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New Thinking In Appraisal Theory.


Real estate appraising is still appropriately described as an art rather than a science. The contention of this article is that it will remain so as long as the fundamental theoretical structure on which practice is based is outmoded, excessively abstracted reality, and not generally descriptive of market behavior.

Uncertainty Creates Need

Appraising exists as a field because there is uncertainty on the part of potential buyers, investors, sellers, and others. This stems in part from the complex nature of the product (the real estate itself), and from the uninformed, imperfect, complex nature of the real estate market. Despite these difficulties, however, estimates of value must be made and appraisal conclusions reached, often in the absence of good data or a significant amount of data. In many instances, it has been demonstrated that much of the present cumbersome, complex, and unrealistic framework of appraisal mechanics has developed in an attempt to compensate for a lack of adequate or appropriate market information.

Critical expressions of dissatisfaction with the current analytical methods available to real estate appraisers has come increasingly from both academics and practitioners in the appraisal field. Moreover, there is growing dissatisfaction with the neo-classical, perfectly competitive, profit-maximizing, ruggedly individualistic economic-man approach of the economic structure that underlies most of current appraisal theory.

New Tools Developed

Within the past decade, a whole range of new tools and ideas have developed in related areas of economics, business, and finance. Two basic threads of development can be observed. On the one hand, a quantitative (mathematical-statistical) approach, based in large part on the availability of high-speed electronic data processing equipment, has made analysis of increasingly more complex problems feasible, where it was simply impractical before. On the other hand, from the social sciences and the behavioral sciences in particular (psychology, sociology, cultural anthropology), an expanding pattern of insights into human behavior in the decision-making process has emerged.

These insights have been applied successfully to business problems. Recent arguments by the author that these offer an outstanding opportunity of transferability to real estate valuation indicate the direction in which many writers in appraisal theory are moving. This is especially true of, but not restricted to, the field of financial capital theory.

It may be redundant to repeat the proposition here, but it is easy to overlook the fact that an appraisal is sought because a decision must be made. A problem exists, and the decision maker (the buyer or seller, landlord or tenant, condemnor or condemnee, borrower or lender) seeks expert advice. While there is still an important distinction between appraising and counseling, an appraisal also provides the basis for the client (and others) to make a more rational business decision.

Therefore, good analysis that is descriptive of market behavior is required. A rigid, inflexible presentation of a non-existent economic structure is hardly a sound theoretical foundation for appraisal investigation. Moreover, the analysis and its presentation must be comprehensible and meaningful to the layman, the client, and the user. This is the challenge that confronts real estate appraisal theory at the present time.

Product of '20's and '30's

The current framework of appraisal theory is essentially the product of the economic theory and the state of the arts in appraising during the late nineteen twenties and the early nineteen thirties. Most appraisal "classics" were published between 1926-1937. There has been a substantial amount of new theoretical developments in economics and related disciplines since then (e.g., the entire structure of Keynesian analysis, and the development of mathematical economics). Moreover, there are many more effective tools of inquiry available (linear programming, small sample statistics, and computer simulation, to cite just a few).

The "three approaches" evolved primarily because there were, and still are, several concepts of value. The same word was employed, but with quite distinct meanings, because different ideas underlay them.

Moreover, as has already been noted, the data required for a direct sales comparison estimate often were simply not available. As a result, complex and elaborate structures evolved to compensate for the lack of defensible information. In the interim, both mathematical and social science disciplines have learned how to deal with the problem of uncertainty. We cannot now, and never will, be able to overcome uncertainty. We are, however, in a much better position today to be able to compensate for uncertainity appropriately when making market value estimates.

Courts Influential

A further problem in the evolution of appraisal theory, which has been accentuated since the end of World War II, is that the courts are most influential in setting the definitions that practitioners have had to live with. Whatever their qualifications, judges and referees are rarely trained as economic or financial market analysts. As a result, their definitions are usually oriented toward legalistic and/or "common sense" concepts of economic matters.

