Measurement of entropy in the assessment of homogeneity of areas valued with the Szczecin Algorithm of Real Estate Mass Appraisal

Aim/purpose – General real estate taxation is a process regulated, inter alia, by the Real Estate Management Act. It is intended to establish a tax base for real estate in the event of a change in real estate tax base. General taxation is one of several applications of mass valuation of real estate, which enables valuation of many properties at the same time and with a uniform approach. One of the methods of mass valuation of real estate already applied in practice is the Szczecin Algorithm of Real Estate of Mass Appraisal (SAREMA). One of the immanent features of general taxation and the algorithm itself is the division of a selected area into possibly homogeneous areas called taxing zones with-in the general taxation terminology and, more broadly, elementary areas, according to the nomenclature used in the SAREMA. The paper presents the results of the studies on the measurement of elementary areas homogeneity on the example of land plots located in Szczecin. It is important to assess whether the designated sub-areas of valuation cover properties similar to each other in terms of their specific characteristics. If so, it will help to obtain more accurate mass valuation results.

Design/methodology/approach – The paper proposes to use a modified entropy measure to establish whether the designated areas are homogeneous in terms of the specified properties of real estate. The database of real estate includes more than 1.5 thousand urbanised land plots located in Szczecin. The measurement of entropy will be preceded by the specification of elementary areas. The available methods include the application of an expert approach, under which land boundaries will be indicated by property valuers.

Findings – The main conclusion of the study is that a modified measure of entropy en-sures a better indication of the degree of indefiniteness of valued sub-areas and thus it offers a better way of supporting the delimitation of these sub-areas in comparison to the classical measure of entropy.

Research implications/limitations – The delimitation of valuation sub-areas constitutes an important element of mass valuation. Proper execution of this process enables obtain-ing much more precise valuations. An objective measure of homogeneity gives  a chance to compare different approaches to the creation of the above-mentioned sub-areas and to choose the best of them.

Originality/value/contribution – The main achievement of the study is a proposal to modify the classical entropy measure, thanks to which it better reflects the specificity of the assessment of homogeneity of the areas valued in terms of property market analysis.