Abstract
Abstract This paper introduces a new approach to the sales comparison model for the valuation of real estate that can objectively estimate the coefficients associated with the explanatory price variables. The coefficients of the price adjustment process are estimated from the formulation of a quadratic programming model similar to the mean-variance model in the portfolio selection problem and are shown to be independent of the property to be valued. It is also shown that the sales comparison model should minimize the variance of the adjusted prices, and not their coefficient of variation as indicated by some national and international valuation regulations. The paper concludes with a case study on the city of Medellín, Colombia.
Highlights
Price prediction is a matter of great importance in the real estate industry (Ahn et al, 2012)
This paper proposes a new approach to the sales comparison model for the valuation of real estate
The main disadvantage of the sales comparison model versus the regression models is that it involves a subjective comparison by an expert valuer between the property to be valued and the properties included in the comparable set, and the price adjustment process can be seriously biased
Summary
Price prediction is a matter of great importance in the real estate industry (Ahn et al, 2012). Professional valuers estimate a property's equity in such a way that overvaluation implies underestimating the default risk, which can be passed on to buyers or secondary mortgage providers (Guo et al, 2013). Valuers must supplement their skills with valuation methods that can systematically analyze larger datasets with an output that is readily applicable to single-property appraisal (Kane et al, 2004). Most of the studies in the literature focus on economic methods, since they are simpler and more objective when the necessary information is available (Dmytrow & Gnat, 2019) In this sense, we must point out that the application of one method or another is conditioned precisely by the quantity and quality of the information available. Researchers have found that many factors can affect prices and that the amount of sales evidence varies widely, but generally there are few sales of properties similar enough to be considered comparable and none that can be considered identical
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