Beyond all this, much of the framework of current appraisal theory was established on an ad hoc basis, under considerable pressure to "get the job done." This is certainly true of the basis for appraisal concepts that were used in the early operations of the Federal Housing Administration, the Home Owners' Loan Corporation, and the Reconstruction Finance Corporation. There was no real body of appraisal theory. Rather, much of it was lifted in toto from the then-existing framework of economic theory.

Lest anyone contend that this argument is inconsistent (since it has already been maintained that much of what has happened in recent years in both quantitative analysis and behavioral science is transferable and applicable to appraisal theory), a careful distinction must be drawn. There is an important difference between uncritical, total transfer of a body of theory from one discipline to another, and the selective application of new devices when logic and experience indicate that they represent appropriate materials for the field in question.

Over the last decade, there has been a considerable amount of mechanical tinkering with the basic framework, but little overall review of appraisal theory. There is substantial evidence and increasingly loud arguments that there is serious need for a thorough, sweeping review of appraisal theory. Meanwhile, appraisals must be made and practitioners must continue to function. This is where academics interested in this field have such an important role to play.

Increased Interest

In the past three to five years, there has been significantly broadened interest in the field of real estate evaluation on the part of students of economics, and particularly finance students. The stimulating and outspoken writings of Dr. Richard Ratcliff of the University of Wisconsin have been particularly noteworthy. Dr. Ratcliff is only one of many throughout the United States who are currently adding to thought and writing in this field; nonetheless, he is certainly one of the most outstanding spokesman for the academic viewpoint.

Dr. Ratcliff is associated with the view that every appraisal is, in fact, a research project. It represents an application of a combination of urban land economics, market analysis, and investment analysis. In this context, it offers an interesting and stimulating challenge to capital and value theory students.

Although there has been a considerable amount of theoretical work published in professional, trade, and academic journals in recent years, much of what is being written is not particularly new. Indeed, a substantial portion of these works involve the revival of old ideas that have long been ignored or forgotten: for example, the view that every income stream is an annuity, and that variations in its character can be adjusted for within the framework of annuity analysis. Much of the remainder of these writings represents an application of ideas and tools from other areas of analysis--specifically to real estate and real estate valuation.

Financial Backgrounds

Most of the university personnel working in the real estate valuation area have formal backgrounds in finance and financial analysis. This is no accident. There is a substantial community of interest between investment analysis and capital theory on the one hand, and real estate valuation on the other. Indeed, many of these academics regard real estate valuation as simply one application of investment analysis and capital theory.

There is a major underlying theme that the appropriate approach to the valuation of income real estate is to regard it as an investment decision and to apply the concepts and tools of investment analysis. This is particularly stimulating to university personnel at present, because great strides have been made in modern capital theory in the past few years.

The most recent expression of the various efforts of academic researchers, whether operating in one of the several real estate research centers that have emerged in universities throughout the United States or in isolation, is Dr. Ratcliff's Modern Real Estate Valuation: Theory and Application. In a sense, it represents in microcosm much of the current state of the arts in appraisal theory, the current dissatisfaction with that current state of the arts, and the new direction that academic thinking is going.

Three Emphases

Journal articles and recent books have shown three major emphases in the thinking of academic real estate valuation theorists:

1. Mathematics and decision-making tools, aimed primarily at reducing uncertainty in business and investment decision-making,

2. Market analyses based on more and better data that is more effectively interrelated through the use of mathematical models and electronic data processing equipment, and

3. Investments and capital valuation, with particular emphasis on capital budgeting, which to its proponents represents the real estate decision.

A pattern of underlying theory is emerging that promises to be more descriptive of the realities of the marketplace, more manageable, and more understandable to non-appraisers. The remainder of this article is concerned with a progress report on these developments and their implications for the foreseeable future.

