Property Markets, Economics and Legal Interests

Introduction and context

Property valuation is not performed in a vacuum. A building or parcel of land derives value from the interaction of physical characteristics, economic forces, legal rights, public regulation and capital-market conditions. The valuer’s task is therefore not merely to inspect an asset and compare prices. It is to interpret a market, identify the legally transferable interest, understand the economic use of the property, and estimate the price or worth associated with that interest at a specified date.

Property markets differ from perfectly competitive markets. Real estate is immobile, heterogeneous, indivisible, costly to transact and strongly affected by planning systems and local institutions. Information is imperfect and transactions are infrequent. Consequently, prices may adjust slowly, market participants may behave strategically, and a price observed in one submarket may not be applicable to another.

This chapter develops a framework for analysing supply, demand, property cycles, location, land economics and capital markets. It also explains how freehold and leasehold interests, easements, encumbrances, development rights, taxation and regulatory constraints affect value. Legal terminology varies by jurisdiction; the principles presented here must therefore be read with the applicable land, property, planning, taxation and registration laws of the relevant country.

Learning objectives

By the end of this chapter, the learner should be able to:

1. Explain the distinctive characteristics of property markets.
2. Analyse the effects of supply, demand, equilibrium and market segmentation.
3. Interpret property cycles and distinguish market value from short-term price movements.
4. Apply location theory and land-economic principles to valuation.
5. Explain the relationship between property markets and capital markets.
6. Distinguish freehold, leasehold, easements, encumbrances and development rights.
7. Assess the effects of taxation, planning controls and other regulatory constraints.
8. Integrate economic and legal analysis into a professional valuation opinion.

1. The nature and structure of property markets

A property market is a system through which interests in land and buildings are created, exchanged, financed and used. It includes owners, occupiers, developers, investors, lenders, public authorities, valuers, brokers, lawyers and other intermediaries.

1.1 Distinctive characteristics

Immobility. Land cannot be moved to a stronger market. Its value is consequently dependent on its location and on the accessibility, services and externalities associated with that location.

Heterogeneity. No two properties are perfectly identical. Differences in size, design, condition, orientation, tenure, permitted use, access and environmental quality complicate direct comparison.

Durability. Buildings and land provide services over many years. Current decisions are therefore influenced by expectations about future rents, costs, regulation and physical obsolescence.

High transaction costs. Legal due diligence, brokerage, taxes, financing, valuation and registration costs can be substantial. These costs reduce transaction frequency and slow market adjustment.

Imperfect information. Participants may not know the true condition, legal status or future development potential of a property. Professional valuation and due diligence reduce, but do not eliminate, information asymmetry.

Spatial segmentation. Residential, office, industrial, retail, agricultural, hospitality and special-purpose properties operate as related but distinct submarkets. Even within one use, properties are divided by location, quality, size, tenure and user profile.

1.2 Stock, flow and market participants

The existing quantity of usable property is the stock. New construction, conversions and demolitions alter that stock. Transactions and leases are flows occurring against the stock. In the short run, supply is often relatively inelastic because construction requires time and existing buildings cannot readily be relocated or reproduced.

Demand is generated by the need for accommodation, production, consumption, investment and wealth preservation. Effective demand requires both a desire to occupy or invest and the financial capacity to do so. A household may desire a dwelling but not constitute effective market demand if it cannot secure financing or pay the required price.

Property markets commonly contain:

• an occupier market, in which space is bought or leased for use;
• an investment market, in which interests are acquired for income, capital growth or diversification; and
• a development market, in which land and buildings are assembled, improved or redeveloped.

A valuation must identify which market is being analysed and which participants are relevant. The price expectations of an owner-occupier may differ from those of an institutional investor or developer.

2. Supply, demand and market equilibrium

In a simplified market, demand generally declines as price increases, while supply generally increases as price increases. The market-clearing price is reached where the quantity demanded equals the quantity supplied. This is a conceptual model rather than a complete description of real estate behaviour.

Demand for property depends on income, employment, population, household formation, business activity, interest rates, credit availability, taxes, expectations and the prices of substitutes. For investment property, expected rent, expected capital growth, risk and required return are especially important.

Supply depends on land availability, construction costs, technology, planning permission, infrastructure, development finance, expected sale or rental prices and the time required to build. Existing stock and redevelopment potential are also important.

