BUSI344 CHAPTER 4.2

Question 1

Identify the main steps of an appraisal assignment leading to selecting the correct market segment.

Question 2

Explain the two fundamental components (subject/market) of the process of identifying thecorrect market segment.

Question 3

What are the four “dimensional aspects” of the valuation solution.

How do these help and determine margins for the data frame and the most likely dataset to be used in the analysis?

Question 4

What are the relevance and differences between the subject neighbourhood, the relevant district,and market segment;

Question 5

Distinguish between a “sufficient” dataset from a data frame, and identify aspects or characteristics which may require additional research.

Question 6

What circumstances dictate reconsideration of a dataset.

Question 7

Explain how experimental method principles of control, randomization, replication, and blocking apply to valuation.

Question 8

In Case Study 3, we examined the potential motivation related to vacant property sales. In our analysis, we also calculated the mean and median sale prices for tenant-occupied property sales. Do the reported means and medians for tenant-occupied properties make economic sense, as they relate to the other two values?

Answer 8

Yes, they do make economic sense. While tenants provide an income during the time of marketing, their presence may deter some buyers, who have a need to move in. Showing homes with tenants can be less pleasant than homeowner-occupied or vacant properties. There may be a confounding variable. It can be reasonably argued that, on average, tenant-occupied properties are more poorly maintained than owner-occupied properties. If so, the surrogate variable is measuring both the condition of the property, and its effect on both buyers and sellers. Perhaps the “occupant” data field is not as good a surrogate variable in the case of tenant-occupied properties as for vacant properties.

Question 9

Two reasons were discussed for why an analyst might need to go back to expand an original dataset or even widen the data frame. One reason was simply that more data was needed. What was the other major reason and why is it important?

Answer 9

The analyst may need to expand a data set or data frame if more data is needed or if the optimal use is not what was originally asserted when the appraisal problem was identified.

Question 10

4. (a) What are the four dimensions of comparability (similarity) and why are they important to identifying the right market?

(b) The transaction dimension has three elements. How do these differ substantially from the other three dimensions?

(c) The utility dimension encompasses the two fundamental types of property benefits, amenities and income. What are the three forms of utility?

Answer 10

4. (a) The four dimensions of comparability are: transaction elements; time; space; and utility characteristics. They are important because their relative independence enables simple regression and centres comparison methods.

(b) The elements of transaction terms do not measure any attributes of the property, only the contract and motivation.

(c) Similar to optimal use issues, the three forms of utility are physical characteristics, legal permissibility, and financial characteristics.

Question 11

5. What are the five stages of data reduction for our purposes?

Answer 11

5. The five stages of data reduction are: a) data base or data sources; b) data frame; c) market data set; d) information set; e) illustrative set.

Question 12

6. While neighbourhoods and districts are important to real estate economics, what economic division is the one we primarily rely on for defining our datasets? How is it defined?

Answer 12

We primarily rely on market segment.

Market segment is defined as a homogeneous market, as characterized by a set of similarity variables.

Question 13

7. Name two major types of changes in market conditions (time)?

Answer 13

7. The two major types of changes in market conditions (time) are trends and event impacts.

Question 14

8.

(a) How is information “better” than data?

(b) How is an information set different from the market dataset?

Answer 14

8.

(a) Information is data that has been organized to make it useful and understandable.

(b) An information set is a subset of the data set, useful for a particular analytic method.

Question 15

9. What statistic is most useful in identifying the best unit of measure?

Answer 15

9. The main statistical measures useful in identifying the best unit of comparison is the correlation between sale prices and that particular variable (the higher the better) and the coefficient of variation of the variable itself (the lower the better) .

Question 16

10. Why do you save sales deleted from your dataset in a separate file?

Answer 16

10. Saving deleted sales from your data set in a separate file helps with documentation and enables audit.

Question 17

11. Appraisal has historically used less intensive data analysis methods. Why? How has this changed today?

Answer 17

11. Historically, appraisal has used less intensive data analysis methods because data was poor in quality, difficult to obtain, and difficult to analyze. Today, good quality data is much more easily available and computing power and software have made it much simpler to analyze effectively.

Question 18

12. What is the difference between “reliability” and “credibility”?

Answer 18

12. Reliability is the more statistical term, relating to low variability (precision). Reliability is measurable. Credibility means worthy of belief and is more subjective, but equally important. Appraisal credibility can only be evaluated in terms of the intended use of the appraisal. Credibility includes appropriateness of the model used, as well as mathematical reliability.

