What is Regression Analysis and How Do Appraisers Use it?
What is Regression Analysis?
Regression analysis is defined as a method that examines the relationship between one or more independent variables and a dependent variable by plotting points on a graph and through statistical analysis; used to identify and weight analytical factors and to make forecasts. (Dictionary of Real Estate Appraisal,4th Edition)
Regression analysis is used by many different professions to determine the impact different variables may or may not have on a dependent variable. For instance, some companies will use regression analysis to determine if the number of days it rains impact sales. Any business that has access to data and can study different variables to see of there is an impact. This analysis, if performed correctly, can be very useful for businesses.
Why Do Appraisers Use it?
Regression analysis is one tool or method that real estate appraisers use in or to determine value adjustments. When appraisers use regression analysis they will compare the sale price (dependent variable) to many independent variables. Appraisers can use statistical data and analyze it.
A part of the appraisal process is to determine value adjustments. Appraisers will find sales of properties that are similar to the property they are appraising. They will then make adjustments for differences in those properties to determine the value of the property. For example, an appraiser is appraising a single family residence that is 2,100 sq ft , 3 bedrooms, 2 bathrooms with a 2 car garage located in Smith Valley Subdivision. The appraiser finds three sales also located in Smith Valley Subdivision that sold within the past three months. This is a very simplified example but you can see there are differences between the size, bedroom counts, bathroom counts and garage size.
As a part of the appraisal process, the appraiser will use different methods to determine the amount to adjust for different features or variables. One of the most common ways to determine value adjustments is the use of paired sales, where the appraiser will pair a sale that is similar to another sale with only one difference or variable. The difference in sale price will determine the amount that was attributed to the feature. Example: Two matched sales are both 2,500 sq ft, have 3 bedrooms and 2 Car Garages but one has 3 bathrooms and the other has only 2 bathrooms. The sale with 3 bathrooms sold for $5,000 more thus the value attributed to bathrooms is $5,000 per bath. I will say that in the real world, rarely do you have two sales that match up in every aspect but one. Thus, regression analysis is another method that can be used by appraisers to help determine value adjustments. Since FNMA's implementation of Collateral Underwriter (CU), more appraisers have begun to use regression as more and more appraisers are having to show how they arrived at their value adjustments.
How Do Appraisers Use it?
If you have enough data, regression analysis can be used to see the relationship of several different variables in relationship to the sale price. When looking at a large number of sales within a neighborhood certain variables can be determined by using a regression analysis. Here is a look at a regression for a property in a subdivision.
In this regression, we looked at a large number of sales within the subdivision. There is a slope of $47 per square foot, meaning for every increase in the size of square feet the price increase $47.