The transaction zone is a range within which a sale price might occur.  Yet our definitions of value nearly all define a “most probable” price.

In prior issues, we have discussed how vintage appraisal practice is vulnerable to accusations of bias.  The “appraisal process” is most vulnerable at the beginning of the analysis, wherein “good judgment” is substituted for reliable similarity models.  That results in our first “impossibility theorem” of objective results:

Impossibility Theorem #1:  You can’t get objective results from subjective data.

We now look at the end of our “appraisal process.”  (Impossibility Theorem #2).

Current education for appraisers focuses on “modern” economic theory from the 18th to the early 20th century, resulting in a set of “recognized methods and techniques”.  These are then embedded in a documented “body of knowledge” generally promulgated by the Appraisal Institute, then separately “enforced” through a rolling interpretation by 50 states and US jurisdictions.

The legislated appraiser economics training focuses on that historical value theory and valuation theory.  Those theories include the agents of production:  land, labor, capital, and entrepreneurship.  They do not embrace (or recognize) the fifth modern agent of production:  information.

This “recognized” theory also considers the four factors of value:  utility, scarcity, desire, and demand (effective purchasing power).  Value may or may not require an actual marketplace.  If price is to be equal to value, then the goal is expected selling price.

But we have a problem.  Most of the assumptions and theory of value taught is based on equilibrium as between buyers and sellers – all of whom are:  typically motivated, well-informed or well-advised, and reasonable “marketplace” exposure time.  [Equivocation of the word ‘market’ permeates the industry and its admonitions.]

The key words in the prevalent definitions are “most probable price.”  (Some say “highest price.)  Unfortunately, this number seldom, if ever, actually exists!  Not in theory.  Not in practice.  It is yet another equivocation (and our second impossibility theorem of value).

Nearly all real property transactions do take place in the broader “marketplace.”  However, the actual market (at a given moment in time) comprises a few buyers, and a few listed properties.  This type of interaction is called “game theory.”  In our case, this means a few buyers looking for some particular set of features and location.  And a small set of properties actually “for sale” at that moment.

This particular class of game (say 3 buyers and 4 properties) does not have an equilibrium point!  No “most probable selling price.”  The buyers have a set of internal motivations and trade-offs.  Each buyer is different.  Each seller (or owner group) will also have different internal motivations, not necessarily rational.  The result is that no number, no value is neither “most probable” nor “the highest.”

Impossibility Theorem #2:  The most probable selling price does not exist!

At best, we may identify, or attempt to quantify a “transaction zone,” within which a probability of a sale price will occur.  This we must do.  Or regulations must require.  Today’s non-acknowledgment of the transaction zone reality — creates yet a second major vulnerability for appraisal bias accusations.

Without recognition of the inherent uncertainty of valuation, the profession will continue to attempt to provide a fiction.  An opinion.  And continue to strive for believability in place of measurable reliability.