In real estate activity, business decisions must be made continually. These are purchase-or-sale decisions, lease-or-buy decisions, buy-or-build decisions, among others. Uncertainty surrounds each of these decisions, because each must be based upon estimates of the future, as well as upon conclusions about the present state of the real estate and investment markets. Essentially, it is an appraiser's task to reduce the range of uncertainty through the application of economic analysis and knowledge. Moreover, it is important to identify those areas in which uncertainty remains, and how great that uncertainty is.

Major Field

Decision-making has arrived as a major field of study in the last several years, particularly in its applications to business administration. Although they are interrelated, there are two major patterns of development that offer prospects for meaningful application to the field of real estate appraisal. These include the widened range of analytical tools (mostly mathematical) that are now being applied to business decision-making, and the reevaluation of appropriate goals or criteria for standards of performance.

The range of analytical tools available to the business decision-maker who often is a decision-maker with respect to real estate (especially real estate investment), is discussed in considerable detail in a recent anthology It is edited by Professors Bursk and Chapman of Harvard University and titled New Decision-Making Tools/or Managers. The book contains 25 articles on the application of these tools to actual business problems. These applications are case studies rather than abstract illustrations.

Without going into detail, it is possible to identify the major groups of these tools to indicate their probable applicability to real estate appraisal.

1. Systems analysis, particularly as applied in benefit-cost analysis. This provides an important standard by which alternative courses of action can be judged. The benefit-cost ratio can be translated into a net rate of return on an investment.

2. Critical path analysis (Program Evaluation Review Technique). This is a method of systematic planning of work which identifies the tasks to be performed and the sequence in which they should be performed, in order to provide the most efficient utilization of time and resources. This is a particularly significant tool for practicing appraisers in the application of the appraisal process in their own work.

Error Range

3. Probability analysis. Through the development of Bayesian statistics and the application of finite mathematics, analysis of the probabilities of error and the range of error inherent in small samples (which most appraisal studies almost necessarily are) offers, for the first time, the prospect of an evaluation of the conclusions reached in appraisal analysis. This is precisely the type of representation that Ratcliff calls for in his discussion of the most probable selling price. In many ways, this is the most exciting of all recent developments, although at the moment it offers the least immediate applicability. For one thing, appraisers must first be trained in this type of analysis.

4. Electronic data processing. Currently, the most important single prospect of the application of electronic data processing to the appraisal field is that it permits rapid and systematic analysis of large volumes of data. Once a bank of reliable market data (sales, rents, etc.) is available, it is possible to talk with increasing degrees of accuracy about what difference a deficiency or excess actually does make on the market. The critical factor, then, is that EDP equipment permits large volumes of data to be manipulated quickly and consistently to produce appropriate results.

Use Models

5. Model building. Both maximizing and optimizing models are now utilized to assist in the allocation of resources, and in the choice of alternative courses of action. These models are mathematical representations of market situations, developed either on paper or in a computer. This is what is meant by simulation. The significant difference between simulation and model-building in general is that a closer approximation to reality is attempted in a simulation model. This means that many more factors are considered and the model is much more complex. In part, this is the result of the development and appreciation of mathematical techniques that were known for many years but did nor appear to be applicable to real market situations. The other development, that has made this knowledge meaningful is the high-speed computer. Computer technology makes it possible to consider more complex sets of interrelationships with many more variables. The real market is indeed a complex phenomenon, and much closer approximatio ns to it are possible as a result of these tools.

Ruthless "Economic Man"

In neo-classical economics, the central figure is the "economic man." He is a ruthless maximizer and is characterized in most writings as amoral, which in the past has led economics to be called "the dismal science." This individual is omniscient (remember that he is the "typical" buyer in the most widely utilized definition of market value), and he always acts in what is termed a rational fashion. That is to say, he maximizes his own well-being, which is measured in most instances by maximization of net income.

As a result, the concept of highest and best use has been regarded as central to both urban land economics analysis and to real estate valuation theory. It is only through highest and best use that maximum net return can be achieved. Among the out-growths of this concept is the fact that there are endless arguments over whether highest and best use refers to the land, the property, or are two concepts referring to both. One need only look in the April, 1966, issues of The Appraisal Journal and The Real Estate Appraiser for an illustration of this dichotomy.

