Feature article originally published in The Appraisal Journal Summer 2013 issue.
12 pages, PDF Download
This article looks at how options concepts in financial markets can be adapted for use in real estate valuation.
Real options valuation theory is well developed and often used in financial markets, but infrequently applied in real estate appraisal. Real estate presents several opportunities to employ real option valuation theories, including real estate purchase options, development and acquisition feasibility, bankruptcy, abandonment, and litigation.
Today, options theory could be employed whenever an appraiser advises a client about a future real estate decision over substantially different and incompatible risky choices. This article explains real options analysis and valuation theories as they apply to real estate, including financial option pricing models, the Black-Scholes-Merton model, real options analysis, binomial options models, and Monte Carlo simulation.
Mark Pomykacz, MAI
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