BUSI344 CHAPTER 4

Question 1

Most appraisal assignments are straight forward and there is little difficulty in identifying the right market segment. However, as assignments become more complex, this choice may become increasingly difficult. A key consideration is that the biggest appraisal mistakes are _______________

Answer 1

Most appraisal assignments are straightforward and there is little difficulty in identifying the right market segment. However, as assignments become more complex, this choice may become increasingly difficult. A key consideration is that the biggest appraisal mistakes are made in choosing the wrong market segment to analyze.

Question 2

Database is a _ _ _ _ _

Answer 2

Database is a collection of records stored in a systematic, structured way most often with some way to uniquely identify those records (the mailing address of a property for example).

Question 3

Most appraisal assignments start with _____ AND ______

Answer 3

Most appraisal assignments start with problem identification and defining the scope of work.

Question 4

UTILITY?

Answer 4

Utility: property characteristics: physical, legal, and financial qualities.

Question 5

You can consider asset analysis to be comprised of five parts:

Answer 5

. You can consider asset analysis to be comprised of five parts:

1. Identify the problem to be solved;

2. Determine the scope of work necessary to solve the problem;

3. Complete the research necessary to reduce the data to a useful and informative set;

4. Complete the analysis necessary to produce a credible result; and

5. Interpret and communicate the results.

Question 6

Effective modeling requires both ______ AND _________.

Answer 6

Effective modeling requires both the right data and the right analytical procedures.

Question 7

Identifying the right market starts with _ _ _ _

Answer 7

Identifying the right market starts with identifying the problem to be solved

Question 8

__________ is a selection of data chosen from a database (or collection of databases), such that any information outside the data frame is judged to have no or negligible impact on the solution desired.

Answer 8

Data frame is a selection of data chosen from a database (or collection of databases), such that any information outside the data frame is judged to have no or negligible impact on the solution desired.

Question 9

_______ is the selection of data chosen from the data frame for direct analysis.

Answer 9

Dataset is the selection of data chosen from the data frame for direct analysis.

Question 10

Another way of looking at the nature of the valuation problem is as follows:

1. Identify the right market segment (market identification); and

2. Locate the subject within that market (property characterization).

Market identification is a process of recognizing and applying key variables.This is essentially the first three parts of asset analysis listed above. To arrive at the appropriate market segment dataset, first we review and examine the effect of the client’s appraisal problem, and second, determine the scope of the solution. Third, we consider the four dimensions of similarity (transaction, time, space, and utility), specifically how they affect our reduction of a database into sets of data useful for analyzing and understanding market dynamics. That is, we apply them to our data decisions. Finally, the issue of optimal use is included in this sequence, in terms of how this may change an initial perception of the right market and right dataset.

Answer 10

Another way of looking at the nature of the valuation problem is as follows:

1. Identify the right market segment (market identification); and

2. Locate the subject within that market (property characterization).

Market identification is a process of recognizing and applying key variables.This is essentially the first three parts of asset analysis listed above. To arrive at the appropriate market segment dataset, first we review and examine the effect of the client’s appraisal problem, and second, determine the scope of the solution. Third, we consider the four dimensions of similarity (transaction, time, space, and utility), specifically how they affect our reduction of a database into sets of data useful for analyzing and understanding market dynamics. That is, we apply them to our data decisions. Finally, the issue of optimal use is included in this sequence, in terms of how this may change an initial perception of the right market and right dataset.

Question 11

As mentioned earlier there are five steps in identifying the right market:

1. Problem Identification – The initial information and question(s) provided by the client.

2. Scope – The solution strategy identified by the appraiser, in consultation with the client.

3. Similarity – A measure of relative equivalency in aspects of time, space, and utility (physical, legal, and financial qualities).

4. Data Decisions – Defining and refining (reducing) available data.

5. Optimality – Research and analysis may lead to a reconsideration of each of the above steps. This is where the process may become iterative.

