Measurements of Rationality for a Scientific Approach to the Market- Oriented Methods

(ProQuest: ... denotes formulae omitted.)The International Valuation Standards (IVS) are internationally recognized appraisal methods used in the market-oriented approach, the income approach, and the cost approach. When a real estate market is active and all necessary market data are available, the market comparison approach (MCA) is the most direct, probative, and documented method used to appraise real estate market values (Simonotti, 2006); in particular, the MCA is the most important method and is comparable to the market- oriented approach. The MCA is known by several different names in the appraisal literature. In some of the older literature it is called the market data approach, while elsewhere it is referred to as the grid adjustment technique.There are many appraisal procedures that can be used in the logic application of the MCA. These procedures are grouped into two categories: (1) quantitative techniques based on detection of objective markets data (paired data analysis, graphic analysis, trend analysis, secondary data analysis, adjustment grid method, etc.); and (2) qualitative techniques based on the analyst's subjective judgment (relative comparison analysis, personal interviews, etc.).In particular, the adjustment grid method (AGM) represents a link between the MCA and the multiple regression analysis, aiming to formalize the adjustment step of the MCA, without reaching the formal and symbolic perfection of the multiple regression models. There are three methods documented in the literature used in the application of the AGM (Colwell, 1983): The first is the additive dollar adjustment method (ADAM), which is based on the assumption that the selling price is a linear function of the property attributes. The second, is the additive percentage adjustments method (APaM), which may be rationalized by a number of functional forms. In general, the percentage difference in prices between a subject and a comparable is found by adding functions of the two properties' attributes. The third is the multiplicative percentage adjustment method (MPaM), in which it is supposed that the ratio of the selling price to that of the comparable is equal to the product of functions of the subject and the comparable's attributes.The evaluation of hedonic prices in applying AGMs can be done directly through paired data analysis and indirectly by acquiring hedonic prices obtained through the application of multiple regression analysis to a sufficiently large sample. There are situations in which both modes are not very applicable due to the lack of data suitable for the application of the paired analysis and the limited availability of sufficient data to the application of multiple regressions (Colwell, Cannaday, and Wu, 1983). Even when the data are available, a statistical analysis does not always lead to consistent results in terms of quantities because they achieved following generalizations that are not always able to take into account the specificities of each property.To overcome these drawbacks, some authors provide an approach other than ADAM, APaM, and MPAM, in which hedonic prices have to be calculated through formulations arising from the application of the valuation criteria (market value, cost value, transformation value, complementary value, replacement value), designed to calculate the hedonic prices indirectly through established formulas (Simonotti, 1997). The application of these mathematical formulations resolves the issue in an objective evaluation of the hedonic price of real estate quantitative characteristics, although some limitations are attributable to: (1) the presence of duplication in formulas that can lead to overestimates or underestimates; (2) the degree of similarity between the properties characteristics; or (3) the reliability of the comparable prices.The presence of abnormalities, related to the similarity and reliability in the process of reconciliation, requires the application of analytical criteria able to measure dissimilarity in the characteristics of the comparable sample and anomalies in their buying and selling prices. …