A useful demand representation is:

where Q_d is quantity demanded, P is property price or rent, Y is income or economic activity, i is the interest or financing rate, E represents expectations, and Z represents other factors such as demographics, taxation and regulation. The expression is conceptual; it does not imply a particular estimated functional form.

A simple linear form may be written as:

where a is the intercept and b > 0 is the absolute responsiveness of demand to price. This model is useful for explaining comparative statics, but real property demand is usually multidimensional and segmented.

2.1 Shifts and movements

A change in property price, holding other variables constant, produces a movement along a demand or supply curve. A change in income, interest rates, planning policy or construction costs shifts the relevant curve. Confusing a movement along a curve with a shift can lead to poor market analysis.

For example, lower mortgage rates may increase purchasing power and shift housing demand outward. However, if supply is constrained, much of the benefit may be capitalised into higher land and house prices rather than producing a proportionate increase in construction.

2.2 Elasticity

Price elasticity measures responsiveness. The point elasticity of demand is:

where ε_d is price elasticity, Q_d is quantity demanded and P is price. The derivative ∂Q_d/∂P measures the local change in quantity demanded for a change in price. Units cancel, so elasticity is dimensionless.

Demand is commonly described as elastic when the absolute value of elasticity exceeds 1 and inelastic when it is below 1. In property markets, short-run supply is often inelastic, whereas long-run supply may be more responsive if land can be assembled and planning permission obtained.

2.3 Market segmentation and submarkets

A city does not have one single property market. A prime central office building, a suburban warehouse and a rural apartment serve different users, have different risk characteristics and should not be analysed through one undifferentiated price series. Relevant segmentation variables include:

• use and permitted use;
• geographical submarket;
• building quality and age;
• lease length and covenant strength;
• unit size and configuration;
• environmental performance; and
• purchaser type and financing conditions.

The valuer should select comparable evidence from the same or a closely related submarket and adjust for material differences rather than relying on superficial geographic proximity.

3. Property cycles and market adjustment

Property cycles are recurring but not perfectly regular changes in rents, prices, construction, vacancy, investment and credit conditions. A stylised cycle may contain recovery, expansion, oversupply and contraction phases.

During recovery, vacancy begins to fall, rents stabilise and investor confidence improves. During expansion, rents, prices, development activity and lending may rise together. In an oversupply phase, completed projects exceed effective demand, vacancy increases and rental growth weakens. During contraction, values may fall, transactions decline and new construction is postponed.

The cycle is influenced by:

• economic growth and employment;
• interest rates and credit standards;
• construction lags;
• investor expectations;
• government policy;
• demographic change; and
• international capital flows.

Construction lags create an important dynamic problem. A developer may commence a project when demand is strong, but completion may occur after demand has weakened. Thus, the supply response can amplify cyclical volatility.

A valuation should distinguish market evidence from market expectations. A strong recent price increase does not establish that the same increase will continue. The valuer should analyse transaction dates, incentives, vacancy, available stock, pipeline supply, financing conditions and the motivation of the parties.

3.1 Risk, uncertainty and scenario analysis

Risk refers to outcomes that can be represented or estimated with some probability; uncertainty refers to outcomes whose probabilities are poorly known. Property valuation often involves both. Instead of presenting one forecast as certain, an analyst may examine base, downside and upside scenarios.

For an income-producing property, a simplified capitalisation relationship is:

where V is value, NOI is stabilised net operating income for a representative period, and R is the capitalisation rate expressed as a decimal per period. The formula assumes a perpetuity-like income stream with stable risk and growth conditions. It is not appropriate without adjustment where income is irregular, rapidly changing or subject to substantial redevelopment.

The capitalisation rate reflects required return, growth expectations, risk, liquidity and the characteristics of the asset and market. It should not be treated as a mechanical constant. A change in R can materially change indicated value even when income remains unchanged.

4. Location, land economics and highest and best use

Location affects value through accessibility, agglomeration, amenities, externalities and expectations. Accessibility includes travel time, transport connections, digital connectivity and proximity to customers, labour, schools, services and infrastructure.

Agglomeration occurs when firms or households benefit from locating near one another. Businesses may share labour pools, suppliers, knowledge and customers. Residential occupiers may value access to employment, education, retail and public services.

Externalities are effects imposed on third parties that are not fully reflected in the private transaction. Positive externalities may include a well-maintained public realm or transport improvement. Negative externalities may include noise, pollution, congestion or flood risk. Public regulation often attempts to manage such effects.