Answer 11

As mentioned earlier there are five steps in identifying the right market:

1. Problem Identification – The initial information and question(s) provided by the client.

2. Scope – The solution strategy identified by the appraiser, in consultation with the client.

3. Similarity – A measure of relative equivalency in aspects of time, space, and utility (physical, legal, and financial qualities).

4. Data Decisions – Defining and refining (reducing) available data.

5. Optimality – Research and analysis may lead to a reconsideration of each of the above steps. This is where the process may become iterative.

Question 12

Market Identification Step 1: Identify the Appraisal Problem

Identifying the right market starts with identifying the problem to be solved. This contains the following elements:

Answer 12

Identify the client and other intended users.

Intended use

Purpose

Date of Value

Property characteristics

Assumptions

Question 13

Intended use. A lender may need to make a loan decision or foreclosure decision. If the use is for a foreclosure decision, the client may want more emphasis on market analysis and in particular the trade-off between a quick sale and the potential costs of carrying the property for a more “normal” marketing period. The correct market might include only other quick sales, not necessarily meeting market value conditions. Intended use will affect what data and what variables are important. It will also affect the scope of the report.

Answer 13

Intended use. A lender may need to make a loan decision or foreclosure decision. If the use is for a foreclosure decision, the client may want more emphasis on market analysis and in particular the trade-off between a quick sale and the potential costs of carrying the property for a more “normal” marketing period. The correct market might include only other quick sales, not necessarily meeting market value conditions. Intended use will affect what data and what variables are important. It will also affect the scope of the report.

Question 14

The third step in identifying the right market is specifying the similarities (and differences) between our subject and its environment. That is, we need to determine all the elements of comparison that, in essence, define our subject. These elements fall into one of four dimensions:

Answer 14

Transaction: rights conveyed, financing, sale conditions (motivation);

Time: market conditions;

Space: adjacent and proximate influences, neighbourhood, district, market segment, and illustrative comparables; and,

Utility: property characteristics: physical, legal, and financial qualities.

Question 15

The four dimensions of similarity: transaction, time, space, and utility, serve as the basis for our valuation modeling pursuits. In evaluating similarity (the third step in the market identification process), the appraiser must keep in mind that the nature of available statistical tools is different for each dimension.

Answer 15

The four dimensions of similarity: transaction, time, space, and utility, serve as the basis for our valuation modeling pursuits. In evaluating similarity (the third step in the market identification process), the appraiser must keep in mind that the nature of available statistical tools is different for each dimension.

Question 16

The third step in identifying the right market is ________

Answer 16

The third step in identifying the right market is specifying the similarities (and differences) between our subject and its environment.

Question 17

Having identified the client’s problem to be solved, the next step is _ _ _ _ _ _

Answer 17

Having identified the client’s problem to be solved, the appraiser now establishes the levels of property identification, inspection, data research, and analysis to be performed. The scope of the solution has a large impact on decisions for data and analysis, including the choices of variables used.

Question 18

Information set _ _ _ _ _

Answer 18

Information set is the selection of data (usually comparable sales from within the market segment), which the appraiser considers directly competitive in terms of the four dimensions of similarity. The difference between a data set and information set is editing and enhancement,which includes verification and transformation.

Question 19

TIME?

Answer 19

Time: market conditions

Question 20

Step 4 of market identification is __________ .

Answer 20

Data decisions

Question 21

____________ is data which has been sorted for a particular purpose in a manner which is understandable to a human. The entire appraisal process is designed to take data, enhance it, and reduce it so that it is meaningful to a human.

Answer 21

Information is data which has been sorted for a particular purpose in a manner which is understandable to a human. The entire appraisal process is designed to take data, enhance it, and reduce it so that it is meaningful to a human.

Question 22

This is the solution strategy identified by the appraiser, in consultation with the client.

Answer 22

ANSWER: SCOPE

Question 23

________ is a collection of records stored in a systematic, structured way most often with some way to uniquely identify those records (the mailing address of a property for example).

Answer 23

Database is a collection of records stored in a systematic, structured way most often with some way to uniquely identify those records (the mailing address of a property for example).

