Flexibility and Real Estate Valuation under Uncertainty

9Resale Timing Decision: Analysis: Let’s See what happens when we apply the Tools of Flexibility Analysis to a Classical Investment Decision: when to sell the Property

LEARNING OBJECTIVES

• See how realistic simulation can be applied to a common practical decision;
• Understand the resale timing problem and the “stop‐gain” rule;
• Understand how to extend the time horizon of the DCF analysis;
• Learn how IF statements enable us to model decision flexibility;
• Understand “trigger” values for the stop‐gain rule;
• See how explicit recognition of uncertainty provides important new perspective on traditional DCF valuation.

OUTLINE OF THE CHAPTER

1. 9.1 The Resale Timing Problem
2. 9.2 Extending the Time Horizon of the Discounted Cash Flow Model
3. 9.3 IF Statements
4. 9.4 Trigger Value for Stop‐Gain Rule
5. 9.5 Value of Example Stop‐Gain Rule
6. 9.6 Conclusion

This chapter shows how we can apply simulation to obtain useful insights and guidance on an important practical problem. It demonstrates the “how” and “why” of flexibility analysis for real estate. It shows how we can do the analysis in a realistic setting, and the results demonstrate by example the value of flexibility for real estate management.

Along the way, we present two methodological additions to the traditional, single‐stream pro forma DCF analysis. These are:

• Extension of the time horizon in the DCF model; and
• Use of IF statements.

We demonstrate these additional tools in a very simple, concrete example. But they will be ...