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Further, agency problems that influence CREF appraisals may directly affect the findings of these studies.
Therefore, it is virtually impossible to draw conclusions as to the accuracy of most CREF property appraisals in light of the fact that they are typically made on an interim basis in the time between the purchase and sale of a property.
To no one's surprise, published studies that examine the differences between appraisals of CREF properties and their actual selling prices have found significant differences between some of the appraised values and the selling prices of individual properties.
In terms of the reliability of CREF appraisals, acceptable levels of accuracy have never been established within the CREF industry.
In fact, large errors in interim appraisals would be of monumental concern to investors, particularly if they believed the source of the errors to be primarily nonrandom.(11) Of course, if appraisal errors were entirely random, they would tend to cancel each other out in a portfolio of properties of equal value, but CREF properties range in size from less than $1 million to more than $100 million.
In practice, most of the information used in appraising individual CREF properties is provided to independent appraisers by each commingled fund's manager.
One investor constraint on the behavior of managers of open-end funds is the ability of investors to withdraw from a CREF if it is believed that overall CREF portfolio value is overstated.
For example, although investors have limited means of knowing the actual extent to which CREF appraisals are influenced by agency problems, they can and often do hire their own independent appraisers to verify asset managers' appraisals.
In some instances, investors even hire independent appraisers to perform separate narrative appraisals that produce alternate value estimates of CREF properties.
Other constraints in place to inhibit parties involved in CREF valuations from attempting to influence the appraisal process are the professional and regulatory standards.
Other issues related to appraisals of CREF properties are: 1) the types of manager-initiated adjustments or updates made to independent appraisals; 2) the treatment of anticipated future closing costs in appraisals of unsold CREF properties; 3) the sensitivity of appraisals to the critical assumptions and particular methods used by an appraisal firm in the valuation process;(17) 4) the frequency and timing of both the in-house CREF valuation updates and the independent appraisals; and 5) the stability and smoothness of overall CREF returns as opposed to returns on other asset classes such as stocks and bonds.
Properties in open-end CREF portfolios are typically appraised by an independent appraisal firm at least once each year.
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