The Use of Survey Research In Real Estate Valuation Clifford A. Lipscomb, Ph.D. July 13, 2012

1. The Use of Survey Research • In Real Estate Valuation • Clifford A. Lipscomb, Ph.D. • July 13, 2012 • www.greenfieldadvisors.com • Suite 240 – 2101 4th Ave Suite 100 - 1870 The Exchange • Seattle, WA, USA 98121 Atlanta, GA , USA 30339 • +01-206-623-2935 +01-770-951-7028

5. What is Survey Research?

6. Informal Surveys Formal Surveys Survey Data Analysis Relation to Other Kinds of Market Data • Survey Research Methods

7. Familiarity with the fundamentals of survey research How does this comport with USPAP and CPE? How does this fit in the appraisal body of knowledge? When will you find this useful? • Goals for this course:

9. NOT focused on litigation NOT introducing new topics -- everything in this course is well established in the valuation literature NOT trying to teach the A.I’s Quant Analysis Course NOT trying to debate USPAP or CPE -- these methods are all well established in USPAP and in the Code of Professional Conduct • What this class is NOT --

10. USPAP? – more at the end Comment to Standards Rule 3-1(a) Changes and developments in economics, finance, law, and society can have a substantial impact on the appraisal profession. To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances. Each appraiser must continuously improve his or her skills to remain proficient in appraisal review.

11. USPAP? – more at the end Comment to Standards Rule 3-1(a) Changes and developments in economics, finance, law, and society can have a substantial impact on the appraisal profession. To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances. Each appraiser must continuously improve his or her skills to remain proficient in appraisal review.

12. Problem 1: Suppose that a buyer who recently paid $500,000 for a home puts that same home up for sale after contamination is discovered on the property. With an impaired property like this one, sometimes no buyer can be found; or if potential buyers bid for the property, there is a lack of information about property specifics. In such situations, value evidence from other arms-length transactions may be scarce, making it difficult for potential buyers, the seller, and appraisers to determine the market value of the home. After some period of time, a buyer and seller agree on a purchase price of $200,000. In the interim, suppose a researcher uses survey research to determine a value of $350,000 for the property based on a description of its contamination issues. So, which is more reflective of the property’s value – the first $500,000 sale, the $350,000 estimate of the researcher, or the second $200,000 sale?

13. Answer: “Market value depends on information, time, and market conditions, all of which are important issues to address when dealing with contaminated properties.” Source: Lipscomb et al. (2011), Contingent Valuation and Real Estate Damage Estimation, J. of Real Estate Literature

14. Problem 2: Suppose that a homeowner has part of her property taken by the government to construct a public-use trail…What is the just and fair compensation for this taking?

15. Answer: Generally, fair compensation is calculated as the market value of the property taken. But, what about the market value change of the remainder parcel? What about berming to shield the remainder parcel from the part taken and used for a new purpose? Source: Seiler, M. (2012), Survey Research undertaken for Rails to Trails Litigation.

16. Informal surveys • Market Research • Rent/Cap Rate Surveys, etc. Formal surveys • Contingent Valuation • Conjoint Measurement • Perceived Diminution • Survey Research

17. Personal interview Focus groups Mail survey Telephone survey Mall-intercept survey Web-based survey Mixed-mode survey • Survey Research Modes

18. Common Uses: To learn about the potential market for a good (demand analysis) To supplement or support other market evidence When transactional data is insufficient or unreliable • Lack of transactions • Transactions don’t meet definition of value • Market is at disequilibrium • Survey Research

19. Two recent examples: Allison v. Exxon – survey research told a compelling story to the jury when transactional data was muddled in a drinking water contamination case Rogers v. U.S. – explained and supported a transactions-based adjustment in a rails-to-trails taking • Survey Research

20. “stated preference” versus “revealed preference” • Survey Research

21. “stated preference” versus “revealed preference” Transactional-based models (e.g. – sales comparison approach): the market participantsrevealtheir preferences via the choices they make • Survey Research

22. “stated preference” versus “revealed preference” Transactional-based models (e.g. – sales comparison approach): the market participants reveal their preferences via the choices they make Survey research: market participants state their preferences directly • Survey Research

23. “stated preference” versus “revealed preference” Note that both are market perspectives, and rely on market data. • Survey Research

27. Often referred to as a fact card, but may be photographs, a video, or other presentation.

28. In Rogers v. U.S., the “fact card” was actually a set of videos, much like a typical RealtorTM sales video. Alternate presentations of the video showed the yard with a trail and without a trail. Often referred to as a fact card, but may be photographs, a video, or other presentation.

29. Important issues include large sample size, response rate, and unbiased format of the questions. Follows well-accepted sampling methods, derived from market research and statistics.

30. Important issues include large sample size, response rate, and unbiased format of the questions. Increasing use of internet surveys allows for very large samples, albeit with lower response rates, but improves selection bias. Follows well-accepted sampling methods, derived from market research and statistics.

