Capital Market Theory and Real Estate Valuation: A Case Study in Choosing an ‘Appropriate’ Discount Rate

Adams, Andrew; Jackson, John D.; Cook, Joe

doi:10.5085/0898-5510-14.2.119

Cited by 2 publications

(1 citation statement)

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“…As a rule of thumb, appraisal dispersion as indicated by standard deviation appears to be approximately 10% (Hansz and Diaz 2003), although feedback, which enables learning, and experience (Spence and Thorson 1998) can moderate this dispersion somewhat. Appraisal bias is important not only for reasons relating to disputes over property tax collection, but also in eminent domain cases (Adams, Jackson and Cook 2001) and as a potential predictor of mortgage default (LaCour-Little and Malpezzi 2003). There are also important normative issues relating to appraisal returns and risk hedging, where overly smooth appraisal-based real estate time series can unfortunately mask the true covariance structure between real estate and other asset categories (Geltner 1989, Gau and Wang 1990, Hendershott and Kane 1995, Lai and Wang 1998, Gunnelin, Hendershott, Hoesli and Soderberg 2004.…”

Section: Introductionmentioning

confidence: 99%

A Simple Bayesian Procedure for Sample Size Determination in an Audit of Property Value Appraisals

Berg

2006

Real Estate Economics

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The article proposes a simple Bayesian technique for auditing property appraisals to determine whether state accuracy guidelines are met. The proposed technique addresses elicitation of appraisers' prior beliefs, computation of reappraisal sample sizes and reporting of audit results. To facilitate communication of quantitative audit findings to nonstatistician stakeholders, the concept of variance appears nowhere in prior elicitation or reporting. In contrast to classical frequentist techniques, the Bayesian procedure easily integrates expert judgment and responds flexibly to the arrival of new information. In addition, the Bayesian procedure significantly reduces the number of reappraisals required to regulate appraisal systems when they are functioning well. The technique can be applied in other settings where government officials audit their own work and must convince overseers, especially the public, that accuracy requirements are satisfied.Public-sector property appraisers, whose responsibility is to compute annual property valuations for use by tax assessors and attest to their accuracy, are providers of technical expertise and what Walls and Quigley (2001) refer to as socio-technical services. Socio-technical services are those that require specialized communication skills for eliciting statistical information from nonstatisticians and for persuasively explaining quantitative issues to various stakeholders, in this case taxpayers, users of public services financed by property tax revenue and other constituencies in the local or regional political economy. The task of communicating algorithmic detail from the computation of property owners' tax bills and attesting to the effectiveness of quality control measures clearly fits the socio-technical label.The focus of this article is the audit of public-sector property appraisals. Such audits require reappraisal of a relatively small number of properties using costly, in-depth appraisal methods and, thus, determination of an appropriate reappraisal sample size. The goal is to convince state officials and members of the

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Section: Introductionmentioning

confidence: 99%

A Simple Bayesian Procedure for Sample Size Determination in an Audit of Property Value Appraisals

Berg

2006

Real Estate Economics

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On the Determinants of Discount Rates in Discounted Cash Flow Valuations: A Counterfactual Analysis

Vonlanthen

2024

Real Estate

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This study addresses the scarcity of empirical findings on the determinants of discount rates in the Discounted Cash Flow (DCF) method, filling a crucial gap in the existing literature and enhancing the understanding of the valuation process from the perspectives of key stakeholders. Leveraging a unique dataset comprising market transactions enriched with expert-based valuation information, the study conducts a comprehensive counterfactual analysis of the fundamental determinants influencing both appraisal-based and transaction-based discount rates. The results reveal that appraisers and investors attribute different levels of importance to object-specific, locational, and macroeconomic variables. A type-specific analysis further reveals that locational and macroeconomic variables exert a greater influence on discount rates in the residential real estate segment. In contrast, object-specific characteristics hold significantly higher importance in explaining discount rates in the commercial real estate segment.

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Capital Market Theory and Real Estate Valuation: A Case Study in Choosing an ‘Appropriate’ Discount Rate

Abstract: No abstract available.

Cited by 2 publications

References 1 publication

A Simple Bayesian Procedure for Sample Size Determination in an Audit of Property Value Appraisals

A Simple Bayesian Procedure for Sample Size Determination in an Audit of Property Value Appraisals

On the Determinants of Discount Rates in Discounted Cash Flow Valuations: A Counterfactual Analysis

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