Mass Appraisal: An Introduction to Multiple Regression Analysis for Real Estate Valuation

Journal of Real Estate Practice and Education,  2004  by Benjamin, John D,  Guttery, Randall S,  Sirmans, C F

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The direction of the adjustment represents whether a comparable's sales price should be adjusted downward or upward by the dollar magnitude. If the comp has the preferred characteristic over the subject property, then make a downward adjustment; if the subject has the preferred characteristic over the comparable property, then make an upward adjustment. The theory underlying this strategy is to transform the comparable property to be like the subject property. For example, if the comparable property has the aforementioned pool but the subject property has no pool, then by theoretically removing the pool, appraisal theory suggests that the comp would have sold for $10,000 less. If, on the other hand, the subject has a $2000 patio while the comp has no patio, then theoretically transforming the comp so that it also has a patio would result in the comp having sold for $2000 more.

Step 4 of the MCA is to determine the adjusted market price (AMP) for each comparable property. The AMP is simply a comp's sales price, plus/minus all adjustments for dissimilar characteristics that are quantified in Step 3. Theoretically, the AMP represents the transformed value of the comp, as though it were now the subject property. Step 5 is to value weight the camps' AMPs. The comparable property that is considered to be the most similar to the subject property receives the highest weight and vice versa. These subjective weights are a function of the number of adjustments for dissimilar characteristics and the magnitude of each adjustment (i.e., the greater the similarity, the greater the weighting expressed in percentage terms). The sixth and final step is to determine the subject's indicated value, which is calculated by summing all the weighted AMPs from Step 5.

Kat now explains to the group that the market comparison approach based on sale prices has several limitations. The past does not necessarily represent the future, but the MCA analysis is based on past trends (i.e., historical data of recent sales), rather than current data or forecasts. In addition, it relies on sales data that may not exist in sufficient quantities, particularly in less populated areas. Furthermore, even if there are several recent sales, these properties may be so dissimilar to the subject property that the MCA is rendered useless. One or two of the meeting attendees nod because they know part of this west Texas county is still rural with limited residential sales.

Another drawback is that the appraisal becomes obsolete fairly quickly. Suppose an owner-occupied residential dwelling were to be appraised. If "sold recently" is defined as no more than six to nine months, then in the best case scenario, all comparable properties used for the MCA analysis would be outdated within only two to three quarters. A short time window exists for selecting comparables in order to make an appraisal.

Most importantly, the value-weighting process used in the MCA, as applied to the adjusted market prices, can be very subjective. Who is to say that Comp #1 should receive a 40% weight, rather than a 25% weight? Multiple regression analysis, therefore, may likely overcome these deficiencies, particularly for tax assessors who must assess thousands of properties annually.