The Difference Between Risk and Uncertainty in Valuation

The COVID-19 pandemic has rocked virtually every industry in the world, including the world of real estate appraisal. In this current volatile market, we all face some degree of uncertainty as we work to press our businesses on. Many amount these new circumstances to “risk,” and use the word synonymously with uncertainty. In appraisal, these two words mean very different things. 

So what is the difference between risk and uncertainty? And which word can we use to define these stressful times? Let’s take a closer look at both. 

Defining Risk

In an appraiser’s work, there are two types of uncertainty. We can see the first type in advance. We can calculate the odds of overcoming its hurdles. This kind of uncertainty is called risk. We use risk to measure the potential for economic gain or loss.

In your own operations, you can account for risk in a number of ways, including:

• Making cost-saving investments
• Making investments for market expansion
• Using current technologies to minimize bias or human error in analysis

There are several risk factors to be accounted for during the valuation process. One such factor is the possibility of the maintenance or development costs of an asset — these costs could be higher than the appraiser initially anticipates. Experienced appraisers understand this risk and know that it can be quantified with statistical techniques, like the use of an automated tool for determining different market outcomes.  

Successful business owners understand risk. They can see every possible outcome in advance of rolling the dice. Genuine uncertainty, on the other hand, is quite different. 

Appraisal Uncertainty

Genuine uncertainty can be a concerning concept for anyone in real estate appraisal. In uncertainty, we are able to recognize several possible outcomes, but not their probability of happening. An appraiser may estimate a busy season, but they can’t possibly account for every possible external factor. Valuation uncertainty can be caused by three factors:

Market Disruption

We don’t often plan for the fiscal year to account for massive disruptions like the coronavirus pandemic. We may account for market risk using the previously mentioned strategies, but they won’t help us stay on track if our market quickly becomes volatile. Uncertainty is nearly impossible to quantify, as available metrics for the valuation will likely only relate to the real estate market pre-pandemic. In the immediate aftermath of COVID-19, true prices and data will be unknown. 

Input Availability

Input availability uncertainty relates to the lack of relevant data, often caused by market disruption. In cases of input unavailability, appraisers have no choice but to rely on similar observable assets. This lack of objective evidence can make reporting extremely difficult and a sizable source of uncertainty.

Choice of Method or Model

Depending on the asset type, an appraiser may need more than one single method or model to estimate property value. These various methods may not always lead to the same outcome. Appraisers must select the most appropriate method for their assets, which can sometimes become a cause of valuation uncertainty. 

Responding to Uncertainty

Dealing with risk is pretty straightforward, but navigating through uncertainty isn’t as easy. However, this shouldn’t dissuade you from taking action to work through it. One of the best ways you can prepare for uncertainty is to aggregate. Open yourself up to as many streams of revenue as possible, both in clientele and in providing a wider range of services. You can do this by leveraging effective marketing tactics and using an appraisal management platform that enables you to maximize your work intake. 

Leveraging technology doesn’t just help you reduce your own business uncertainty, but it can also help to reduce uncertainty in your valuations. Valcre offers plenty of tools that can help you create more reliable reports, from reliable market analyses to the most up-to-date demographic data. 

These are uncertain times, but this uncertainty won’t last forever. Eventually, we’ll enter back into a less volatile market, in which we’ll be able to deliver clear valuation insights with little to no uncertainty. Until then, now is the opportunity to learn from our experiences surrounding COVID-19 and adopt new strategies for the next big market disruption.

Schedule a demo to see how Valcre can transform your business!

This article first appeared on the Valcre blog at valcre.com/blog/2020/7/16/the-difference-between-risk-and-uncertainty-in-valuation.