Question 24

Data frame is ________

Answer 24

Data frame is a selection of data chosen from a database (or collection of databases), such that any information outside the data frame is judged to have no or negligible impact on the solution desired.

Question 25

Dataset is ________

Answer 25

Dataset is the selection of data chosen from the data frame for direct analysis.

Question 26

________ is the selection of data (usually comparable sales from within the market segment), which the appraiser considers directly competitive in terms of the four dimensions of similarity. The difference between a dataset and information set is editing and enhancement, which includes verification and transformation.

Answer 26

Information set is the selection of data (usually comparable sales from within the market segment), which the appraiser considers directly competitive in terms of the four dimensions of similarity. The difference between a dataset and information set is editing and enhancement, which includes verification and transformation.

Question 27

___________ is used for reporting or presentation purposes. It parallels the comparable sales used in traditional appraisal. The illustrative set has one primary purpose: it is a further data reduction to help simplify the methodology used for those who may have no training or experience in data analysis methods.

Answer 27

Illustrative data set is used for reporting or presentation purposes. It parallels the comparable sales used in traditional appraisal. The illustrative set has one primary purpose: it is a further data reduction to help simplify the methodology used for those who may have no training or experience in data analysis methods.

Question 28

Step 5 of market identification is _______

Answer 28

Step 5 of market identification is Optimality

Question 29

A paradox of appraisal is that the characteristics of the subject identify the market in which it competes, and yet market forces determine which characteristics are important. Inpractice, which comes first? This problem can be called “analytical iteration”. Thatis, as each step is completed it may lead to some reconsiderationof a previous step. In fact, there could be many such iterations.

Answer 29

A paradox of appraisal is that the characteristics of the subject identify the market in which it competes, and yet market forces determine which characteristics are important. Inpractice, which comes first? This problem can be called “analytical iteration”. Thatis, as each step is completed it may lead to some reconsiderationof a previous step. In fact, there could be many such iterations.

Question 30

After identifying the correct market for the subject, we then move on to __________ So far we have focused on the research part of the valuation problem. Our focus now concentrates on ________. This modeling effort will be based on the principles of ___________.

Answer 30

After identifying the correct market for the subject, we then move on to characterizing the property within that market. So far we have focused on the research part of the valuation problem. Our focus now concentrates on analysis of the chosen dataset. This modeling effort will be based on the principles of experimental design.

Question 31

Our goals in promoting statistical analysis are to increase _______ and to ______. To achieve these goals, we seek reliable and credible results through modeling:

______ is defined as: freedom from random error.

Credibility is defined as: ______________

Modeling is the mechanism by which we achieve ________.

Modeling is both an art (a set of skills) and a science. Effective modeling requires both the right data and the right analytical procedures.

Answer 31

Our goals in promoting statistical analysis are to increase human understanding and to reduce variability. To achieve these goals, we seek reliable and credible results through modeling:

Reliability is defined as: freedom from random error.

Credibility is defined as: worthy of belief. Credible results come from a combination of professional competence and ethical behaviour. Credibility is also dependent on our ability to effectively communicate results, whether verbally, in a formreport, in a storyline summary, through a results-only account of findings, or through a full narrative discourse.

Modeling is the mechanism by which we achieve the highest possible reliability.

Modeling is both an art (a set of skills) and a science. Effective modeling requires both the right data and the right analytical procedures.

Question 32

In general, economics gives us the nature of the _______ of our answer, while the statistics gives us the ______and _____ of the effect.

Answer 32

In general, economics gives us the nature of the c**au**se portion of our answer, while the statistics gives us the direction and size of the effect.

Question 33

Recall that our statistical objective is to _____ and reduce ______. To do so, we will apply all four of the principles of experimental design for valuation data analytics:

• *1. ________
  2. _______
  3. _______
  4. _______**

Answer 33

Recall that our statistical objective is to increase precision and reduce variability. To do so, we will apply all four of the principles of experimental design for valuation data analytics:

1. Control: limiting what data is used

2. Randomization: relying on chance.

3. Replication: considering similar experiments.

4. Blocking: exploiting natural and logical groupings of variables.

Question 34

Explain statistical “control”.

