Distressed Properties: Valuation Bias and Accuracy

Posted: 21 Apr 2011

See all articles by Shuang Zhu

Shuang Zhu

Kansas State University - Department of Finance

R. Kelley Pace

Louisiana State University - E.J. Ourso College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2011

Abstract

Using New Orleans foreclosure data, where each property has three appraisals, we are able to investigate the factors affecting appraisal bias and accuracy and estimate the magnitude of appraisal accuracy for distressed properties. Unconditional analysis shows that lender appraisal on average is higher than referee appraisal, while borrower appraisal is lower than referee appraisal. Much of the bias could be explained by various client and appraiser characteristics. Our main finding is that the relation between the client and the appraiser affects valuation bias. Customer employed appraisers tend to give client friendly valuation than their court appointed counterpart. Experienced and licensed appraisers render less biased valuations; while appraisers specializing in lenders tend to give lender friendly valuation. Experienced and licensed appraisers also have more accurate valuation. Neighborhood characteristics are largely incorporated in the appraised value. The overall magnitude of random appraisal error after controlling for bias is 10.9 percent in mean absolute error and 7.7 percent for licensed appraisers.

Keywords: appraisal bias, appraisal accuracy, distressed property, foreclosure

Suggested Citation

Zhu, Shuang and Pace, R. Kelley, Distressed Properties: Valuation Bias and Accuracy (April 19, 2011). Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1815326

Shuang Zhu (Contact Author)

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

R. Kelley Pace

Louisiana State University - E.J. Ourso College of Business Administration ( email )

Department of Finance
2164 B Patrick F. Taylor Hall
Baton Rouge, LA 70803-6308
United States
(225)-578-6256 (Phone)
(225)-578-9065 (Fax)

HOME PAGE: http://www.spatial-statistics.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
655
PlumX Metrics