The current position of increasing numbers of writers in the field of business decision-making, investment decision-making, and real estate valuation is that the typical purchaser of or investor in capital goods is nor a maximizer. At the least, maximum profits are not the only criterion. As a result, highest and best use has come to be regarded as an impossible standard for the measurement of market behavior or of individual decision-making, and it has been questioned as even a tendency.

If the decision-maker or investor seeks to maximize anything, it is a combination of measurable monetary reward and related but non-measurable satisfactions, which provide for optimization rather than maximization. It has become possible to talk of seeking an optimum rather than a maximum solution, once again because of the volume of work that can be handled by computers.

Best Under Circumstances

An optimum solution is the most efficient solution under a given set of constraints. This solution can be a maximum (for such things as profit or present worth) or a minimum (for such things as cost). It differs from maximizing solution because it is the best combination of many factors, all of which can interact with one another as well as bear on the objective. To this extent, it can be more realistic, even though it appears to be more abstractly mathematical in the procedure by which the optimum solution is reached.

Simultaneously with these developments, however, the behavioral sciences have brought our the notion that in their decision-making behavior, businessmen and investors do not necessarily seek either a maximum or an optimum solution. When confronted with a purchase/no purchase decision, an investor may select an "acceptable" solution, rather than the "best" solution. This idea is especially useful in real estate investment analysis, when the decision maker is held to select the first alternative that meets his minimum standards (e.g., a cash throw off of at least 107, or a mortgage constant no greater than 8.25%).

In this configuration, the decision-maker or investor sets a limit below or above which he will not accept a proposal. At any given point in time, there may be no other alternatives to choose. Even if there were, it may not be worth the effort or the trouble to seek them out. Therefore, the investor does not look for the most profitable use or the best possible alternative. Rather, he simply selects one that meets the standards or criteria that he has previously established.

Called "Satisficing"

This procedure is called "satisficing." Since we know that in the real estate market the typical buyer is not informed about everything possible, no matter how sophisticated he may be, a notion that permits him to act on the basis of the best information available and to meet his own standards appears more realistic and more descriptive than one which presumes that he is omniscient and always acts to maximize one variable only: net rate of return. Indeed, there is strong empirical evidence that sophisticated institutional investors do not always seek to maximize net rate of return, and that other considerations do enter into the decision that constitute the "comparables" that appraisers must utilize.

Therefore, it is the author's proposition that on the basis of this evidence a new concept for the selection among alternative uses must be developed. This is most probable use, which would be that use to which the realty (both land and improvements) is most likely to be put by the type of purchaser or investor to whom it is attractive in the market at the time of the appraisal. This postulates typical buyers drawn from the experience of the market, rather than from an abstracted set of conditions unlikely and probably impossible to be achieved. It cannot escape notice that most probable use is also a necessary conclusion if most probable selling price is to be estimated, even though Dr. Rarcliff has not made this point explicit.

The analytical framework of urban economics and urban land economics, within which real estate valuation theory must evolve, is no longer rigidly neo-classical, nor is it couched in terms of the maximizing economic man. It is much more flexible, more realistic, and more complex. Multi-dimensional problems can be solved, and it is recognized that they must be solved.

In particular, it is recognized that there are many interrelated goals, both public and private, of an urban community. Moreover, some of these goals are often mutually exclusive. As a result, more complex analytical frameworks are required, and policy conclusions in the field of urban economics are now characterized as "interrelated opportunity costs at the policy level."

Make Wide Utilization

The ability to cope with increasingly complex conditions requires that market simulation via computers be widely utilized in urban economic analysis. Simulation permits the testing of alternative policies, as well as efforts at measuring their impact on the community. It helps to identify meaningful relationships among different factors, and hence provides guides to future actions. More important, from the point-of-view of the appraiser, simulation helps in the identification of those factors which are particularly critical or pertinent in community growth and development. In other words, it helps to identify the major indicators that the appraiser definitely should seek out, follow, and analyze.

