Algorithm of real estate mass appraisal with inequality restricted least squares (IRLS) estimation

Abstract

PurposeThe purpose of this paper is to present an algorithm of real estate mass appraisal in which the impact of attributes (real estate features) is estimated by inequality restricted least squares (IRLS) model.Design/methodology/approachThis paper presents the algorithm of real estate mass appraisal, which was also presented in the form of an econometric model. Vital problem related to econometric models of mass appraisal is multicollinearity. In this paper,a prioriknowledge about parameters is used by imposing restrictions in the form of inequalities. IRLS model is therefore used to limit negative consequences of multicollinearity. In ordinary least squares (OLS) models, estimator variances might be inflated by multicollinearity, which could lead to wrong signs of estimates. In IRLS models, estimators efficiency is higher (estimator variances are lower), which could result in better appraisals.FindingsThe final effect of the analysis is a vector of the impact of real estate attributes on their value in the mass appraisal algorithm. After making expert corrections, the algorithm was used to evaluate 318 properties from the test set. Valuation errors were also discussed.Originality/valueRestrictions in the form of inequalities were imposed on the parameters of the econometric model, ensuring the non-negativity and monotonicity of real estate attribute impact. In case of real estate, variables are usually correlated. OLS estimators are then inflated and inefficient. Imposing restrictions in form of inequalities could improve results because IRLS estimators are more efficient. In the case of results inconsistent with theoretical assumptions, the real estate mass appraisal algorithm enables having the obtained results adjusted by an expert. This can be important for low quality databases, which is often the case in underdeveloped real estate markets. Another reason for expert correction may be the low efficiency of a given real estate market.