Magazine article Real Estate Issues

Appraisal or Valuation: An Art or a Science?

Magazine article Real Estate Issues

Appraisal or Valuation: An Art or a Science?

Article excerpt

CRE PERSPECTIVE

Herein, the author looks at the age-old conundrum to see whether, in today's hi-tech world and with the advent of Global Valuation Standards, there is a consensus of opinion.

Art: thing in which skill may be exercised.

Science: systematic and formulated knowledge.

-Source: The Concise Oxford Dictionary

There seems to be a common view among those I interviewed for this article that roughly correlates with the dictionary definitions. Another way of distinguishing between the two might be that one is subjective whilst the other is objective. Which is which? Well, I believe that whilst art is a subjective view, a scientific view should be objective. However, in terms of an appraisal, it could be argued that a client is paying the appraiser for a subjective interpretation of the objective scientific analysis and calculation. There will always be an esoteric mix of factors to interpret, such as current market sentiment, the micro-location of the asset, age, and precise specification of the building, among many others.

NEW VIEWS FOR OLD

Is this ratio of subjectivity a new view? Has this view changed in recent years? Folk have been valuing property for centuries. The Roman trader needed to assess an asset's value just as much as today's real estate bond trader. What has changed, particularly in very recent years, is the methodology by which the number is calculated. Indeed, the very word calculated implies a more scientific approach than when I first valued property. Gut feel had a lot to do with a value then, based on the comparables method. Yes, there was some mathematics-the application of a years purchase multiplier to the rent. Even then, the valuer needed to apply a subjective judgement to arrive at the number reported to the client.

Perhaps appraisal was, in the past, a cottage industry, as the quality of the output depended on the appraiser's ability to gather market information that used to not be so readily available. Lack of data needs more experience. More data leads to a better opinion.

Nowadays, most appraisers would not dream of undertaking an appraisal without the benefit of a computer package. It is not for me to give credit to a particular supplier-there are many on the market..some better than others. However, some packages require so many fields to be completed that the appraiser can end up making judgements on judgements, and the ensuing variables call for considerable (artistic) interpretation.

However, even when the factual data has been input, the appraiser still needs to make assumptions. Is this the art or the science at play? Assumptions as to market rent, probable yield, discount rate, and the like, all call for considerable relevant experience and subjective judgement. Is this not what scientists do when hypothesising a theory? Appraisals cannot be proved empirically. Even a genius has to make a judgement of whether a theory is proven or not. Does that make it any less scientific? I think not.

So, maybe appraisal is an imprecise science rather than an art.

DATA MINING

When an appraiser conducts market research, this can produce raw data. The client could, most likely, get that data from the Internet or another source. There is so much data available today, with increasing transparency in the marketplace. Data mining is part of the science. However, the client is willing to pay for the interpretation of the data to determine an opinion of value, which can be relied upon. The interpretation is the art.

Deals happen. There is not a perfect market. This imperfection makes an appraiser's task very difficult. The appraiser has to interpret where the market is going. A valuation is like a snapshot in time. Imagine a photograph containing a ball in flight. Is it actually going up, or going down? That's what the client wants to know. He would really like to know where that ball will be after an agreed period of time, but that is probably too difficult for all but the crystal-ball gazers. …

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