Answer 34

One way we can reduce variation is by constricting our research data to a narrow range of similar (or identical) conditions. In doing so we can eliminate or isolate the effect of a specific variable.This is often accomplished by removing a variable from a model to see how the relationships change without that variable. By controlling for extraneous sources of variation, we reduce the variability of the response. A key to good control is to watch for collinear or correlated variables and not carry them along into our control group.

Question 35

Explain randomization

Answer 35

This is a way of equalizing or “averaging out” the effects of unknown or uncontrollable sources of variation. Randomization protects us from effects we might have missed, such as an undiscovered outlier.

Question 36

The theory underlying randomization is that _ _ _ _ _ _

Answer 36

The theory underlying randomization is that troublesome variables, whether known or unknown, will tend to be evenly spread out, ideally with a random assortment on either side of the subject’s parameter. This applies to categorical as well as measure variables. This is very similar to the traditional appraisal process of bracketing, wherein the appraiser attempts to have at least one comparable greater than and one comparable less than the subject.

Question 37

RANDOMIZATION

We do go one step further here, in that our objective is not only to bracket, but to balance as much as possible, with a similar number of comparables greater than and less than in important characteristics.

Answer 37

RANDOMIZATION

We do go one step further here, in that our objective is not only to bracket, but to balance as much as possible, with a similar number of comparables greater than and less than in important characteristics.

Question 38

Replication in experimental design means _ _ _ _ _

Answer 38

Replication in experimental design means one’s results should be able to be replicated by others.

Question 39

SPACE?

Answer 39

Space: adjacent and proximate influences, neighbourhood, district, market segment, and illustrative comparables

Question 40

Explain blocking.

Answer 40

Blocking involves taking advantage of natural or logical groupings of similar variables.

An example is comparing warehouses on rail roadsidings with warehouses not on sidings.

Railsiding is the blocking variable. If the warehouse properties are similar otherwise, the blocking variable provides a valid basis for paired group comparison.

We have two distinct groups of similar experimental units (blocks), and we can isolate the variability from the differences between the blocks.

Question 41

Information set is the selection of ______ (usually _ _ _ _ _ _ _ _ _ _), which the appraiser considers directly competitive in terms of _ _ _ _ _ _ _ _. The difference between a data set and information set is _______ and _______,which includes ___________ and _________________.

Answer 41

Information set is the selection of data (usually comparable sales from within the market segment), which the appraiser considers directly competitive in terms of the four dimensions of similarity. The difference between a data set and information set is editing and enhancement,which includes verification and transformation.

Question 42

Control involves _ _ _ _

Answer 42

Control: limiting what data is used.

Question 43

Randomization refers to the practice of _ _ _ _

Answer 43

Randomization refers to the practice of using chance methods (random number tables, flipping a coin, etc.) to assign subjects to treatments. In this way, the potential effects of lurking variables are distributed at chance levels (hopefully roughly evenly) across treatment conditions.

Question 44

In the statistical theory of the design of experiments, blocking is the arranging of experimental units in groups (blocks) that are similar to one another.

Answer 44

In the statistical theory of the design of experiments, blocking is the arranging of experimental units in groups (blocks) that are similar to one another.

Question 45

This involves exploiting natural and logical groupings of variables.

Answer 45

Blocking: exploiting natural and logical groupings of variables.

Question 46

Categorical Data. Categorical variables represent types of data which may be divided into groups. Examples of categorical variables are race, sex, age group, and educational level.

Answer 46

Categorical Data. Categorical variables represent types of data which may be divided into groups. Examples of categorical variables are race, sex, age group, and educational level.

