Measuring Random Appraisal Error in Commercial Real Estate :: essays research papers

Recent empirical studies imply that most estimation wrongdoing is nonrandom, which suggests that strategies that advocate portfolio assembly over item-by-item property weft may be defective.Each step of the appraisal address involves an unbeknown(predicate) amount of estimation error. The combination of these errors is unlikely to produce a perfect, error-free bringing close together of value. Thus, appraisal error is virtually unavoidable. Investors need reasonable estimates of value when buying, selling, or retaining commercial property, so an unknown amount of appraisal error adds perplexity to the decision-making process. Despite the uncertainty, investors have learned to make allowances for appraisal error in their decision-making processes. The way in which accepted nation investors interpret appraisal errors has a material effect upon the decisions that they make. In particular, the predominant belief among real estate professionals is that appraisal error is random . This belief materially influences investor attitudes toward portfolio management and the valuation process itself. Lack of understanding of the relative magnitudes of random and nonrandom components of agree appraisal error has consequences for optimal portfolio strategies. For example, investors who deem the bulk of summation appraisal error to be random may reasonably conclude that error in estimates is beyond their control or influence. To minimize total portfolio valuation error, such investors may assemble large, diverse portfolios even though the cost of owning an get down of properties of various types and in various locations is expensive. On the other hand, if the bulk of total appraisal error is nonrandom, investors would do better to pay attention to improving value estimates on from each one property rather than hoping that the errors in set of a large pool of properties will offset one another. In particular, investors should institute valuation controls and pr ocedures to minimize the errors in each valuation of individual portfolio pluss. Such controls might include obtaining multiple simultaneous estimates, changing appraisers for each periodic revaluation, or increasing the frequency of valuations. This conclusion becomes particularly square in light of studies like Miles that determine that the typical magnitude of total appraisal error is about ten percent of appraised value. Information in three recent empirical studies provides evidence that previous appraisal research has been mistaken in assuming most appraisal error to be random. The demonstration that most appraisal error is nonrandom should encourage real estate investors to focus additional attention on individual asset selection and valuation at the expense of portfolio assembly.Estimates of Total Appraisal wrongful conduct