4.1 Bid-rent reasoning

Urban land economics commonly explains land values through the trade-off between accessibility and occupancy cost. Users that benefit greatly from central access may be willing to pay more for central land. Users requiring large sites and less central access may locate farther away where land is cheaper.

A simplified bid-rent concept can be expressed as:

where B(x) is the maximum land payment at location x, R(x) is the revenue or utility generated at that location, and C(x) is the cost of operating or accessing it. This is a conceptual framework, not a universal valuation equation. In practice, zoning, infrastructure, environmental constraints and competing users alter the relationship.

4.2 Highest and best use

Highest and best use is the reasonably probable use that is physically possible, legally permissible, financially feasible and maximally productive. The tests are cumulative. A use that is profitable but prohibited is not a permissible highest and best use. A legally permitted use may still fail because the site is physically unsuitable or financially infeasible.

The analysis should be undertaken for the property as vacant and, where relevant, as improved. A valuer should consider alternative uses, demolition or refurbishment, density, timing, market absorption, planning risk and the costs of obtaining approvals. Development potential should not be added to value merely because it is imaginable.

5. Property and capital markets

Property is both a physical asset and a financial claim. Capital markets influence property through interest rates, lending standards, investor required returns, securitisation, listed property vehicles and portfolio allocation.

A basic present-value model for a finite holding period is:

where V₀ is value at the valuation date, CF_t is net cash flow in period t, r is the periodic discount rate, n is the number of periods and RV_n is the reversionary or terminal value at period n. Cash flows and the discount rate must use consistent periods and risk assumptions. If cash flows are annual, r must be an annual rate; if monthly, the rate and timing must be monthly or properly converted.

The discount rate reflects the time value of money, expected inflation where relevant, risk, liquidity and asset-specific uncertainty. It is not automatically equal to a mortgage interest rate. Debt financing affects the investor’s equity return, while unlevered property value is generally analysed from the asset’s operating cash flows before financing.

5.1 Leverage and sensitivity

Debt can increase the expected return on equity when property performance exceeds the effective cost of debt, but it also magnifies losses and introduces refinancing and covenant risk. A professional analysis should test interest-rate changes, vacancy, rent growth, operating costs, exit yield and loan maturity.

Sensitivity analysis changes one assumption at a time; scenario analysis changes several linked assumptions. Neither predicts the future, but both reveal which assumptions drive the conclusion and help decision-makers understand valuation risk.

6. Legal interests in property

Value attaches to a legal interest, not simply to a physical object. The valuer must identify what is owned, for how long, subject to what rights and restrictions, and with what ability to transfer, occupy, develop or earn income.

6.1 Freehold and ownership interests

Freehold generally denotes an ownership interest of indefinite duration, subject to statutory powers, superior title, public controls, taxes and private rights. In some jurisdictions the equivalent legal concept may be described differently. Ownership does not necessarily mean unrestricted control. Planning law, environmental law, title conditions, compulsory acquisition powers and third-party rights may materially limit use.

The valuation instruction should specify whether the interest is vacant possession, subject to existing leases, subject to occupational rights or affected by other contractual arrangements.

6.2 Leasehold interests

A lease grants possession or use for a defined term in exchange for rent or other consideration. The value of the landlord’s interest depends on the rent, lease term, review provisions, tenant covenant, repair obligations, options, incentives and reversionary prospects. The tenant’s interest depends on the economic benefit of occupying the premises relative to market rent and the remaining term.

Important lease clauses include:

• rent and service-charge provisions;
• rent review mechanism;
• break, renewal and purchase options;
• assignment and subletting rights;
• repair, insurance and reinstatement duties;
• permitted use and alteration controls; and
• default and forfeiture provisions.

A valuer must not assume that the contract rent equals market rent. Contractual rent may be above or below current market levels, and the timing of reviews may create a valuable or burdensome lease position.

6.3 Easements and rights of way

An easement is a non-possessory right benefiting one parcel or person and burdening another, such as a right of way, drainage right, access to services or rights for utilities. An easement can enhance the dominant property and constrain the servient property. Its valuation effect depends on location, width, permanence, exclusivity, operational impact and the possibility of relocation or release.