Question 47

NOTES ONLY

Our data reduction decisions from earlier in the lesson:

Database: Numbers and facts available or attainable

Data frame: Excludes what is believed statistically not useful

Dataset: Limited to what is believed economically relevant (market dataset)

Information set: Data controlled for analysis and comprehension

Illustrative set: Data chosen for its ability to exemplify the solution

Answer 47

NOTES ONLY

Our data reduction decisions from earlier in the lesson:

Database: Numbers and facts available or attainable

Data frame: Excludes what is believed statistically not useful

Dataset: Limited to what is believed economically relevant (market dataset)

Information set: Data controlled for analysis and comprehension

Illustrative set: Data chosen for its ability to exemplify the solution

Question 48

_________ refers to the technique of separating out the effect of one particular INDEPENDENT VARIABLE from the effects of the remaining variables on the DEPENDENT VARIABLE in a MULTIVARIATE ANALYSIS.

Answer 48

Statistical control refers to the technique of separating out the effect of one particular INDEPENDENT VARIABLE from the effects of the remaining variables on the DEPENDENT VARIABLE in a MULTIVARIATE ANALYSIS.

Question 49

Market Identification Steps

As mentioned earlier there are five steps in identifying the right market:

[LIST THE FIVE STEPS]

Answer 49

Market Identification Steps

As mentioned earlier there are five steps in identifying the right market:

1. Problem Identification – The initial information and question(s) provided by the client.

2. Scope – The solution strategy identified by the appraiser, in consultation with the client.

3. Similarity – A measure of relative equivalency in aspects of time, space, and utility (physical, legal, and financial qualities).

4. Data Decisions – Defining and refining (reducing) available data.

5. Optimality – Research and analysis may lead to a reconsideration of each of the above steps. This is where the process may become iterative.

Question 50

This is the initial information and question(s) provided by the client.

Answer 50

ANSWER: Problem Identification

Question 51

TRANSACTION?

Answer 51

Transaction: rights conveyed, financing, sale conditions (motivation);

Question 52

This is a measure of relative equivalency in aspects of time, space, and utility (physical, legal, and financial qualities).

Answer 52

ANSWER: SIMILARITY

Question 53

What’s involved in data decisions?

Answer 53

ANSWER: Defining and refining (reducing) available data.

Question 54

Market Identification Step 1: Identify the Appraisal Problem

Identifying the right market starts with identifying the problem to be solved. This contains the following elements:

Identify the client and other intended users. This helps the appraiser ascertain the type, focus, and level of work to be performed, as well as the depth, breadth, detail, and language of the report.

Examples:

1. Work for an attorney will usually differ from work for a lender.

2. Work for a developer could lead you to the conclusion that the value desired is the land for assemblage, rather than the current retail use.

Who the client is may make a strong impact on setting the rest of the problem scenario. It is a dominating factor in the scope of the report and must be clearly communicated.

Intended use. A lender may need to make a loan decision or foreclosure decision. If the use is for a foreclosure decision, the client may want more emphasis on market analysis and in particular the trade-off between a quick sale and the potential costs of carrying the property for a more “normal” marketing period. The correct market might include only other quick sales, not necessarily meeting market value conditions. Intended use will affect what data and what variables are important. It will also affect the scope of the report.

Purpose. Market value is but one type of value. The lender noted above may want al iquidation value or disposal value to help compare the carrying costs of waiting for perhaps a higher market value under normal marketing effort and time. The type of value will affect what data and what variables are important.

Date ofValue.Even theexactminuteof value can make a differencewhileabuildingisburning.While a current value is the most common, there are many cases and reasons for retrospective (historical) valuations. Similarly, many construction and development valuations require a prospective (future) value, perhaps upon completion of construction or upon full absorption of rental space to tenants. Investment analysis invariably involves some forecasting of future elements. Markets exist and behave differently at different times. Date of value clearly identifies the time dimension of the valuation solution.

Property characteristics. Physical, legal, and financial qualities of a property launch the main challenges of market identification. These substantially define property characterization. Property characteristics are treated differently because their correct identification requires competency in that type of assignment. This lesson provides methods for the recognition and control of property characteristics as analytical variables. Property characteristics affect what data and what variables are important.

