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Rules for a coherent real estate risk scoring

Rules for a coherent real estate risk scoring Scoring is a widely used, long-established, and universally applicable method of measuring risks, especially those that are difficult to quantify. Unfortunately, the scoring method is often misused in real estate practice and underestimated in academia. The purpose of this paper is to supplement the literature with general rules under which scoring systems should be designed and validated, so that they can become reliable risk instruments.Design/methodology/approachThe paper combines the rules, or axioms, for coherent risk measures known from the literature with those for scoring instruments. The result is a system of rules that a risk scoring system should fulfil. The approach is theoretical, based on a literature survey and reasoning.FindingsAt first, the paper clarifies that a risk score should express the variation of a property’s yield and not of its quality, as it is often done in practice. Then the axioms for a coherent risk scoring are derived, e.g. the independence of the risk factors. Finally, the paper proposes procedures for valid and reliable risk scoring systems, e.g. the out-of-time validation.Practical implicationsAlthough it is a theoretical work, the paper also focuses on practical applicability. The findings are illustrated with examples of scoring systems.Originality/valueRules for risk measures and for scoring systems have been established long ago, but the combination is a first. In this way, the paper contributes to real estate risk research and risk management practice. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

Rules for a coherent real estate risk scoring

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-9269
DOI
10.1108/jerer-01-2020-0001
Publisher site
See Article on Publisher Site

Abstract

Scoring is a widely used, long-established, and universally applicable method of measuring risks, especially those that are difficult to quantify. Unfortunately, the scoring method is often misused in real estate practice and underestimated in academia. The purpose of this paper is to supplement the literature with general rules under which scoring systems should be designed and validated, so that they can become reliable risk instruments.Design/methodology/approachThe paper combines the rules, or axioms, for coherent risk measures known from the literature with those for scoring instruments. The result is a system of rules that a risk scoring system should fulfil. The approach is theoretical, based on a literature survey and reasoning.FindingsAt first, the paper clarifies that a risk score should express the variation of a property’s yield and not of its quality, as it is often done in practice. Then the axioms for a coherent risk scoring are derived, e.g. the independence of the risk factors. Finally, the paper proposes procedures for valid and reliable risk scoring systems, e.g. the out-of-time validation.Practical implicationsAlthough it is a theoretical work, the paper also focuses on practical applicability. The findings are illustrated with examples of scoring systems.Originality/valueRules for risk measures and for scoring systems have been established long ago, but the combination is a first. In this way, the paper contributes to real estate risk research and risk management practice.

Journal

Journal of European Real Estate ResearchEmerald Publishing

Published: Jun 4, 2021

Keywords: Property; Decision support; Risk; Real estate; Scoring

References