Academic journal article Journal of Real Estate Literature

Hedonic Models and the Inclusion of Conditions of Sale in Commercial Real Estate Transactions: A Review of the Literature

Academic journal article Journal of Real Estate Literature

Hedonic Models and the Inclusion of Conditions of Sale in Commercial Real Estate Transactions: A Review of the Literature

Article excerpt

The real estate literature contains a significant volume of research dedicated to hedonic analysis. This deep well of literature has contributed to the collective understanding of how hedonic models are constructed and how property prices vary as a function of a broad range of factors. However, despite the breadth of exploration and the maturity of the research tradition, little attention has been paid to conditions of sale, or the group of elements of comparison, that provide important context to and underpin most commercial real estate (CRE) transactions.

The Appraisal Institute (AI) identifies conditions of sale as one of the elements of comparison in identifying comparable transactional data. Although the AI describes several attributes, such as short sales or bank owned real estate, as being illustrative of conditions of sale, no specific grouping or list is articulated (Appraisal Institute, 2013). Given the thematic signals from the AI, conditions of sale here are defined as the group of metrics that describe the real estate transaction context, motivating factors, and contract specifics. For example, a 1031 tax exchange, in which capital gains are deferred through a like kind exchange, is a condition of sale. In a 1031, the buyer or the seller (or perhaps both) are tax and time motivated. This motivation relative to the time table established by the IRS relative to purchases and sales creates important context.

Recently, a small number of empirical studies (Wiley and Wyman, 2012; Gatzlaff and Liu, 2013; Liu, Gallimore, and Wiley 2013; Robinson and McAllister, 2015; Robinson and Sanderford, 2015) used clusters of control variables called "conditions of sale" in GRĘ hedonic models. Their inclusion of this control variable cluster suggested suspicion that conditions of sale contribute both substantively and econometrically to the models-helping to sharpen the coefficient estimates of other variables of interest and to provide new insight into the variability of asset prices. However, despite their inclusion in these models, little was reported on their effects. Further, while a number of conditions of sale have been analyzed in hedonic models on an individual basis, the lack of any comprehensive study in the literature creates substantial obstacles. Primarily, it limits the ability of researchers, investors, appraisers, and assessors to develop ex ante theoretical expectations about their potential price effects and to respond appropriately to statistical model results. The extent to which these variables concurrently, materially or consistently influence CRE transaction prices is unclear. To the best of our knowledge, no comprehensive review of the hedonic literature exists justifying the inclusion of conditions of sale on transaction prices or the empirically derived estimates of their effects.

To close the literature gap, the objective of this paper is to assess the literature surrounding conditions of sale in two ways. First, we examine the hedonic analysis literature to develop perspective about the potential to include conditions of sale variables as a cluster of control variables in CRE-oriented hedonic analysis models. Second, we review the empirical findings on a number of individual conditions of sale. The paper is organized to first provide background on hedonic analysis, the context, and tools in which conditions of sale could be utilized. in the next section, we describe the types of conditions of sale clusters and suggest several types of conditions of sale variables that could be included in hedonic analyses. in the following section, we summarize the extant literature describing the individual price effects of the conditions of sale metrics identified in the prior section. We provide concluding remarks in the last section and challenges future research to empirically test the theoretical findings drawn together here.

Hedonic Valuation Literature Summary

BACKGROUND

Drawing on the first systematic research on the influence of quality on commodity prices (Waugh, 1929), Court (1939) introduced the term "hedonic" into the economics lexicon (Sheppard, 1999). …

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