FAQ's: What is the "Confidence Factor?"
The confidence factor is a measurement of the quality of the comparable sales data used in the analysis, and a measure of how well the subject property fits with the comparables. The Confidence Factor is a combination of two components, the Adjusted R Square and the Median Confidence.
Adjusted R Square The R Square is the basic measure of "goodness of fit," in regression analysis. As explained in the Appraisal Institute's Regression Analysis in Appraisal Practice seminar handbook, the R Square is the ratio of explained variation in the dependent variable to the total variation in the dependent variable. In other words, how much of the variation in the dependent variable (sales price) is "explained" by the variation in the independent variables (square footage, room count, lot size, etc.)
The Adjusted R Square is the R Square adjusted for the number of independent variables. The Adjusted R Square can be expressed as a percentage, with 100% indicating that the dependent variable (sales price), is completely determined (statistically) by the independent variables (square footage, room count, lot size, etc.)
Median Confidence The median value in a set is the "middle number," meaning that there are an equal number of values greater and lesser than that value. The Median Confidence, as developed by Valuation Management Systems, is an expression of the distance between the subject property and the median value, as regards each of the variables. This measurement is important because regression works best when the subject is "surrounded" by comparable data. If the subject property is very close to the median square footage of the comparable sales, for example, then there are approximately as many properties larger as there are properties smaller than the subject.
The Median Confidence calculation takes each subject variable (square footage, room count, lot size, etc.), and compares it to the median value of that variable in the comparable sales. That difference is expressed as a percentage of the median value. There is a median confidence percentage calculated for each variable, and also for the resultant value estimate (as compared to the median sales price of the comparable sales).
Confidence Factor The Confidence
Factor is an average of each of the Median Confidence percentages and the Adjusted
R Square percentage. The resultant Confidence Factor presents a helpful picture
of approximately how well the variables used in the model "explain"
the resultant sales prices, and how well the subject property's characteristics
fit with those of the comparable sales.