Valuation accuracy, variation and bias in the context of standards and expectations
| Date | 01 April 2000 |
| Pages | 130-161 |
| DOI | https://doi.org/10.1108/14635780010324240 |
| Published date | 01 April 2000 |
| Author | Neil Crosby |
| Subject Matter | Property management & built environment |
JPIF
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Journal of Property Investment &
Finance, Vol. 18 No. 2, 2000,
pp. 130-161. #MCB University
Press, 1463-578X
CONFERENCE PAPERS
Valuation accuracy, variation
and bias in the context of
standards and expectations
Neil Crosby
Professor of Land Management, The University of Reading,
Reading, UK
Keywords Valuation, Standards
Abstract Valuation accuracy usually conjures up images of empirical studies of comparisons
between sales and valuations and different valuations of the same properties, and a number of
references to these studies are included in the paper. However, this paper concentrates on the
institutional influences which impact on valuations and their accuracy. The overall aim of this
paper is to examine the legal interpretation of valuation inaccuracy in the UK. This might seem a
bit parochial in the context of a World Valuation Congress. However, cases in many countries in
the Commonwealth form precedents for each other and therefore decisions in, for example, the
UK and Australasia, are drawn on by others in reaching decisions. The paper also reaches
conclusions which have wider implications for all jurisdictions which have valuation disputes
settled in courts, tribunals and any other quasi-judicial body.
1. Introduction
At the Pacific Rim Real Estate Society Conference in Perth in 1998, two
colleagues and I presented a paper on the legal implications of valuation
variation and as a result I was asked to speak on valuation accuracy and
related matters at this conference. That paper and two variations have been
subsequently published in various academic journals and a short summary in
the leading UK property professional journal, the Estates Gazette (Crosby et al.,
1998a, 1998b). Given the nature of this conference and the difficulty in some
countries of accessing overseas journals, this paper repeats some of that
material.
First, using analysis of cases in Australia and the UK, it demonstrates how
valuation accuracy or inaccuracy has been institutionally legitimised via the
legal process but shows that there is a limit to the level of inaccuracy.
Second, it briefly discusses the context of the delivery of accuracy. Concepts
and bases of valuation set the question that the valuer is trying to answer and
International, Continental and National valuation guidance notes set the
standards. The internationalisation of real estate has led to more cross-border
co-operation between valuers and their regulatory institutions and local
standards are developing within the context of wider international standards.
Third, the paper addresses the issue of valuation accuracy, variation and, to
a lesser extent, bias and discusses a number of studies carried out in the UK,
USA and Australia on how accurate valuations are and by how much they
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Conference papers:
Standards and
expectations
131
vary. Despite problems with different methodologies and different
interpretations of the outcome, it is possible to make some crude comparisons
between the studies.
Finally, the paper compares the legal context with the empirical studies and
concludes on the ability of valuers to hit a target; the expectations of the courts
are actually less onerous than the expectations we have of ourselves. This
discussion highlights the importance of the role of expert witnesses. There is
mounting concern in the UK about the role and performance of expert
witnesses in a range of matters and a review has been undertaken recently in
the UK by Lord Woolf and a guidance note produced by the Royal Institution of
Chartered Surveyors (RICS, 1997).
The terms accuracy, variation and bias need defining for the purposes of this
paper.
Valuation accuracy is the ability of a valuation to correctly identify the
target. If the valuation basis is market value, this is the ability of the valuer to
identify the sale price of the property (or rent on letting if market rental value).
In accuracy studies, this target is usually taken as a subsequent sale price
transacted in the market place.
Valuation variation is the ability of two or more valuers to produce the same
valuation on the same basis at the same time. Variation is therefore, measured
as this difference.
Valuation bias is where valuations consistently under or overvalue in
relation to the target; in the case of accuracy where valuations are consistently
under or over the sale price and in variation studies where one valuer is
consistently over or under another.
