Distressed Properties: Valuation Bias and Accuracy

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