6.4 Encumbrances and title restrictions

An encumbrance is a right, claim or restriction affecting title or use. Examples include mortgages, liens, restrictive covenants, charges, options, notices, rights of way and outstanding claims. Some encumbrances affect transferability; others affect development, building form or income.

A mortgage is generally a security interest rather than a reduction in the physical property’s market value. However, distress, enforcement conditions or a restricted sale process may affect the price achieved in a particular transaction. The valuer must distinguish the value of the property interest from the amount of secured debt.

6.5 Development rights and airspace

Development rights may include rights to construct additional floors, change use, subdivide, intensify, extend, transfer development potential or use airspace and subsurface space. These rights may be held by the owner, shared, leased, reserved by another party or controlled by planning regulation.

Development value is conditional. It depends on legal permission, physical capacity, infrastructure, market demand, construction cost, finance, timing and risk. A residual approach may be used conceptually:

where GDV is gross development value at completion. The residual is highly sensitive to assumptions and is not necessarily a reliable land value unless the development programme, timing and risks have been carefully specified. The developer’s return is included because a feasible project must compensate the developer for risk and effort.

7. Taxation and regulatory constraints

Taxes influence both transaction prices and investment returns. Relevant taxes may include transfer or stamp taxes, land value taxes, property taxes, income taxes, capital gains taxes, value-added or sales taxes, development charges and withholding taxes. Their application depends on jurisdiction, ownership structure, use and taxpayer status.

The valuer should identify whether a quoted price is gross or net of tax, whether tax is payable by buyer or seller, and whether a tax is recurring or transaction-specific. A tax that reduces the buyer’s effective return may reduce the price the buyer is willing to pay, although market incidence depends on supply and demand elasticities.

Regulatory constraints may include:

• zoning and permitted use;
• floor-area ratio, height and density limits;
• building and fire codes;
• heritage protection;
• environmental and contamination rules;
• affordable-housing or inclusionary requirements;
• accessibility standards;
• energy-performance rules;
• development contributions; and
• compulsory acquisition or public reservation.

Regulation can reduce value by limiting use, increasing cost or delaying development. It can also increase value by protecting amenity, reducing harmful externalities, improving infrastructure or limiting competing supply. The direction and magnitude of effect must be analysed rather than assumed.

8. Integrated professional method

A robust valuation workflow links market, economic and legal analysis:

1. Define the assignment. Establish purpose, valuation date, basis of value, currency, interest valued and reporting assumptions.
2. Inspect the property. Record physical condition, access, services, configuration, environmental features and surrounding land uses.
3. Verify legal status. Review title, plans, leases, easements, covenants, charges, planning records, permissions and restrictions.
4. Define the market. Identify relevant geographic and functional submarkets, participants, transaction evidence and current supply pipeline.
5. Analyse highest and best use. Test physical possibility, legal permissibility, financial feasibility and productivity.
6. Select valuation methods. Consider comparison, income, cost, residual or other methods appropriate to the interest and evidence.
7. Adjust and reconcile. Reconcile differences in date, location, quality, tenure, income, risk, transaction terms and legal rights.
8. Test sensitivity and uncertainty. Identify assumptions that could materially change the conclusion.
9. Report transparently. State evidence, assumptions, limitations, scope and the distinction between fact, interpretation and judgement.

Applied case: Riverside Exchange redevelopment

The following is an illustrative case, not a report on an actual property.

Background

Riverside Exchange is a 1.6-hectare former industrial site near a metropolitan rail station. The site contains obsolete warehouses and has potential for residential and small-scale commercial redevelopment. A developer has agreed an option to acquire the site, subject to planning permission.

Problem

The owner believes the site is worth the price of a nearby completed apartment scheme. The developer argues that contamination, affordable-housing obligations, infrastructure contributions and construction finance make that comparison inappropriate. The valuer must estimate the value of the freehold interest subject to the existing planning position and assess whether the proposed scheme represents highest and best use.

Analysis

The market review identifies strong housing demand but rising interest rates and a substantial pipeline of apartments. Comparable evidence is segmented by station proximity, tenure, completion date and building quality. The site is not comparable to a completed, serviced building because it carries planning, remediation and construction risk.

Title review identifies a utility easement crossing part of the site and a restrictive covenant limiting certain industrial activities. Planning policy permits mixed-use development in principle but requires a detailed application, transport assessment and affordable-housing contribution. Environmental investigation indicates remediation is feasible but uncertain in cost.