Assumptions. Appraisal assumptions can be classified into four types:

Limiting conditions – liability and use.

General – typical and ordinary.

Extraordinary – that which may be false.

Hypothetical – that which is false.

The above six elements of identifying the appraisal problem directly affect decisions regarding the data to be used, thevariables to be exploited, andthe type of statistical/graphicaltools to be used. They are key indefining the scope of work and scope of reporting.

Answer 54

Market Identification Step 1: Identify the Appraisal Problem

Identifying the right market starts with identifying the problem to be solved. This contains the following elements:

Identify the client and other intended users. This helps the appraiser ascertain the type, focus, and level of work to be performed, as well as the depth, breadth, detail, and language of the report.

Examples:

1. Work for an attorney will usually differ from work for a lender.

2. Work for a developer could lead you to the conclusion that the value desired is the land for assemblage, rather than the current retail use.

Who the client is may make a strong impact on setting the rest of the problem scenario. It is a dominating factor in the scope of the report and must be clearly communicated.

Intended use. A lender may need to make a loan decision or foreclosure decision. If the use is for a foreclosure decision, the client may want more emphasis on market analysis and in particular the trade-off between a quick sale and the potential costs of carrying the property for a more “normal” marketing period. The correct market might include only other quick sales, not necessarily meeting market value conditions. Intended use will affect what data and what variables are important. It will also affect the scope of the report.

Purpose. Market value is but one type of value. The lender noted above may want al iquidation value or disposal value to help compare the carrying costs of waiting for perhaps a higher market value under normal marketing effort and time. The type of value will affect what data and what variables are important.

Date ofValue.Even theexactminuteof value can make a differencewhileabuildingisburning.While a current value is the most common, there are many cases and reasons for retrospective (historical) valuations. Similarly, many construction and development valuations require a prospective (future) value, perhaps upon completion of construction or upon full absorption of rental space to tenants. Investment analysis invariably involves some forecasting of future elements. Markets exist and behave differently at different times. Date of value clearly identifies the time dimension of the valuation solution.

Property characteristics. Physical, legal, and financial qualities of a property launch the main challenges of market identification. These substantially define property characterization. Property characteristics are treated differently because their correct identification requires competency in that type of assignment. This lesson provides methods for the recognition and control of property characteristics as analytical variables. Property characteristics affect what data and what variables are important.

Assumptions. Appraisal assumptions can be classified into four types:

Limiting conditions – liability and use.

General – typical and ordinary.

Extraordinary – that which may be false.

Hypothetical – that which is false.

The above six elements of identifying the appraisal problem directly affect decisions regarding the data to be used, thevariables to be exploited, andthe type of statistical/graphicaltools to be used. They are key indefining the scope of work and scope of reporting.

Question 55

Market Identification Step 2: Scope

Having identified the client’s problem to be solved, the appraiser now establishes the levels of property identification, inspection, data research, and analysis to be performed. The scope of the solution has a large impact on decisions for data and analysis, including the choices of variables used.

The breadth of the research element is itself comprised of four fundamental dimensions. Each of these requires an “extent” or framing definition. The four dimensions run parallel to the “sequence of adjustments” found throughout appraisal literature:

1. Transaction conditions – e.g., motivated sales or not;

• *2. Time segment researched;
  3. Space – e.g., explore a similar market or not; and,
  4. Characteristics range – e.g., what range of size is considered competitive?**

Complexity involves a trade-off for the analyst (as well as for the client) between meticulous detail versus an easily grasped and communicated model structure. Two reporting issues arise:

• *1. Greater complexity may require a greater effort and competence; and,
  2. Any gap between the appraiser’s familiarity with a method and a client/user’s familiarity (and competence) must be bridged by the report.**

Detail in a report can vary. As well, the level of detail necessary in the analysis may not match that of the report, which may require onlysummations or conclusions with no detail. In such a case, the report will need to explain and reconcile any differences.