Finally, simulation helps to indicate the costs of increasing precision in solutions. There comes a point of decreasing returns when inputs of effort and time and money simply do not result in a desirable payoff

As a result of simulation, models of community development are emerging that are considerably more helpful in estimating future patterns and trends of growth than are the concentric circles, spokes, wedges, and multiple nuclei of the simpler, more generalized and more abstracted models that are found in most current texts on real estate. It means that the forecast of community development can be considerably more specific, and (hopefully) more accurate as well.

Subject to Analysis

Real estate valuation students and practicing appraisers alike have historically emphasized the critical importance of an appropriate background for market analysis in setting the proper framework for appraisal work. The most important new development is that simulation once again provides an opportunity for more effective, more meaningful, and more realistic analyses than have been possible heretofore. Market analysis is simply good appraisal practice, but a more systematic approach that can be provided through market simulation forces the appraiser consciously to consider potentially pertinent factors every time.

The analysis of the market environment is what Dr. Ratcliff calls macro-market analysis. Not only is this important in estimating the determinants of supply and demand in the real estate market, but it is also subject to independent analysis for predictive purposes. Through understanding of the interrelationships of major market factors, it is possible to appreciate the probable impact on real estate values of such phenomena as a change in the Federal Reserve discount rate or a shift in accelerated depreciation rules in the Federal internal revenue code.

An increasing number of marker factors has been identified as influencing real estate value. In particular, the institutional, legal, political, and social framework of the community has been subjected to analysis and evaluation as it impinges on private real estate decisions. So, too, has public policy, like planning and zoning.

Finally, the most important single addition to environmental or macro-market analysis is the recognition that the tax system has a tremendous influence on decision making in the real estate field. A graduated income tax system with special treatment of long term capital gains and of depreciation is the basis for the so-called "tax shelter" afforded by many investors by real estate. Wide-spread recognition of the impact of the Federal income tax system on real estate values, and inclusion of this impact in market analysis, is a major development that is long overdue in real estate appraisal analysis.

Compete With Subject

Dr. Ratcliff discusses the selection of alternative investment opportunities on the part of investors in terms of those properties which are competing with the "subject" property in the mind of the potential purchaser at the time the decision is being made. This idea of competitive area rather than comparable properties is gaining increasing acceptance among appraisal students. It recognizes that buy-lease and buy-build decisions are competitive with purchase-no purchase decisions. It also helps to delineate the market area that is significant for the type of property under consideration. It eliminates parochial thinking in geographic terms only, and forces substitution of economic or financial competition for physical comparisons. In addition, the competitive area concept emphasizes terms of sale, particularly financing, at least as much as it emphasizes physical characteristics.

There is mounting dissatisfaction with the one-value concept in real estate appraisal. Moreover, there is strong feeling that the "three approaches framework" may do harm rather than good. The argument is that each type of property and problem has one best or proper approach. The underlying philosophy of each of the three approaches is different enough so that the value which emerges from each of the methods is also different in concept. Therefore, the argument emerges that there is no necessity that the three be close to one another, because they represent quite different ways of looking at the same property depending on the purpose of the analysis. This view also holds that the process of correlation is more a process of forcing than of reconciliation.

Not Fully Formed

It is also increasingly evident that the market is not fully informed, nor is the typical buyer. Moreover, the typical buyer is not necessarily a maximizer. It is necessary, therefore, to identify who this typical buyer is in each problem. It is necessary to ascertain his motives and thought processes in order to reach a conclusion about value through his eyes.

The appraisal process has already been noted as highly amenable to the application of critical path analysis. This will offer outstanding prospects for more efficient utilization of time and other scarce resources on the part of practicing appraisers.

