METHODOLOGY FOR CALCULATING COLLATERAL DISCOUNT IN THE VALUATION OF RESIDENTIAL REAL ESTATE FOR COLLATERAL PURPOSES

Tatiana Kasyanenko, Olga Buzu and Gabriel Sandulache

The Valuation Journal, 2020, vol. 15, issue 1, 39-71

Abstract: The article presents a technique for calculating the collateral discount, which the authors propose to apply in the valuation of residential real estate offered as collateral. This technique is based on the construction of a two-factor model, built by analogy with a certain model that is applied in lending secured with movable property (a sea vessel). The factors introduced into the model were selected by comparative analysis of various pricing aspects that are taken into account in the lending process. These are, first of all, the probability of successful debt collection and the level of liquidity of the property being valued, as these factors are the ones that minimize waste of time and cost in a bank’s effort to draw a preliminary conclusion regarding the possibility of successful seizure and sale of the collateralized residential property. The application of the proposed technique allows the employees of the bank’s lending department to have a formalized decision-making process regarding the grant of a loan and the discount rate - in fact, to do so without involving specialized valuation knowledge.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:vaj:journl:v:15:y:2020:i:1:p:39-71

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