The valuer models a development scenario using expected completed sales, phased absorption, construction costs, professional fees, finance, remediation, infrastructure contributions, contingency and the developer’s required return. Alternative scenarios test lower sales prices, a longer approval period and higher remediation costs. The easement reduces the efficient development footprint but may be incorporated into landscaping and access design.

Approach and outcome

The residual analysis indicates that the site has development value, but substantially below the owner’s comparison with completed apartments. A sensitivity analysis shows that sale prices and the approval period are the most influential variables. The reported conclusion is subject to clearly stated assumptions about planning permission, remediation and market conditions. The valuer recommends that the client not present the residual as a precise certainty and that legal and environmental reports be obtained before exchange.

Learning points

The case demonstrates that location alone does not determine value. The relevant interest, planning status, development costs, timing, risk and legal burdens must be integrated. It also shows why a valuer must avoid double counting: if a comparable already reflects a planning restriction or an easement, the same disadvantage should not be deducted again without evidence.

Challenges, ethics and contemporary practice

Property valuation involves professional judgement and potential conflicts of interest. Ethical practice requires independence, competence, confidentiality, disclosure of conflicts, appropriate evidence and transparent assumptions. A valuer should not allow a client’s desired outcome, fee pressure or lending target to determine the conclusion.

Contemporary practice increasingly uses geographic information systems, automated valuation models, remote sensing, digital title records, property databases and machine-learning tools. These tools can improve consistency and identify patterns, but they do not replace legal interpretation, inspection or professional judgement. Automated models may reproduce historical discrimination, omit unrecorded rights, rely on stale transactions or perform poorly in thin markets. Data provenance, model validation, explainability, privacy and cybersecurity are therefore governance requirements.

Climate risk is also becoming material. Flood, heat, wildfire, coastal exposure, energy-performance regulation, insurance availability and transition costs can affect income, expenditure, liquidity and the useful life of buildings. Climate analysis should be connected to cash flows and legal requirements rather than treated as a generic premium or discount.

Best practice is to maintain an auditable chain from evidence to adjustment to conclusion. Material assumptions should be explicit, alternative interpretations should be considered, and uncertainty should be communicated rather than hidden behind excessive numerical precision.

Chapter Summary

Property markets are spatial, segmented, heterogeneous and institutionally regulated. Supply and demand are shaped by income, employment, demographics, finance, construction costs, planning and expectations. Because supply responds slowly and information is imperfect, property markets experience cycles and may not adjust immediately to new conditions.

Location affects value through accessibility, agglomeration, amenities and externalities. Highest and best use requires a use to be physically possible, legally permissible, financially feasible and maximally productive. Capital-market conditions influence discount rates, investment demand, leverage and transaction prices.

Valuation concerns a legal interest rather than merely a physical asset. Freehold, leasehold, easements, encumbrances and development rights create different bundles of benefits and obligations. Taxes, planning controls, environmental rules and development obligations may constrain or enhance value. A reliable professional opinion integrates market evidence, economic analysis, legal due diligence, risk assessment and transparent reporting.

Key Terms

Property market: System through which interests in land and buildings are used, financed and exchanged.

Stock: Existing quantity of usable property at a point in time.

Effective demand: Desire for property supported by financial capacity and willingness to transact.

Market segmentation: Division of a broad market into submarkets with distinct users, risks and pricing.

Elasticity: Measure of responsiveness of one variable to a change in another.

Property cycle: Recurring pattern of changes in rents, prices, vacancy, construction and investment.

Externality: Benefit or cost imposed on parties not fully represented in a transaction.

Agglomeration: Economic benefit arising from spatial concentration of activities.

Bid rent: Maximum amount a user is willing to pay for land at a particular location.

Highest and best use: Use that is physically possible, legally permissible, financially feasible and maximally productive.

Capitalisation rate: Rate used to relate stabilised income to value under specified assumptions.

Discount rate: Required rate used to convert future cash flows into present value.

Freehold: Generally, an ownership interest of indefinite duration, subject to law and superior rights.

Leasehold: Time-limited right of possession or use created by a lease.

Easement: Non-possessory right benefiting one property or party and burdening another.

Encumbrance: Right, claim or restriction affecting title, transfer or use.

Development right: Legal or planning entitlement to construct, alter, intensify or change use.

Residual value: Indicative land or site value after deducting development costs and required return from development value.

