Real Estate: August 2008 Archives

Alleged damages might be the result of a physical invasion; proximity to a nuisance; overreaching land use regulations; indirect benefit or burden transfers; some fickle and transitory notion of stigma; or irrational phobic reaction to some uncertain environmental substance or condition. From this starting point the forensic valuation consultant gathers evidence to determine if permanent damages have occurred. Like forensic engineering, forensic real estate valuation is similar to failure analysis and root cause analysis with respect to the methodologies and logic employed.

The term "forensic" is used here to connote the investigation of whether property values have been permanently damaged in the context of a trial of fact, pre-trial settlement, arbitration, or as a matter of public policy. Forensic valuation is like conventional real estate appraisal in that appraisers are held to a standard to not fudge the numbers, to avoid unacceptable valuation methods, and to shun undisclosed assumptions to back up a desired result. But the distinguishing characteristic of forensic valuation is its focus on the measurement of permanent property losses, its insistence on the use of consistent, logical, and legally appropriate valuation methods to the situation at hand, and its adherence to the scientific method that requires the reporting of unwanted results and disconfirming market data.

Forensic Valuation: What Is It? Forensic real estate valuation is the application of economic principles and methodologies to answer questions of fact as to whether real estate values have suffered a permanent damage. Forensic real estate valuation contrasts with the prevailing valuation theory in the real estate industry that often fails to distinguish permanent loss from the following:

* Situations Where Damages Are Impermanent or Non-recoverable
* The market has already provided "implicit compensation" for a pre-existing "foreseeable" condition (i.e., the "foreseeability damage test").
* The purported loss reflects the real estate market cycle.
* The loss was insured and thus recoverable.
* The loss is a brief, temporary loss of marketability.
* The loss was mitigatable or avoidable.
* The loss is speculative or stems from a self-interested claim of "stigma."
* Any diminution in value reflects a changed highest use of the property rather than full economic loss.