There is virtual unanimity among academic students of real estate appraisal (many of them experienced professional practitioners as well) that the cost approach is an inappropriate and inadequate method of estimating market value, market price, or any other meaningful value. Cost of production certainly does not represent value, nor is it a direct determinant of market price. It is an influence, admittedly, but it operates primarily on the supply side. Estimates of cost new represent reasonable checks against alternative courses of action, particularly in terms of the feasibility of proposed projects. In addition, buy-build choices involve consideration of probable cost.

In addition to its questionable validity, the cost approach is also excessively mechanical and subject to more guesswork in the estimation of accrued depreciation than is associated with any other alternative method of value estimation.

Based on Assumption

One of the major difficulties with the application of this approach to value estimation is that it is based on the assumption that what has occurred in the recent past is most likely to prevail in the near future, or at least is the best available guide to the near future. Moreover, there is dissatisfaction with the extent and quality of both macro- and micro-market analysis. This is not a conceptual problem so much as one of application. Nevertheless, it is a serious criticism of current practice.

Increasing emphasis is placed on the terms of sale, and particularly the terms of lending, as more data becomes susceptible to analysis in models through electronic data processing. It has already been observed hat macro-market analysis has identified more factors operating as influences on real estate value, which means that more analysis is potentially necessary when "coin parables" are being considered. The competitive market approach to comparable sales analysis also emphasizes economic rather than physical factors.

There are strong recommendations that the direct sales comparison approach (and this term is preferred over the more insipid, less precise "market data approach") should have primary applicability for residential properties.

If there is unanimity of opinion on any point in the field of real estate appraisal, it is found in the view that the income approach to value estimation is a simulation or an attempted replication of the investment analysis process applied to real estate. It has already been noted that real estate valuation theory students tend to be most interested in this particular area, in large part because their formal training is more likely to have occurred in the field of finance.

Offer Applications

Current financial and capital theory offer substantial opportunities for application to real estate valuation analysis. As a result, there is increasing emphasis on financing, terms of lending, market alternatives, investor expectations, and the like in appraisal literature.

One of the major contributions from financial analysis is the emphasis on cash flow rather than on net operating income as the basis for the capitalization process, from the point of view of the investor-purchaser. As a result, equity-mortgage analysis has gained increasing acceptance, both in practice and in theory.

Appraisal theorists argue widely that capitalization of income is the approach to the valuation of non-residential properties, including special purpose properties. In the latter instance, the estimation of value in use via income capitalization for a special purpose property is less subjective, and hence more descriptive of a market decision-making process than is the guesswork inherent in assessing accrued depreciation in the cost approach. This is one area in which considerably more work needs to be done, but it is a most intriguing prospect.

There is a marked trend toward emphasis of the position that it does make a considerable difference in investment analysis just who (or what) the typical investor is. In fact, this process of identification represents the first step in Dr. Ratcliff's micro-market analysis.

Investor Characterized

The investor is characterized by his tax status, his goals, the type of property he can reasonably be expected to be interested in, the amount he can invest as equity funds, and the amount and terms of financing available to him. Since these factors influence the evaluation of the anticipated income flow from the property, and the rate at which that income is to be capitalized, it follows that the identity of the typical investor and his characteristics is an important step prior to property valuation.

In effect, the typical (or most probable) investor identifies the market for the property in question by setting the range of competing possibilities that confront the property. Who or what is most likely to invest in this type of property? Moreover, what form of organization will this investor most probably have? This also influences how much is likely to be bid for the property, especially when the tax status of the investor is considered.

This is not the hypothetical informed buyer of more traditional appraisal theory; rather, it is the most probable investor most likely to be attracted to this type of property in this market at this time. The process of identification requires detailed and careful market analysis on the part of the appraiser.

The productivity of a property is its capacity to generate net income. In most current writings this is the anticipated cash flow, rather than an accounting net return. This is at the root of expanded interest in the equity-mortgage approach to income capitalization. The productivity of a property consists of all expected income or benefits from it, which means that both cash flow and the anticipated reversion must be included in capitalization analysis. The Ellwood approach in particular emphasizes this point, although other writers have noted it as well.

