Exhibit 31.2

**CERTIFICATION**

I, Stephen B. Waters,certify that:

1.    I havereviewed this quarterly report on Form 10-Q of Davidson Diversified Real EstateIII, L.P.;

2.    Basedon my knowledge, this report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report; 

 

3.    Basedon my knowledge, the financial statements, and other financial informationincluded in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this report; 

 

4.    Theregistrant's other certifying officer(s) and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant andhave: 

 

(a)   Designedsuch disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this report is being prepared; 

 

(b)   Designedsuch internal control over financial reporting, or caused such internal controlover financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;

 

(c)   Evaluatedthe effectiveness of the registrant's disclosure controls and procedures andpresented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and 

 

(d)   Disclosed inthis report any change in the registrant's internal control over financialreporting that occurred during the registrant's most recent fiscal quarter (theregistrant's fourth fiscal quarter in the case of an annual report) that hasmaterially affected or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and 

 

5.    The registrant's othercertifying officer(s) and I have disclosed, based on our most recent evaluationof internal control over financial reporting, to the registrant's auditors andthe audit committee of the registrant's board of directors (or personsperforming the equivalent functions): 

 

(a)   Allsignificant deficiencies and material weaknesses in the design or operation ofinternal control over financial reporting which are reasonably likely to adversely affect the registrant's abilityto record, process, summarize and report financial information; and 

 

(b)   Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant's internal control over financial reporting.

Date:  November 13, 2008

/s/Stephen B.Waters

Stephen B. Waters

Vice President of DavidsonDiversified Properties, Inc., equivalent of the chief financial officer of thePartnership