Emphasis is an often overlooked aspect of scope. The client may want the appraiser to pay particular analytical attention to a certain aspect, such as the sale of a particular competitor’s property. Similarly, a client may want an appraiser to fully develop and report on a particular aspect (say the cost approach), while the rest of the report is delivered verbally.

The above four elements interact to determine the scope of the report.

Answer 55

Market Identification Step 2: Scope

Having identified the client’s problem to be solved, the appraiser now establishes the levels of property identification, inspection, data research, and analysis to be performed. The scope of the solution has a large impact on decisions for data and analysis, including the choices of variables used.

The breadth of the research element is itself comprised of four fundamental dimensions. Each of these requires an “extent” or framing definition. The four dimensions run parallel to the “sequence of adjustments” found throughout appraisal literature:

1. Transaction conditions – e.g., motivated sales or not;

• *2. Time segment researched;
  3. Space – e.g., explore a similar market or not; and,
  4. Characteristics range – e.g., what range of size is considered competitive?**

Complexity involves a trade-off for the analyst (as well as for the client) between meticulous detail versus an easily grasped and communicated model structure. Two reporting issues arise:

• *1. Greater complexity may require a greater effort and competence; and,
  2. Any gap between the appraiser’s familiarity with a method and a client/user’s familiarity (and competence) must be bridged by the report.**

Detail in a report can vary. As well, the level of detail necessary in the analysis may not match that of the report, which may require onlysummations or conclusions with no detail. In such a case, the report will need to explain and reconcile any differences.

Emphasis is an often overlooked aspect of scope. The client may want the appraiser to pay particular analytical attention to a certain aspect, such as the sale of a particular competitor’s property. Similarly, a client may want an appraiser to fully develop and report on a particular aspect (say the cost approach), while the rest of the report is delivered verbally.

The above four elements interact to determine the scope of the report.

Question 56

Market Identification Step 3: Similarity

The third step in identifying the right market is specifying the similarities (and differences) between our subject and its environment. That is, we need to determine all the elements of comparison that, in essence, define our subject.

These elements fall into one of four dimensions:

Transaction: rights conveyed, financing, sale conditions (motivation);

Time: market conditions;

Space: adjacent and proximate influences, neighbourhood, district, market segment, and illustrative comparables; and,

Utility: property characteristics: physical, legal, and financial qualities.

There is usually statistical independence between each of these dimensions, meaning that, in general, the variables from each do not have significant relationships. For example, the motivation aspects of a foreclosure sale(transaction) wouldbe unrelated to recent pricechanges in the sub-market(time) or the number of bedrooms in the house (utility). However, within a dimension, we often have high dependence: e.g., house living area and bedroom count are almost always highly correlated (more area usually means more bedrooms). This independence across dimensions is what allows us to use the statistical tools of paired group comparison and simple regression for market identification analyses. However, keep in mind that independence across dimensions is not absolute nor universal. It is the appraiser’s task to both exploit independence when possible and to expose dependence when it occurs.

Answer 56

Market Identification Step 3: Similarity

The third step in identifying the right market is specifying the similarities (and differences) between our subject and its environment. That is, we need to determine all the elements of comparison that, in essence, define our subject.

These elements fall into one of four dimensions:

Transaction: rights conveyed, financing, sale conditions (motivation);

Time: market conditions;

Space: adjacent and proximate influences, neighbourhood, district, market segment, and illustrative comparables; and,

Utility: property characteristics: physical, legal, and financial qualities.

There is usually statistical independence between each of these dimensions, meaning that, in general, the variables from each do not have significant relationships. For example, the motivation aspects of a foreclosure sale(transaction) wouldbe unrelated to recent pricechanges in the sub-market(time) or the number of bedrooms in the house (utility). However, within a dimension, we often have high dependence: e.g., house living area and bedroom count are almost always highly correlated (more area usually means more bedrooms). This independence across dimensions is what allows us to use the statistical tools of paired group comparison and simple regression for market identification analyses. However, keep in mind that independence across dimensions is not absolute nor universal. It is the appraiser’s task to both exploit independence when possible and to expose dependence when it occurs.