31. One of the only ways to measure “non-use” values • Environmental impairment • Both Goods (willingness to pay) and Bads (willingness to accept • Private impacts of public goods (airports, rails-to-trails, etc.) • Survey Research - Advantages

32. One of the only ways to measure “non-use” values • Environmental impairment • Both Goods (willingness to pay) and Bads (willingness to accept) • Private impacts of public goods (airports, rails-to-trails, etc.) Often referred to as “passive use” values • Survey Research - Advantages

33. Enormously flexible Widely used both in appraisal and other areas – well developed body of knowledge Methodology outlined in the Reference Manual on Scientific Evidence published by the U.S. Justice Department Results easy to analyze and describe – understandable and compelling to a Court • Survey Research - Advantages

34. 1993 NOAA Panel – questions that have been answered since then in the literature Confusing WTP with WTA (Note: WTP has an implicit income constraint) Confusing cross-sectional and longitudinal studies Strategic behavior Inherent biases to overcome in the survey design • Survey Research - Challenges

35. Survey Research – “Must Read” Diamond, “Survey Research”, in Reference Manual on Scientific Evidence (U.S. DOJ, 2011) Dillman, Mail and Internet Surveys – The Tailored Design Method, Second Edition (2007) Mundy and McLean, “Addition of CV to the Required Body of Knowledge”, in J. Real Estate Practice and Education (1998) Lipscomb, Kummerow, Spiess, Kilpatrick, and Kilpatrick, “Contingent Valuation and Real Estate Damage Estimation”, in J. of Real Estate Literature (2011) Seiler, Seiler, Traub, and Harrison, “Regret Aversion and False Reference Points in Residential Real Estate”, in J. of Real Estate Research (2008)

37. USPAP? • Scope of Work Rule – current wording: • “The scope of work is acceptable when it meets or exceeds: • The expectations of parties who are regularly intended users for similar assignments; and • What an appraiser’s peers’ actions would be in performing the same or a similar assignment

38. USPAP? • Scope of Work Rule – Proposed 2014 update: • “The scope of work is acceptable when it meets or exceeds: • Both the expectations of parties who are regularly intended users for similar assignments and what an appraiser’s peers’ actions would be in performing the same or a similar assignment; or

39. USPAP? • Scope of Work Rule – Proposed 2014 update: • Recognized methods and techniques prescribed by the Appraisal Practices Board of the Appraisal Foundation, or in other peer-reviewed, published appraisal or valuation books and articles, and published appraisal or valuation coursework taught by a college, university, professional appraisal or valuation organization, or state and federal government agencies.”

40. USPAP? • Scope of Work Rule – Proposed 2014 update: • Recognized methods and techniques prescribed by the Appraisal Practices Board of the Appraisal Foundation, or in other peer-reviewed, published appraisal or valuation books and articles, and published appraisal or valuation coursework taught by a college, university, professional appraisal or valuation organization, or state and federal government agencies.”

41. USPAP? Standards Rule 1-1 (a) “In developing a real property appraisal, an appraiser must… be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.”

42. USPAP? Standards Rule 2-2(a)(b)(c) (viii) “(Describe) (Summarize) (State) the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions….”

43. USPAP? Comment to Standards Rule 3-1(a) Changes and developments in economics, finance, law, and society can have a substantial impact on the appraisal profession. To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances. Each appraiser must continuously improve his or her skills to remain proficient in appraisal review.

44. USPAP? Comment to Standards Rule 3-1(a) The reviewer must have the knowledge and experience needed to identify and perform the scope of work necessary to produce credible appraisal assignment results. Aspects of competency for an appraisal review, depending on the review assignment’s scope of work, may include, without limitation, familiarly with the specific type of property or asset, market, geographic area, analytical methods, and applicable laws, regulations, and guidelines.

45. USPAP? Competency Rule “The appraiser must determine, prior to accepting an assignment, that he or she can perform the assignment competently. Competency requires: 1. the ability to properly identify the problem to be addressed; 2. the knowledge and experience to complete the assignment competently; and 3. recognition of, and compliance with, laws and regulations that apply to the appraiser or to the assignment.” “From questionnaire design to non-linear regression models used to estimate WTP, achieving competency in the use of the [contingent valuation method] is very cumbersome.” Source: Lipscomb et al., 2011

46. Advisory Opinion 9 Value may be affected by cost, use, and risk effects. “Risk effects are typically estimated by the appraiser and often represent the most challenging part of the appraisal assignment. These effects are derived from the market’s perception of increased environmental risk and uncertainty. The analysis of the effects of increased environmental risk and uncertainty on property value (environmental stigma) must be based on market data, rather than unsupported opinion or judgment. In general, the unimpaired value of the property being appraised can be estimated using the sales comparison approach, cost approach, or income approach. Estimating the effects of environmental contamination on real property value usually involves the application of one or more specialized valuation methods. These methods should be consistent with the requirements related to the valuation approaches in USPAP.”

48. CPE? • E.R. 1-4 • It is unethical in the performance of a service to knowingly fail to: • Identify the appropriate Standards to be applied • Disclose in any report the Standards applied • Take all steps necessary or appropriate to understand the Standards applied

49. CPE? • E.R. 1-4 • It is unethical in the performance of a service to knowingly fail to: • Identify the appropriate Standards to be applied • Disclose in any report the Standards applied • Take all steps necessary or appropriate to understand the Standards applied

50. Dr. Clifford A. Lipscomb is the Director of Economic Research at Greenfield Advisors. He holds baccalaureate degrees in Economics and Sociology (Berry College) and the Ph.D. in Public Policy (Georgia Institute of Technology). He has more than 15 years of experience in economic analysis, statistical analysis, consulting, and teaching. His previous employment includes Valdosta State University and the U.S. Bureau of Economic Analysis. At both the BEA and Valdosta State, Dr. Lipscomb worked directly with clients and stakeholders. At the BEA, he was part of the trilateral negotiation team that created the North American Product Classification System for real estate-related goods and services. While at Valdosta State, Dr. Lipscomb won two Best Paper awards from the American Real Estate Society (in 2006 and 2007) and the 2009 Council for Community and Economic Research (C2ER) Excellence Award for Research That Supports Business Development. Dr. Lipscomb has published extensively in high-quality academic journals, including Environmental and Resource Economics, Journal of Real Estate Finance and Economics, Journal of Real Estate Research, and Journal of Real Estate Literature. He is the Founding Book Review Editor for the Review of Regional Studies. He also serves on the Technical Advisory Board of the ACCRA Cost of Living Index and is a Registered Real Property Appraiser in Georgia.