Real Estate Appraisal and Transaction Price: An Empirical Evaluation of Alternative Theories

Abstract

Mortgage appraisals are often required before a loan is approved. If information on thetransaction price is available and lenders compensate appraisers, a principal-agent problemmay arise. As a result, appraisers tend to overstate the value of a property because of theirincentive to set the appraised value to be equal to (or greater than) the transaction price(Gwin and Maxam, 2002). This paper offers an alternative theory that generates a differentempirical prediction. The theory is predicated on the updating appraisal process ala Quanand Quigley (1991) and a signaling modification to Gwin and Maxam (2002). Empirical teststo the theoretical moral hazard model postulated by Gwin and Maxam and the alternativetheory herein is conducted using appraisal and transaction data from a lending institution inSingapore. The results support the alternative specification.