Josh Panknin, Director of Real Estate Technology Initiatives in the Engineering school at Columbia University wrote an excellent thought-provoking article, The Property Valuation Reckoning is Imminent, How Technology is Highlighting Underwriting’s Shortcomings. In his March 5, 2019 piece, Panknin wrote, “Despite the numerous claims of “disruption” and “transformation,” technology hasn’t provided much more than incremental improvements other than a few exceptions. Technology has, however, forced the industry to question everything it does. It’s put a focus on efficiency, new capabilities, and a rethinking of how we can develop strategies around technology to modernize the real estate industry and take advantage of the enormous financial and social opportunities it presents.”
The issues surrounding automated valuation models for farmland are no different than analyzing commercial real estate, the basis of Panknin’s article. Simply put, in order to achieve the goals of “holistic accuracy” we start with the core ingredients of each specific property and then apply the forces that affect value.
THE RECIPE FOR IDENTIFYING FARMLAND VALUE
The four core principles that effectively create real estate value are: utility, scarcity, effective purchasing power, and desirability. The four factors that dynamically affect real estate value are government (taxation, policies, and regulation), economics (supply and demand, commodity prices, rents), environment (climate, precipitation, elevation, topography, soils, transportation systems), and social or demographic influences. These are academic terms that translate into identifying determinants of farmland value. As rural land appraisers, we’ve developed a skill set in identifying the elements that both create and influence farmland value. These are a mixture of quantitative, qualitative, and external factors (like tariffs, changes in weather patterns, or taxation) that are regional, local, or property specific and are frequently difficult to capture for dynamic modeling approaches that typically use aggregated data to attempt to create credible farmland, valuation models.
USING ALL-PURPOSE FLOUR MAKES LOUSY BREAD
I learned a long time ago that all-purpose flour does not make good bread, the same way pulling aggregated data from assessor and MLS sources without analysis makes unreliable data. No one argues the recipe for good bread calls for flour ground from hard red wheat, not a variety of wheats dumped in the same bin, and likewise, the recipe for good data requires a specified quantity of observations, a quality assurance the information is well-vetted, and a heavy dose of pain-staking analysis.
What Panknin correctly points out is that while we don’t have all the answers to compiling the perfect predictive models, we can improve our process in compiling well-researched data that is vetted, verified and correctly segmented to represent the
components of the transactions we analyze to move toward a better end result in our models.
SUBSTANCE VS PROCESS
It took a lot of years for me to fully understand the significance of substance versus process. While compiling the substance, the ingredients, so to speak, the process, or the tools we use to collect and store the data, is equally important. If we spend the time breaking down the components of property-specific information, why wouldn’t we then input them into a system that allows us to consistently compile, analyze, and share the data in a meaningful way?
Panknin ends his article by saying this: We don’t often find a hammer in the garage and ask ourselves what we can build with it. Rather we decide that we want to build something and then go into the garage to figure out what tools we’ll need to accomplish the task. Just like the hammer, technology itself won’t make the real estate industry much better. Technology offers many tools with enormous potential.
At LandValue Solutions, we have built our technology around these beliefs. Panknin’s full article can be found here: https://www.propmodo.com/the-property-valuation-reckoning-is-imminent/
Ruby Miles Stroschein, MAI is the CEO and Founder of LandValue Solutions. She is a graduate of the University of Idaho with a Master’s Degree in Agricultural Economics and lives in Moscow and Elk River, Idaho. Ruby has completed several years of complex appraisal assignments in eminent domain, conservation easements, and litigation. She taught Farm and Natural Resource Appraisal at the University of Idaho as an adjunct professor for eight years and served on the Idaho Appraisal Licensing Board for 12 years. Ruby was the principal of Gem Valley Appraisal Service for over 30 years before turning the company over to her daughter, Sarah Miles, MAI who has been her business partner for 18 years.