Real Estate Damage Measurement: What Works, What Doesn’t, and Why Not

“This book promises to shine a very bright light on the heretofore murky approaches to impaired damages estimates that are being litigated with increased frequency in property damage cases. It is a great relief for many of us involved in defending this litigation to have a resource like this in a single, coherent volume. I cannot wait to get my hands on this book.

“I personally know that the author has been immersed in untangling these practices for more than 30 years. In that time, he has been an unswerving advocate for valuation and damage estimates that are reliable in that they are based upon sound principles and methodologies. This book is the result of his vigorous and indomitable pursuit of those principals and methods.”

— Richard Morton, Esq.
Partner, Environmental and Toxic Tort Litigation
Womble, Carlyle, Sandridge & Rice, LLP

“I have had the pleasure of working with the author on several appraisal projects that involved complex environmental issues. That experience, coupled with a review of his resume, has provided me with the opportunity to understand the depth of his experience in dealing with impaired damages estimates. I am pleased that he has chosen to undertake what I am sure was a labor of love in sharing that experience in this book.

“The author has set forth in a very readable fashion the theory of analyzing potential impaired value properties, while pointing out many of the pitfalls that result in faulty analysis. I can certainly recommend this publication to any novice or experienced appraiser or other experts called on to make this type analysis.” 

—Douglas C Brown, MAI
Past President, The Appraisal Institute
Douglas C. Brown and Associates, Inc

“Al Wilson offers an unvarnished, no-holds-barred assessment of damages theory related to environmental contamination and detrimental conditions. Wilson’s comments are presented in simple, easy-to-understand terms that explain the process of calculating damages, the requisite foundations for credible opinions, and the most common abuses employed by some experts.”

“Wilson presents a hard hitting expose’ of the junk science most commonly used to calculate losses in property value resulting from environmental contamination. Wilson identifies some of the more contrived, materially flawed methodologies and their underlying weaknesses. He provides context and understanding by contrasting the flawed methodologies with those that are more widely accepted and can be credibly supported. Wilson’s book is an important contribution to better understanding the nuances of damages theory.” 

—Richard Marchitelli, MAI, CRE, FRICS
Executive Managing Director
Cushman and Wakefield

Table of Contents

Dedication
Preface
About the Author

Chapter 1: Overview
1.1 Introduction
1.2 Basic Concepts, Definitions and Issues
A. Comparisons
B. Sale Price
C. Market Value
D. Diminution in Value
E. Damage to Value
F. The Pillars of Causality
G. Location Premium
H. Proximity Stigma
I. Disamenity Impact Distance
J. Is There a Diminution?
K. Fully Informed
L. Dates
1. Date of Event
2. Date of Public Announcement
3. Date of Market Recognition
4. “Shock” Effect:
5. Date of Value
6. Date of Purchase:
7. Date of Sale or Trigger Event
M. Peer Review
N. The Use of Surveys
O. Regression
P. The Normal or Typical Market Conditions
Q. Market Macro-Factors
R. Market Micro-Factors
S. Local Factors
T. Sale Confirmation Interview
U. Appraised and Assessed Market Values
V. Appraised Market Value
W. Assessed Market Value
X. Absolute and Average Differences
Y. Hybrid Methods—CAMA and AVM
Z. Ad Hoc Regression Modeling
AA. Hedonic Analysis of a Regression Model (HARM)
1.3 Summary of Regression Modeling Types
A. Appraised Market Value
B. Assessed Market Value (Mass Appraisal)
C. Ad Hoc modeling
D. Hedonic Analysis of a Regression Model (HARM)
E. Contingent Valuation a.k.a. Potential Buyer Surveys
F. Meta-Analysis
1.4 Summary and Conclusions
Endnotes

Chapter 2: Appraised Market Value
2.1 Introduction
2.2 Appraised Market Value (a.k.a. Fair Market Value)
2.3 Knowledge
2.4 “Active Real Estate Market”
2.5 Establishing a Market Value
A. Sales Comparison or Market Data Approach
B. Income Approach
C. Cost Approach
D. Reconciliation of Results
2.6 Development Issues
A. Infrastructure Issues
B. Land Form
C. Demolition
D. Incompatible Land Uses
E. Non-conforming Uses
2.7 Unimpaired Market Value
A. Impaired Market Value
B. Stigma
C. Measurement of the Impaired Value
1. Case studies
2. Disamenity life-cycles
3. Health risk cycle
4. Remediation life-cycle
5. Public relations (media) life-cycle
6. Regulatory life-cycle
7. Lending life-cycle
8. Overall time considerations
D. Appraised Market Value Confidence Interval
Exhibit 2.1: Hypothetical Comparison of Appraised versus Actual Sale Price
Exhibit 2.2: Appraised Market Values for a Partial Remediation in Illinois
2.8 Summary
Endnotes
Appendix 2.1

