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Options in Real Estate Valuation

Mark Pomykacz and Chris Olmsted

The Valuation Journal, 2014, vol. 9, issue 1, 72-93

Abstract: 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.

JEL-codes: G12 R32 (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:vaj:journl:v:9:y:2014:i:1:p:72-93