Property Valuation Methodology.(Book Review)

Property Valuation Methodology by Dominique Fischer

Published by Black Swan Press, Perth, Australia, 2002, 202 pages

$78.56, softcover

Property Valuation Methodology is a half-book. What is a "half-book"? It is one that only tells half of the story--in this case the theory, economic principles, and methodologies of valuing property. Students and others will find the other half of the information in the lectures and lab sessions associated with this textbook. The lectures highlight valuation theory and enrich it through PowerPoint presentations. The lab sessions give practical insights by using real world databases from local real estate markets.

The value of Property Valuation Methodology is that it is not just a textbook that presents valuation theory; it also gives students hands-on training in using the database tools, built-in statistical functions, and procedures of Microsoft's Excel spreadsheet program. In a series of case studies, the students are taught how to use the database functions, data analysis tools, and the auto filter and advanced filter techniques to search and analyze a large database of sales. Spreadsheet templates are also developed by the students to analyze comparable sales and to extract adjustments. Formula writing (using Excel's function subroutines) is used to enhance the templates and shortcut procedures and calculating time. These exercises give the students valuable tools that they can use in real world applications.

This book is an Australian adaptation of the author's Canadian book: "Evaluation Immobiliere" (1992). Property Valuation Methodology is used by undergraduate property majors studying at the School of Economics and Finance at Curtin University of Technology (Australia). Those students are seeking careers in valuation and in investment management and marketing; they are aspiring members of the Australian Property Institute and the Real Estate Institute of Western Australia.

This textbook's author, Dominique Fischer, has impressive credentials. He is the head of property studies in the School of Economics and Finance at Curtin. He has a master's degree from the Wharton Business School at the University of Pennsylvania and a doctorate degree in econometrics/housing economics from the Universit d'Aix-en-Provence. Fischer's worldwide experience in valuation includes positions as a visiting professor of real estate at the University of Michigan; vice-dean at Laval University, Quebec, Canada; visiting scholar at Nankai University, China; and visiting scholar at the Center for Real Estate Development, Massachusetts Institute of Technology, to name just a few.

Fischer's worldwide experience as a lecturer and practitioner gives him unique insights and the ability to inform his readers about the two spheres of influence in the valuation world: the U.S. sphere and the U.K. sphere. The U.K. sphere of influence includes the United Kingdom, Australia, New Zealand, Singapore, Hong Kong, Malaysia, and others. The U.S. sphere of influence includes the United States, Canada, South America, Japan, and most of the countries that are not part of the U.K. sphere of influence. Fischer has direct experience in the U.S. sphere and knows the Appraisal Institute's influence. The Royal Institution of Chartered Surveyors controls the U.K. sphere, and this book opts generally for standards defined in the International Valuation Standards. Throughout his book, Fischer points out the differences in methodology and theory of the two spheres of influence and gives his opinion as to the strengths and weaknesses of each.

Property Valuation Methodology includes six chapters, a general conclusion section, and eight appendices. The preface describes the "targeting, sequencing, and web site linking" features of the book. Web site references are crucial to the text. Fischer notes the reality that forces this type of format: undergraduate students do not read referenced material, therefore the textbook has to be self-contained. The references are compiled in a searchable bibliographical file on the course Web site. Fischer's approach in the tutorial sessions is to rely on the "learning-by-computing" method. The use of the Excel workbooks online allows him to constantly update and expand the workbooks with new approaches and additions. Reliance on the Internet gives this book an advantage over traditional course offerings where course materials constantly have to be reprinted when updates or additions are made. The Web site address cited in the book, however, is no longer operational and the best way to contact the author is through Curtin University at fischerd@cbs.curtin.edu.au.

The chapters in the book cover the economic principles and concepts of property valuation and the three approaches to valuation, with one chapter devoted entirely to discounted cash flow analysis. In the final chapter, titled "Appraising Appraisal," the author explains his reservations concerning the entire valuation methodology montage. He claims that this montage can be reduced to one alternative definition of value, a single approach, a single technique, and a single principle. His counter paradigm (page 111) provides:

This counter paradigm is followed by a discussion of the traditional, legal, and Ratcliff definitions of value. Fischer partially agrees with Ratcliff that prices should be read from the market. He disagrees with the concept that appraisers must make a prediction and thus forecast prices. His arguments are persuasive and point out the redundancy of the trilogies of appraisal theory. In reality, all of the approaches are driven by market comparisons. Fischer believes that a valuer's function is to read the market as of now, with the role of analysts being to use their market knowledge to offer advice on future values.

The book's general conclusion section briefly discusses why the current paradigm exists. Fischer gives three tracks for reexamining and updating the profession. One track is replacing the traditional neoclassical economic model with the more productive modern price theory approaches based on imperfect information, noncompetitive equilibrium, and auction theory. The second track is an investment in the construction and maintenance of geographic databases that can be updated. The third approach is a political track that would push for the practice of property value self-assessment for the purpose of local and state property taxation; this would place valuers in the position of advisers and auditors.

Fischer concludes that property valuation is neither an art nor a science, but is more akin to a craft. He believes that valuers must remain careful not to end up like the craftsmen of the Middle Ages, who disappeared in the industrial revolution because they were trapped in the sterile and obsolete rules of their trade.

Property Valuation Methodology includes eight appendices dealing with special topics; these topics range from multivariate treatment of comparative analysis to Fischer's "typographical ten commandments." There are also discussions of the mathematics of finance, Ellwood-type adjustments to the capitalization rate, methodological dissonance, residual techniques, splitting property rights, and the valuation process and report. Each of these topics is covered briefly in theory and by example. The discussions here are not exhaustive; they are similar to those found at the end of Appraisal Institute course materials, where discussions augment the course material, but are not the central focus of the course. From a U.S. perspective, the most entertaining of the book's appendices is Appendix IV on methodological dissonance. This appendix contrasts the differences between the U.S. and U.K. valuation spheres and the arrogance each sphere displays toward the other.

While this is a textbook for undergraduate studies, it also is interesting general reading and provides a cosmopolitan view of property valuation methodology and theory. Fischer's technique of using a "half book" rather than a traditional textbook is innovative and practical. It emphasizes the fact that technology is rapidly changing and that practicing appraisers need to know how to use all of the tools at their disposal to be effective valuers. As Fischer points out, large databases are being developed and maintained; therefore it takes more computing power to make full use of these large reservoirs of information. Being proficient in Excel (and similar programs) is the future and so it is an integral part of the practical application portion of appraisal courses.

Reviewed by Larry T. Wright, MAI, SRA, Vice President, Stanfield and Associates, Houston, Texas)