Chapter 3: Assessed Market Value (Mass Appraisal)
3.1 Introduction
3.2 Regression Model Assumptions
3.3 Regression Modeling Mathematics
A. Functional Relationship
B. Statistical Relationship
C. Regression Analysis
D. Regression Model
E. Regression Modeling
F. Model Computational Methods
G. The Data
H. Measures of Regression Model Performance
I. Statistical Significance
J. Economic Significance
K. Regression and Causality
L. Regression Estimation versus Prediction
M. Precision
N. Accuracy
O. Internal and External Validity
P. Sensitivity Analysis
Q. Impact Distance
R. Estimated Values
S. Use of Inappropriate Units of Measure
T. Use of Heterogeneous Data
U. External Validity
3.4 Mass Appraisal (IAAO Standards)
A. Standard on Verification and Adjustment of Sales
B. Standard on Mass Appraisal of Real Property
C. Property Characteristics Data
D. Data Accuracy Standards
E. Data Collection Quality Control
F. Highest and Best Use
3.5 Valuation Models
A. The Sale Comparison Approach (in Mass Appraisal)
B. Holdout Samples
C. Standard on Ratio Studies
D. Standard on the Valuation of Properties Affected by Environmental Contamination
E. Standard on Automated Valuation Models (AVMs)
F. Computer Assisted Mass Appraisal (CAMA)
Exhibit 3.1: Regression Modeling Performance Benchmarks
Exhibit 3.2: IAAO Conforming Mass Appraisal
Exhibit 3.3: A Litigation “Mass Appraisal”
A. Background
B. USPAP STANDARD 6152
C. Regression Models
D. Data
3.5 Summary
Endnotes

Chapter 4: Ad Hoc Regression Modeling: Hedonic Analysis of a Regression Model (HARM)
4.1 Introduction
A. Highest and Best Use
B. Failure to Establish a Baseline
C. Use of Inappropriate Data
D. Use of Excessively Large Databases
E. Additional Sources
F. Ameliorating Conditions
G. Localized Market Conditions
H. Neighborhood Conditions
I. Type of Environmental Condition
J. Source/Non-Source
K. Remediation
L. Ad Hoc Regression Modeling
M. Use of Models with Inconsistent Coefficient Values
4.2 General Comments
4.3 Hedonic Analysis of a Regression Model (HARM)
A. The Ideal Case
B. Analysis of Damage Coefficient Precision
Exhibit 4.1: UST Effects
Exhibit 4.2: Pipeline Rupture
Exhibit 4.3: An Examination of the Coefficient
Exhibit 4.4: Guardian Pipeline
4.4 Summary
Appendix 4.1: Bibliography for Table 4.1
Appendix 4.2: On the Economic Insignificance of Statistical Significance in Post-Daubert Hedonic Pricing Models
List of Studies
Endnotes

Chapter 5: Contingent Valuation Method (CVM, a.k.a. Prospective Buyer Surveys), Perceived Diminution Surveys, and Loss of Use and Enjoyment
5.1 Introduction
5.2 Contingent Valuation and Compensating Surplus
A. The NOAA Blue Ribbon Panel Report
B. Further Background
C. “contracted market”
D. “limited awareness or knowledge”
E. “knowledge about such factors can spread unevenly throughout the population”
F. Compensating Surplus
G. Current Economic CV Thinking
H. CV Issues Overview
I. Advocate for CV: Carson
J. Dissenting Opinion: Hausman
K. CV Practice in Real Estate
L. Proponent’s View of Real Estate CV and LU&E
5.3 Perceived Diminution
5.4 Loss of Use and Enjoyment (LU&E)
A. Income Approach in LU&E
B. Discounting for Expenditures Over Time
C. Development of the LU&E using Averting Expenditure and the Income Approach
D. Income Approach Summary
E. Rent Approach
F. Rent Summary
G. Case Studies
1. Hartford, Illinois “case study”
2. Potter v. Firestone case study
H. Summary of LU&E
5.5 Summary
Endnotes

Chapter 6: Peer Review
6.1 Introduction
A. Peer Review Types
B. Characteristics of True Peer Review
C. Daubert Factors
1. Testing
2. Known error rates
3. Acceptability in the relevant scientific community
D. Peer Review in Real Estate Academic Practice
E. Real Estate Peer Review Issues
1. Revealed preference claim
2. Use of untested surveys and inappropriate survey methods
3. Agreed versus involuntary abridgement of rights
4. Failure to appreciate the difference between a diminution in value and damage
F. Peer Review Critical Inquiries
G. Analysis of Existing Papers
Exhibit 6.1: UST Effects
Exhibit 6.2: Price and Liquidity (1999)
A. Predicted versus Actual Sale Price
Exhibit 6.3: Discussion of Pipeline Rupture (2001)
A. Study Hypothesis
B. Predictive Regression Analysis
C. Sales Rate Analysis
D. Other Issues
E. Sensitivity Analysis
6.2. Summary and Conclusions
Appendix 6.1 Partial List of Published, Peer-Reviewed Papers Identified as having Significant Issues
Endnotes

Chapter 7: Meta-Analysis
7.1 Introduction
A. Meta-Regression Development Steps
B. Effect Size
C. Publication Bias
D. Meta-regression in Real Estate Practice
E. Data Bias
F. Data Issues
G. Failure to Conform to Meta-analysis Guidelines
H. Legal Context
7.2 ‘Bad Things’ Meta-Analysis Issues
A. Study Design
B. Data Quality
C. Bad Things Model Results
7.3 Timeliness of Data
A. Research Methods
B. The Market
C. Distance of Impact
D. The Models and Results
Exhibit 7.1: Lipscomb Kilpatrick JREL
7.4 Summary
Endnotes

Chapter 8: Summary and Conclusions
8.1 Introduction
A. Appraised Market Value
B. Assessed Market Value (Mass Appraisal)
C. Ad Hoc Modeling
D. Hedonic Analysis of a Regression Model (HARM)
8.2 Requisite Conditions—Normal or Typical, Diminution, Damage
8.3 Application of Regression Models
8.4 Appraised and Assessed Market Values
8.5 Ad Hoc Regression Models and HARMs
8.6 Revealed Preference
8.7 CV or Prospective Buyer Surveys
8.8 Meta-Analysis
8.9 Denial of Access to Required Market Data
8.10 The Literature
A. True Peer Reviewed Literature
B. Editorially Peer Reviewed Literature
8.11 The Bottom Line

Endnotes
Index