Valuation accuracy of external and internal property valuations in Germany

While all valuers are obliged to act impartially and transparently to reduce bias, the closer relationship between valuers and clients among internal valuations may raise additional concerns regarding the independence of the valuer and hence the objectivity of the result. This paper analyses how internal and external valuations differ in their ability to mirror market prices. The dataset for the analyses contained 4,805 commercial properties in Germany between 1995 and 2013. The first part of the analysis was a Market-Adjusted Valuation and Actual Sale Price Comparison, based on sold properties. It showed that a majority of both valuation types had a valuation error within the acceptable threshold of 15% but that external valuations were on average significantly closer to sale prices than internal valuations. Due to sample selection issues, a second analysis, called Actual Valuation and Fitted Sale Price Comparison, was carried out. Real transactions were used to derive hedonic prices that could be compared against valuations of held properties. The Heckman Correction was used to mitigate sample selection bias. The results showed that both valuation types produced a majority of observations within the set threshold but that external valuations were on average closer to sale prices than internal valuations.