Argue Against Separation

Moreover, there is widespread argument from current writers that the income from land cannot be logically separated from the income from improvements, except in isolated land-lease cases. As a result, income productivity should normally be attributed to the total property, and therefore the property residual technique is the only appropriate technique to apply in capitalization analysis. This, too, is particularly associated with Ellowood's writings, as is the corollary argument that overall rates can and should be developed for income capitalization.

Finally, there is growing insistence that the net income to be capitalized--the net income that the typical investor is seeking--is not only cash flow (which considers financing charges and depreciation allowances), but net cash flow after provision for income taxes.

Investment decision-making or allocation is held to be an application of the capital budgeting process. In particular, this involves a comparison of the cost of capital with net income to calculate the benefit-cost ratio. The result is a guide to investment selection in terms of comparative benefit-cost ratios. This can be helpful in making rent-or-buy and buy-or-build decisions, as well as simple buy-no buy decisions.

Capital allocation may occur in terms of the best or most profitable alternative in an open system. However, when investment funds are limited and capital rationing or priorities are to be established, investment decisions can be made on the basis of "acceptable" return. This, once again, is "satisficing."

Most Probable Selling Price

Perhaps the most stimulating and challenging new development in appraisal theory is Dr. Ratcliff's contention that the objective of appraisal analysis should be the estimation, or prediction, of most probable selling price, rather than market value. Dr. Ratcliff argues that this is more nearly descriptive of what the market does. The concept is more oriented toward economic and market factors, rather than based on legalistic notions of an abstract, "economic man environment.

This idea is consistent with Dr. Ratcliff's view that every appraisal is a forecast in terms of given market conditions, based on systematic research. In passing, it should be noted that Paul F. Wendt has pointed out that the Italian appraisal theorist Medici used the term "most probable price" as synonymous with his notion of market value. Moreover, most probable selling price appears to require acceptance of the criterion of most probable use, which has been discussed earlier in this article.

Every Estimate a Forecast

Most probable selling price brings out the point that every value estimate is a forecast--even a backward one--under given market conditions. It permits analysis in terms of something other than the perfectly competitive market of neo-classical economics that is assumed in traditional appraisal theory. To this extent, it can bring appraisal estimates closer to reality.

Finally, when modern methods of statistical probability analysis are applied to appraising that is aimed at estimating most probable selling price, both the reliability of the single value estimate and the odds on the range around it can be estimated with a high (and predictable and measurable) degree of confidence. This will become more meaningful as more and better data on market sales, rentals, and incomes are generated through the use of models and high-speed data-processing equipment.

These developments and new directions in thinking about appraisal theory offer both opportunities and challenges for appraisers. In order to take advantage of the one and to meet the other, however, appraisers must be prepared. Otherwise, the job may well be performed by other groups.

First, the skills to perform the functions and activities noted throughout this article--and in earlier presentations--must be developed formally and systematically by professional appraisal organizations. At the same time, they must learn and teach the appropriate technical terminology that accompanies the disciplines in which these skills are founded.

Can Be Incorporated

Next, these following concepts can be more widely incorporated into appraisal practice immediately without controversy: general annuity capitalization, discounted cash flow analysis, property residuals with shorter term projections, analysis in terms of tax structures and investor characteristics, applications of electronic data processing to market data analysis, and critical path programming.

Finally, several of the foregoing concepts require further testing, through research and case studies, before they can be added to the operational tools of the practicing appraiser. These include market simulation, probability analysis, cost-benefit analysis, cost of capital studies, satisficing, most probable use, and most probable selling price. This testing is largely the province of appraisal students.

William N. Kinnard Jr., PhD, was a professor of finance and real estate and was the director of the Center for Real Estate and Urban Economic studies, University of Connecticut. He graduated from Swarthmore College and earned his MBA and PhD in finance at the Univeristy of Pennsylvania.
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Title Annotation:real estate appraising
Author:Kinnard Jr., William N.
Publication:Appraisal Journal
Geographic Code:1USA
Date:Jul 1, 2001
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