Regulatory constraint: Public-law limitation affecting use, construction, operation or transfer.

Sensitivity analysis: Examination of how a conclusion changes when one or more assumptions vary.

Review Questions

Short Answer Questions

1. Why are property markets described as heterogeneous and spatially segmented?
2. Distinguish a movement along a demand curve from a shift in demand.
3. What are the four tests of highest and best use?
4. Explain one important difference between a freehold and a leasehold interest.
5. Why can an easement affect the value of both a dominant and a servient property?

Long Answer Questions

1. Analyse the factors that influence supply and demand in an urban housing submarket.
2. Explain the stages of a property cycle and discuss how construction lags can amplify volatility.
3. Discuss how location, accessibility, agglomeration and externalities influence land value.
4. Compare the income capitalisation and discounted cash-flow approaches, including their assumptions and limitations.
5. Explain how planning regulation, taxation and environmental rules can both reduce and enhance property value.

Analytical / Application Questions

1. A site is close to a railway station but is affected by a utility easement, contamination risk and a proposed affordable-housing requirement. Design a valuation investigation that integrates market, legal and development analysis.
2. A property’s stabilised annual net operating income is 2,400,000 currency units and the indicated capitalisation rate is 8%. Calculate the indicated value using V = NOI/R, then explain why the result may be unreliable if income is expected to change sharply.
3. Two comparable properties have similar physical characteristics, but one has a long secure lease at below-market rent and the other is vacant with immediate redevelopment potential. Explain why their prices may differ and identify the adjustments a valuer should investigate.

Multiple Choice Questions with Answers

Question 1

Which characteristic most directly explains why a property cannot be moved to a stronger market?

A. Durability

B. Immobility

C. Indivisibility

D. Information asymmetry

Correct Answer: B. Immobility

Question 2

A reduction in mortgage interest rates, holding other factors constant, will most directly tend to:

A. Shift housing demand outward

B. Shift housing demand inward

C. Eliminate property segmentation

D. Reduce the physical stock immediately

Correct Answer: A. Shift housing demand outward

Question 3

Which statement best describes highest and best use?

A. The use preferred by the current owner

B. The use with the highest gross revenue regardless of legality

C. A use that is physically possible, legally permissible, financially feasible and maximally productive

D. The existing use whenever a building is present

Correct Answer: C. A use that is physically possible, legally permissible, financially feasible and maximally productive

Question 4

A property has stabilised annual NOI of 800,000 currency units and a capitalisation rate of 10%. Using V = NOI/R, the indicated value is:

A. 80,000 currency units

B. 800,000 currency units

C. 8,000,000 currency units

D. 80,000,000 currency units

Correct Answer: C. 8,000,000 currency units

Question 5

Which interest normally grants possession or use for a defined term in return for rent or other consideration?

A. Easement

B. Leasehold

C. Restrictive covenant only

D. Mortgage lien

Correct Answer: B. Leasehold

Question 6

What is a likely effect of a restrictive easement crossing a development site?

A. It may constrain the site layout or developable area

B. It automatically transfers ownership to the easement holder

C. It guarantees a higher capitalisation rate

D. It removes all planning requirements

Correct Answer: A. It may constrain the site layout or developable area

Question 7

In a residual development analysis, which item is normally deducted from gross development value?

A. Expected completed sales revenue

B. Construction and professional costs

C. The site’s gross development value

D. The property’s location quality

Correct Answer: B. Construction and professional costs

Question 8

Why may short-run property supply be relatively inelastic?

A. Buildings can be relocated only at low cost

B. Planning and construction require time and existing stock cannot quickly be reproduced

C. Demand is always perfectly predictable

D. Property taxes eliminate construction costs

Correct Answer: B. Planning and construction require time and existing stock cannot quickly be reproduced

Question 9

Which statement about a discount rate is most accurate?

A. It is always identical to the mortgage interest rate

B. It converts future cash flows into present value and reflects time value and risk

C. It applies only to vacant land

D. It is a legal restriction on development

Correct Answer: B. It converts future cash flows into present value and reflects time value and risk

Question 10

Why should automated valuation models not replace all professional valuation work?

A. They cannot perform any arithmetic

B. They may omit legal rights, rely on biased data or perform poorly in thin markets

C. They are prohibited from using transaction data

D. They always produce values below market prices

Correct Answer: B. They may omit legal rights, rely on biased data or perform poorly in thin markets