Contingent Valuation and Real Estate Damage Estimation

Abstract

Real estate appraisal practice stresses the three traditional approaches to valuation (cost, sales comparison, and income approaches) to value contaminated properties. This paper discusses the possibility and usefulness of a fourth approach to real estate valuation – the contingent valuation method (CVM).

Developed over several decades mainly in Environmental and Resource Economics as well as Market Research, the CVM is widely applied in benefit-cost analyses. This method is particularly useful in the estimation of losses for contaminated properties when market data are not available or market failure is suspected. Transactions of impaired properties often represent a small sample of all properties under consideration; efficient market assumptions, such as an adequate level of information, are usually not met. In such circumstances, stated values derived from surveys may offer complementary and valid evidence of market value. Where transactional evidence and survey results differ, further analysis of market conditions may be helpful to determine which represents the most credible value conclusion.