Distressed Properties: Valuation Bias and Accuracy

Posted: 26 Jan 2012

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: January 24, 2012

Abstract

Using New Orleans foreclosure data, where each property has three appraisals (borrower, lender, and referee), we are able to investigate the factors affecting appraisal bias and accuracy for distressed properties. Unconditional analysis shows that on average lender appraisals are higher than referee appraisals, while borrower appraisals are lower than referee appraisals. Much of the bias could be explained by various client and appraiser characteristics. The relation between the client and the appraiser affects valuation bias.Customer employed appraisers tend to give more client friendly valuations than their court appointed counterparts. However, experienced and licensed appraisers render less biased valuations. The appraisal bias does not appear to depend on neighborhood and demographic characteristics. In addition, experienced and licensed appraisers provide materially more accurate valuations. Unlicensed, inexperienced appraisers have an error rate approximately four times worse than licensed, experienced appraisers.

Keywords: Appraisal bias, Appraisal accuracy, Distressed property, Foreclosure

Suggested Citation

Zhu, Shuang and Pace, R. Kelley, Distressed Properties: Valuation Bias and Accuracy (January 24, 2012). Journal of Real Estate Finance and Economics, Vol. 44, Nos. 1/2, 2012, Available at SSRN: https://ssrn.com/abstract=1991224

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)

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