What If's?

In Real Estate valuation, we constantly deal with uncertainty and risk. The “What Ifs” (housing prices fall, interest rates rise, expenses increase, etc) can wreck havoc on even an experienced home buyer and investor. With the advance of electronic spreadsheets and computer programs, we can now explore a myriad of what ifs quickly and easily with sensitivity analysis.

With an electronic spreadsheet, we can create a computer model/ algorithm which can go through the various calculations needed for valuation (preferably a discounted cash flow analysis) generating a forecasted operations statement and reversion statement. You input variables such as purchase price, financing terms, forecasted changes in expenses, rents, capital growth, and tax implications. By altering one variable and holding others constant, you see how sensitive the resulting estimate of value is to that variable.

For example, you can see how changing interest rates by intervals of .1% (or any desired amount) affect value (before tax, after tax, cash flow, total value). Though this is quite useful, rarely does only one variable change in a given situation. More likely, several variables will move in varying degrees. With sensitivity analysis, we can alter a host of variables to reflect possible situations in a form of risk analysis where value can be estimated under pessimistic, optimistic, and most probably situations. Simulations can be run to explore the range of possible investment values.

Any questions or for FREE customized Market Reports, automatic email updates on properties that fit your criteria, or Realtor Referrals, please EMAIL ME or call me at 734-478-9270. -Anwell Tsai