Property valuation: the market approach optimised by a weighted appraisal model
| DOI | https://doi.org/10.1108/JPIF-07-2019-0094 |
| Pages | 399-418 |
| Date | 24 September 2019 |
| Published date | 24 September 2019 |
| Author | Francesco Tajani,Pierluigi Morano,Francesca Salvo,Manuela De Ruggiero |
| Subject Matter | Property valuation & finance,Real estate & property |
Property valuation: the market
approach optimised by a weighted
appraisal model
Francesco Tajani
Department of Architecture and Design, Sapienza University of Rome, Rome, Italy
Pierluigi Morano
Department of Civil Engineering Sciences and Architecture,
Polytechnic University of Bari, Bari, Italy
Francesca Salvo
Department of Environmental and Chemical Engineering,
Universita degli Studi della Calabria, Arcavacata di Rende, Italy, and
Manuela De Ruggiero
University of Calabria, Cosenza, Italy
Abstract
Purpose –The purpose of this paper is to develop an innovative model that can be included within the
market approach methods for property valuations. The algorithm takes into account the frequent high level of
dissimilarity of the comparables selected for the assessment, thus providing for the use of appropriate
similarity and reliability coefficients capable of weighing the data of the comparison sample with respect to
the different degrees of similarity and reliability.
Design/methodology/approach –The proposed model borrows the operative logics of the goal programming
techniques, in order to identify the solution, the market value of the subject property and the implicit prices of the
different influencing factors, since they are more reliable from the mathematical and empirical points of view.
Findings –The modelhas been applied to two case studies,relating to samples of residentialproperties located
in the city of Naples(Southern Italy). Theresults obtained have outlinedthe high valuation performance of the
developedappraisal model, capableof overcoming the applicabilitylimits of classical marketapproach methods
as well as providing solutions thatare highly consistent with theexpected empirical phenomena.
Practical implications –The research takes into account the growing need of both professionals and end
users (banks, courts, public and private Entities, etc.) for valuation models that are easily repeatable and
sufficiently objective. They are required in order to allow for the rapid verification of the elaborations carried
out as well as to check the valuer’s appreciation of the contribution of the influencing factors in the market
price formation. The outputs of the two applications developed have highlighted the ability of the proposed
model to satisfy these market requests.
Originality/value –The proposed model can be easily implemented through a simple calculation program,
with the mathematical structure elaborated allowing to overcome some application limits of the classical
market approach methods. Furthermore, the introduction in the algorithm of appropriate similarity and
reliability coefficients, capable of suitably weighting the data of the comparison sample, allows to widen the
spatial horizon for the identification of the comparables as well as select properties characterized by a high
level of dissimilarity. This makes it possible to apply the model in territorial contexts characterized by
markets that are not excessively dynamic.
Keywords Market value, Goal programming, Property price, Market approch methods,
Reliability coefficients, Similarity coefficients
Paper type Research paper
1. Introduction
The economic events of the last decades have highlighted the cogency of adequate
professional skills in property appraisals, following the negative effects triggered –first in
financial markets, then in the real ones –by inappropriate valuations, with numerous
Received 18 July 2019
Revised 12 August 2019
16 August 2019
Accepted 16 August 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
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The paper is to be attributed in equal parts to the authors.
Property
valuation
JournalofProperty Investment&
Finance
Vol.38 No. 5, 2020
pp.399-418
©EmeraldPublishingLimited
1463-578X
DOI10.1108/JPIF-07-2019-0094
399
overpriced property assets compared to their real market values. In this context, the
formalization of shared and uniform rules and principles in the International Valuation
Standards has become peremptory, in order to guarantee a common language among
professionals and the public interest in the integrity of the valuation process (Gilbertson and
Preston, 2005). Considering that property valuations are an integral part of the business
community (French, 2011), this integrity allows to reduce the likelihood of systemic
economic crises, like that of the US subprime in 2007, and therefore, of instability in the
financial markets that can result in global collapse.
The need to “dominate”uncertainty, i.e. to obtain reliable forecasts of property market
values over the medium-long term (e.g. for properties as credit exposure securities), the
improvement in computing technology and the availability of numerous end-user friendly
softwares have generated the experimentation and diffusion of innovative mass appraisal
models (genetic algorithms, spatial analysis models, fuzzy logic, artificial neural networks,
etc.). Besides being characterized by a strong theoretical and methodological basis, they are
able to automatically capture the causal relations between explanatory variables and prices,
as well as estimate property values in the short term (Harvey, 1996; Antipov and
Pokryshevskaya, 2012; Morano et al., 2017).
Although these models are able to assess the marginal contribution of the influencing
factors on the property price formations, satisfying the current need to standardize the
appraisal method (Mansfield and Lorenz, 2004) as well as avoid the excessive randomness of
valuers that are overconfindent in their estimative ability ( Jansen van Vuuren, 2017), there
is an evident widespread diffidence of the ordinary practitioners toward these automated
valuation models. This contingence is determined, on the one hand, by the complexity of the
underlying mathematical formalisms of these techniques, while on the other, by the frequent
limited availability of comparison data, which should allow for the implementation of
econometric procedures that are able to adequately describe the mechanisms of property
price formation in specific markets (Tajani and Morano, 2018).
On the other hand, the high level of differentiation of properties and the market effects
generatedby this contingency in terms of anomalies and stickiness complicate the forecasting
possibilities and make the data sample construction and the use of multi-parametric
proceduresincreasingly delicateand problematic.Thus, recalling the monopolistic competition
market form as the natural theoretical reference. Even if it is known that numerous factors
should be considered in thevaluations, the value systemsare currently morecomplex than the
simple and hierarchical ones of the periods of quantitative city growth, with them being
characterized by quality factors that are often difficult to be quantified.
There is, therefore, a need for “hybrid”valuation models, that could also be implemented
with few comparative data and, at the same time, could obtain sufficiently objective results,
i.e. free from parameter appreciation of the valuer that could affect the valuation reliability.
2. Aim
According to the International Valuation Standards, the market approach, the income
approach and the cost approach constitute the three classic assessment procedures, in their
multiple variations and their adaptations to the realities of the different countries (RICS,
2017). Among them, when data are available, the market approach is the most systematic
one for the value estimation, due to the possibility to directly compare the assessed value of
the subject property and the selling prices of the comparables within the same market area.
The market approach has the main advantage of providing for an objective reference –the
selling prices of the comparables –exempting the valuer from the need to appropriately
justify the assumptions made on the estimation parameters adopted in the income approach
(cap rate, terminal value, analysis period, etc.) and in the cost approach (depreciation
functions, market value of the area, etc.).
JPIF
400
38,5
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