Appraisals as Science

Is appraisal a science, or is it an art? One school of thought says that value is in the eye of the beholder, and the eye of the beholder sees things personally. The value of a house depends in large part on personal perceptions: curb appeal, the use of color, the "feel" of a room. These things are subjective. To take account of them requires appraisal as art.

What, then, are we to make of the fact that, in a given neighborhood, though some housing may be renovated Victorians and other housing new, open floor plan lofts, we find a high degree of price uniformity? Appraisal is about statistics, says this second school of thought: the price per square foot of this, the vacancy rate of that. Statistics are science. Appraisal, then, is science. Art or science: which is it?

The history of the world for the last five hundred years has been the general expansion of science into voids that were formerly filled by pseudo-science. Once, doctors diagnosed illness through the perception of "ill humours." Today, if your doctor suggested that your medical problem lay in ill humours and came at you with leeches, you would be out the door and looking for a new M.D.

If appraisal today, despite the wealth of statistics that are available to the real estate analyst, remains something less than a science, it is for a reason. The reason, in short, is that some don't want it to be. Here are some barriers:

- general math phobia 
- courts that historically influenced appraisal in the direction of argument rather than objectivity
- banking regulatory agencies that define the minimum level of acceptability for statistical analysis in appraisals at a level that is just that: minimal

The result is an environment in which practitioners can present a work product and call it an appraisal when it may present only a limited analysis, make use of only a few comparable sales when dozens may be available, and not address at all such descriptive information as range, margin of error, and probability.

Yet appraisal as science does exist. It exists wherever an appraiser makes use of broad statistical data rather than limited anecdotal evidence to estimate vacancy, operating expenses, and capitalization rates. It exists in its most advanced form today in mass appraisal techniques, where an appraisal company that may be assessing all the houses in a community for tax purposes applies multiple regression analysis to hundreds of market sales to create a model capable of fully describing any one property's value.

Appraisal as art is threatened by appraisal as science. Appraisal as art - the evaluation of the intangibles in real estate - will always be a necessity. And appraisal will always require the judgement of an appraiser - if only, in some instances, to evaluate the output of a statistical model.

But appraisal as science will grow. Appraisers will use it to their own advantage and to the advantage of their clients. Appraisers can't hang onto pseudo-science any more than doctors could. We will let go of pseudo-science. That will happen. Inevitably.

Eric T. Reenstierna, MAI

The Reenstierna Associates Report is published as a service to the clients of Eric Reenstierna Associates and other real estate professionals. The views expressed are those of the articles' authors and do not necessarily reflect those of other members of the organization. Copyright 2005. All rights reserved.

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