Question 19

13. Multiple regression analysis (MRA) is a powerful tool. Why don’t we just use MRA to solve all valuation problems?

Answer 19

13. Multiple regression analysis (MRA) is a powerful tool, but we have emphasized other tools in this lesson for two reasons: 1) simple graphs and two-variable statistics are easier to understand and explain to clients; 2) comparison of means and medians as well as simple regression can be used in conjunction with MRA, or within traditional procedures.

Question 20

14. How is similarity identified and measured?

Answer 20

14. Similarity is defined by problem identification, including assignment conditions. It is measured by the four dimensions of similarity: transaction, time, space, and physical/financial utility.

Question 21

15. You have started an internship with an older well-respected appraiser. Everyone tells you that you are lucky to get a position with someone of his stature. You are ready to begin applying your modern tools. You get your first assignment, and enthusiastically download what you believe is a good market dataset. Being your first assignment, you have your new mentor check your search parameters. He laughs, and says: “All that statistical stuff is OK for school, but a good appraiser never needs to use more than three ‘comps’! Just pick the best three and use those”. What can you say?

Answer 21

15. You face an interesting dilemma, if you have what you believe is a useful tool, but something your mentor does not believe in or perhaps does not understand. You will have to decide whether to do exactly what you’re told or whether to try and introduce something new to the process. This may be a business decision mixed up with an ethical question.

The profession has a long tradition of new appraisers learning new things, then bringing them to practice through their work. Being a professional requires tact as well as being “right”. If you were to take an all-or-none “MRA or bust!” attitude, you will likely lose your opportunity to bring new methods to the “old guard” and also to provide additional value-added techniques to clients.

The simple regression and grouped comparison methods you have learned here can provide a bridge between traditional methods and modern technology. Graphs, scatter plots, trend lines, and group comparisons are intuitive and easily understood. You can consider bringing these methods into your work, doing good for clients, your own reputation, and the future of the profession.

Question 23

16. What are the four appraisal principles of experimental design? Provide a one-sentence explanation of each

Answer 23

The four appraisal principles of experimental design are control, randomization, replication, and blocking.

(a) Control: limiting data to homogeneous group(s).

(b) Randomization: relying on control (bracketing and balancing), so that elements are distributed by chance.

(c) Replication: relying on similar “experiments,” or similarity of missing information.

(d) Blocking: exploiting “natural” groupings of variables.

Question 24

17. (a) List the sequence of five data group subsets we have learned regarding data reduction.

(b) Which of the above sets is most similar to the traditional three comparable sales?

Answer 24

17. (a) Five subsets in data reduction: database, data frame, market dataset, information set, and illustrative set.

(b) The illustrative set serves the best simplicity aspects of the traditional “3 comps” report.

Question 25

18. (a) Which is better as a unit of comparison, continuous variables or categorical variables?

(b) Which is better for control and blocking, continuous variables or categorical variables?

Answer 25

18. (a) A continuous (measure) variable, used as a unit of comparison, can significantly improve the precision of an analysis–there is less flexibility with a categorical (discrete) variable.

(b) For control and blocking, the best are binary (yes/no) variables. Next best are categorical (discrete) variables with more than two choices

Question 26

19. You have applied graphs and simple regression in an appraisal. You receive a scathing, angry review, highly critical of your methods,stating:”You can proveanything with statistics. These are not approved methods and were not taught in the appraisal courses I took. I want real support for your adjustments, like actual pairs”. What can you say?

Answer 26

19. First, it is important to breathe, reminding yourself that it is sometimes hard to be a professional, and that you must apply your well-developed people skills. A hallmark of a true professional is that you often know more than your client and you need to know how to communicate without offending.

So you may want to start off by mentioning you lack the reviewer’s vastly greater experience, and that you are doing your best to integrate the older proven methods with what you have learned in your appraisal education.

You may point out that “paired data analysis” is discussed in the appraisal literature right alongside other recognized methods like grouped data analysis, statistical analysis, graphic analysis, and trend analysis (e.g., Appraisal of Real Estate, Second Canadian Edition, Chapters 18 and 19). Each of these methods have strengths and weaknesses, but by applying more than one, you can take advantage of all their benefits.

However, if the reviewer/client remains unhappy, then you may consider stating your willingness to avoid such tools in the future, if the client so desires.

You could state that you are willing to perform whatever level of service the client desires, so long as you are able to stand by your work as credible. You might even state your agreement to put such requirements in your initial contracted “scope of work”, so it is clear up-front what level of data analysis the client expects.