Why do real estate appraisals nearly always equal offer price? A theoretical justification

Why do real estate appraisals nearly always equal offer price? A theoretical justification Are real estate appraisals based on fundamentals that determine the value of the real estate or on offer price? Does this question really matter? In a game of moral hazard with hidden information, we examine an appraiser’s incentives in conducting an appraisal. We find that a moral hazard problem can arise if the mortgagee rewards the appraiser with future business for successful appraisals. An appraiser may be willing to overstate the value of a property if the lender wants him to do so. Additionally, we define the conditions under which the moral hazard problem actually makes all of the players better or no worse off. We argue that the subjective judgment of an appraiser may be Pareto improving. Thus, excessive regulation of the appraisal industry or finer tuned quantitative models that constrain subjective judgment may actually reduce the gains of real estate trade. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Investment & Finance Emerald Publishing

Why do real estate appraisals nearly always equal offer price? A theoretical justification

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Publisher
Emerald Publishing
Copyright
Copyright © 2002 MCB UP Ltd. All rights reserved.
ISSN
1463-578X
DOI
10.1108/14635780210433481
Publisher site
See Article on Publisher Site

Abstract

Are real estate appraisals based on fundamentals that determine the value of the real estate or on offer price? Does this question really matter? In a game of moral hazard with hidden information, we examine an appraiser’s incentives in conducting an appraisal. We find that a moral hazard problem can arise if the mortgagee rewards the appraiser with future business for successful appraisals. An appraiser may be willing to overstate the value of a property if the lender wants him to do so. Additionally, we define the conditions under which the moral hazard problem actually makes all of the players better or no worse off. We argue that the subjective judgment of an appraiser may be Pareto improving. Thus, excessive regulation of the appraisal industry or finer tuned quantitative models that constrain subjective judgment may actually reduce the gains of real estate trade.

Journal

Journal of Property Investment & FinanceEmerald Publishing

Published: Jun 1, 2002

Keywords: Real estate; Valuations; Theory; Appraisal

References

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