Understanding the Difference Between Traditional and Digital Property Valuation

Introduction

The coronavirus pandemic has accelerated the adoption of digital technologies all around the world. Imposition of lockdowns and the restrictions on mobility forced people to find innovative methods for completing tasks that previously required physical intervention by individuals. However, even before the pandemic, new technologies were being introduced in the real estate sector (Grellier, 2020). Property valuations are considered a vital part of conducting any business in real estate. Thus, digital appraisals are being adopted by many users and government organisations (CFI, 2021). Although there are some restrictions in using this method, the level of transparency and the subsequent accuracy it offers is being lauded by many as a solution to the lengthy and cumbersome traditional appraisal process. Continue reading to understand the differences between traditional and digital methods of property valuation.

Research Questions

1. What is the difference between digital and traditional property valuation?
2. Can digital appraisals replace traditional methods of property valuation?
3. What are the pros and cons of investing in each avenue?

Difference Between Traditional and Digital Property Valuation

Property appraisals are an integral part of buying, selling, investing, or regulating real estate. . Accurate valuations of real estate are a major challenge for the industry and government regulatory bodies. The traditional appraisal model involves using the services of a third party for doing a physical inspection of the site along with carrying out other key comparisons based on location and socio-physical aspects of the property (German et al., 2021). In a digital (or desktop) appraisal, no onsite visits are required, and the appraisal is carried out by searching information on the property available on listing websites, spatial maps, GIS systems, government bodies, and municipal records (Mitchell, 2020). To understand the difference between the two methods, one must comprehend how computers and humans operate while carrying out these appraisals. Humans have superior cognitive skills compared to computers that are restricted to the data provided, algorithms used, and access to storage. Past experiences and correlations with other factors outside the documented realm can also be utilised by human-based analysis. However, computers are fast and reliable in performing repetitive tasks and calculations. Therefore, a high level of accuracy can also be achieved as long as the data used is accurate and reliable.

Traditional methods of real estate valuation include the comparable sales approach, income analysis, cost analysis, and cost of development approach. The comparable sales approach uses comparisons of similar properties to reach a fair market value after accounting for any differences in size, location, and features. However, the method is difficult to apply in densely populated areas where sales and rentals of unimproved land are rare. In the income analysis approach, the value of a property is estimated by determining the income yielded by the property. Any distortions like the depreciation or underutilisation of the property can severely impact the assessment carried out under this method. In the cost analysis approach, it is assumed that a property is not worth more than the cost of construction, and all remaining values are assigned to the land itself. Physical, economic, and functional depreciation greatly impact the analysis conducted under this method. Finally, the cost of development approach estimates the sale price of land-based on full-fledged market research of potential development options on the land. This method requires extensive study of market options, local regulations on development, and physical attributes of the land that would affect its development capacity. Therefore, a fair market value calculated under this method will have considerable restrictions with the uncertainty of local developments each year.

The biggest change in property valuations over the last few decades involves the introduction of computers and mathematical formulas to establish a relationship between property characteristics and sales prices. The approach is called a computer-assisted mass appraisal (CAMA). Characteristics such as location, size, and spatial data are important aspects of carrying out these mathematical functions, and therefore, a large amount of data is required to arrive at an accurate valuation estimate. The development of computerised geographic information systems (GIS) are a necessary condition for this appraisal method. The technology allows for data on land titles, sales, market trends, and municipal infrastructure to be incorporated with geographical locations. Hence, the digital method of appraising a property will largely depend on the accuracy, reliability, depth, and quantity of data available to the system. To successfully use these systems for mass appraisal, the results yielded must be reasonable, understandable, and available to the public. There should be an online publicly accessible directory of land titles and records that are mapped to GIS systems in real time. People should be able to access and view these records to increase transparency in the sector (JCHQ, 2021).

Can Digital Appraisals Replace the Traditional Methods?

Technological innovation has seen a rise in the last few decades, and with the real estate sector being linked to many functions of society and the government, there is bound to be innovation in the sector. Large scale land valuation is required by government bodies to effectively manage processes like tax collection and land record title management. Using the traditional valuation methodology, it is not possible to conduct a large-scale valuation of all properties in an area and the practice is limited to buying, selling, investing, and financing real estate. Although there are many variables that can be ignored while conducting a digital appraisal as the estimated value will solely depend on the data available to the system, the concept has been applied in many countries around the world and has proven successful in providing a close enough fair market value for properties. Development of these new approaches must be clearly communicated to taxpayers as they will be most affected in case of any malpractice or use of biased algorithms. Therefore, a certain level of consistency is required before the digital appraisal method is accepted by the market, local officials, and government bodies.

Conclusion

Property valuations are a vital part of conducting any sort of business in the real estate sector. The government also requires valuations for the smooth running of functions like tax and measuring economic growth. Although the digital method of conducting appraisals has drawbacks due to its dependency on accurate and reliable data, the method has proved to be a reliable source of large-scale property valuation in many countries. Therefore, considering the world is rapidly adopting newer technologies for carrying out government and economic functions, the future of digital appraisals seems promising for the real estate sector.

Key Takeaways

Property valuations are considered a vital part of conducting any business or regulatory activity in real estate.

Digital appraisals are being adopted by many users and government organisations. Although there are some restrictions in using this method, the level of transparency and the subsequent accuracy is being lauded by many as a solution to the lengthy and cumbersome traditional appraisal process.

The traditional appraisal model involves using the services of a third party for doing a physical inspection of the site along with carrying out other key comparisons based on location and socio-physical aspects of the property.

In a digital (or desktop) appraisal, no onsite visits are required, and the appraisal is carried out by searching information on the property available on listing websites, spatial maps, GIS systems, government bodies, and municipal records.

Humans have superior cognitive skills compared to computers that are restricted to the data provided, algorithms used, and access to storage.

There are many variables that can be ignored while conducting a digital appraisal as the estimated value will solely depend on the data available to the system, however, the concept has been applied in many countries around the world and has proven successful in providing an accurate enough fair market value for properties 

Bibliography

CFI. (2021). Asset Valuation. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/asset-valuation/

German, J. C., Robinson, D., & Youngman, J. (2021). Traditional Methods and New Approaches to Land Valuation. Retrieved from https://www.lincolninst.edu/publications/articles/traditional-methods-new-approaches-land-valuation

Grellier, A. (2020). A shift to digital: the impact of Covid-19 on real estate. Retrieved from https://www.ibanet.org/article/6582CAA2-B25B-40A9-B1F4-61FC4D1CA2E1

JCHQ. (2021). What is a Desktop Appraisal? Retrieved from https://realestatecareerhq.com/desktop-appraisal/#What_is_the_difference_between_a_full_appraisal_and_desktop_appraisal

Mitchell, M. (2020). Are remote appraisals and remote notaries here to stay? Retrieved from https://movement.com/blog/2020/05/19/remote-appraisals-remote-notaries-stay/