Real Estate Appraisal and Transaction Price: An Empirical Evaluation of Alternative Theories

Mortgage appraisals are often required before a loan is approved. When information on the transaction price is available and when lenders (lenders) compensate appraisers for mortgage appraisals, a principal-agent problem may arise. The effect is that appraisers tend to overstate the true value of a property because they have an incentive to set the appraised value to be equal to the transaction price. An earlier paper by Gwin and Maxam (2002) examines this principal-agent problem. This paper offers an alternative theory that provides a different prediction. The alternative theory is predicated on the updating appraisal process ala Quan and Quigley (1991), and a signaling modification to Gwin and Maxam (2002). In addition, an empirical test to the theoretical moral hazard model postulated by Gwin and Maxam (2002) and the alternative theory is carried out using appraisal and transaction data from a lending institution in Singapore