2. Accuracy of valuation in the courts
2.1 Pinpoint accuracy?
One of the relics of the British Empire is that the legal decisions in a number of
countries impact on decisions in others. Decisions in the UK courts are used as
precedents in, for example, Australasia (and vice versa) and valuers and their
valuations have been the subject of a number of decisions concerning their
competence in all three of these countries. In the UK courts in the case of
Banque Bruxelles Lambert SA v. Eagle Star Insurance Co Ltd [1995] 2 All ER
769, Sir Thomas Bingham MR offered the following description of the duty
which is owed by a valuer to, in this case, a mortgage lender:
[T]o take reasonable care to give a reliable and informed opinion on the open market value of
the land in question at the date of valuation. In the ordinary way [the valuer] does not warrant
that the land would fetch on the open market the value he puts on it, any more than a medical
practitioner warrants that he will cure a patient of illness.
A similar line was taken by Judge Orde, sitting as a deputy judge, in UCB
Home Loans Corporation Ltd v. Roger North & Associates [1995] EGCS 149:
It is to be emphasised that valuers accepting a commission do not undertake a standard of
care which is higher than is normal and reasonable to others of their calling. Still less is it
required of them that they would necessarily hit any target arrived at by a consensus of
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expert opinion or that they would produce a figure of valuation which comes within range of
any sum subsequently realised by a sale when the property is tested in the market, any more
than a surgeon who undertakes treatment or surgery guarantees a cure.
This concentration in the valuation context on method rather than result is
hardly surprising, given that there appears to be a widely held judicial view
that valuation is a subjective process. As Goddard LJ put it in Baxter v. FW
Gapp & Co Ltd [1938] 4 All ER 457:
Valuation is very much a matter of opinion. We are all liable to make mistakes, and a valuer is
certainly not to be found guilty of negligence merely because his valuation turns out to be
wrong. He may have taken too optimistic or pessimistic a view of a particular property. One
has to bear in mind that, in matters of valuation, matters of opinion must come very largely
into account.
In Singer & Friedlander Ltd v. John D Wood & Co [1977] 2 EGLR 84, Watkins J
took a similar line:
The valuation of land by trained, competent and careful professional men is a task which
rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many
imponderables confront the valuer that he is obliged to proceed on the basis of assumptions.
Therefore, he cannot be faulted for achieving a result which does not admit of some degree of
error. Thus, two able and experienced men, each confronted with the same task, might come
to different conclusions without any one being justified in saying that either of them has
lacked competence and reasonable care, still less integrity, in doing his work . . . Valuation is
an art, not a science. Pinpoint accuracy in the result is not, therefore, to be expected by he who
requests the valuation.
It is clear that the view thus expressed is shared by higher courts, as evidenced
by recent dicta from the Court of Appeal: ``Valuation is not an exact science; it
involves questions of judgement on which experts may differ without forfeiting
their claim to professional competence'' (Zubaida v. Hargreaves [1995] 1 EGLR
127). And: ``Valuation is not a science; it is an art, and the instinctive `feel' for
the market of an experienced valuer is not something which can be ignored''
(Craneheath Securities Ltd v. York Montague Ltd [1996] 1 EGLR 126).
It is clear that ``pinpoint accuracy'' is not expected and, as in other
professions, all the valuer has to do is approach the task with a standard of care
reasonable to others of the same calling.
2.2 Brackets or margins of error
Despite the fact that the courts have legitimised ``inaccuracy'', they have not
presented the valuers with a blank cheque. In a number of cases in the UK, the
concept of margin of error has been utilised to decide on a bracket outside of
which the valuer should not fall. A valuation outside of the bracket has in some
cases been taken as evidence that the valuation is negligent regardless of how it
has been undertaken; in other cases it is taken as strong evidence that a
problem exists with the valuation but for negligence to be proven, there needs
to be corroborating evidence of mistakes in the approach.
An early example of such reasoning may be seen in the Court of Appeal in
Baxter v. FW Gapp & Co Ltd [1939] 2 KB 271, where du Parcq LJ stated:
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