confidence is a possible explanation of the appraisal smoothing phenomenon. The rational updating hypothesis formulated by Quan and Quigley (1991) suggests that appraisal smoothing exists because appraisers do not adequately update values because of poor market information, and due to the uncertainty of current market conditions attribute a function of the value to historic valuations.

3. CoStar is a provider of commercial real estate information, marketing and analytic services and claims to be the largest such provider in the US (and UK). Other providers of such information exist.

4. The use of a past valuation date was necessitated by the limitations imposed on our use of the CoStar database. Estimating value as at a date in the past is within the normal remit of appraisers.

5. www.CoStar.com.