An evaluation model for an effective risk assessment in the rent to buy property market

Abstract

Purpose In this research a model for the rationalization of the assessment in a rent to buy contract has been proposed, in order to contextualize the economic amounts involved in the negotiation according to the specific market risk of the area where the property is located. The paper aims to discuss this issue. Design/methodology/approach The model borrows the logical principles of operational research, in order to take into account the convenience constraints of the parties involved (seller and buyer) and to determine the minimum amount of the additional annual rent to be charged as down payment on the final sale price, compensating the investment risk. The procedure proposed for the risk assessment combines the discrete modeling of real option analysis and the exponentially weighted moving average method, in order to weigh appropriately the data available for the specific area in the analysis. Findings Considering the limit conditions of variability of the property market value at the time provided for the notarial deed, the proposed model returns two values (minimum and maximum) for a fixed contract duration and for a specific market area for the annual additional rent, which define the reference range to ensure the compliance with the convenience constraints of the parties involved. Practical implications In order to test the reliability of the developed methodology, the model has been implemented to the 24 “microzones” defined by the Italian Revenue Agency for the city of Bari (Southern Italy). The results obtained were then georeferenced, in order to create thematic maps of convenience for the subjects interested in the rent to buy formula. The developed maps define a useful support to be consulted in the negotiation phase between the seller and the buyer, allowing both to verify the investment conveniences within the limits of their disposable incomes and their needs. Originality/value The tabulated values of the down-payment amounts and the related thematic maps constitute a valid support for both the parties in the initial negotiation phase of the contractual conditions: in fact, if comparable data for the assessment of the market value and the market rent at the time of the stipulation of the contract are ordinarily available, the increase in the rent, to be charged as the annual down payment on the final purchase price, is generally entrusted to the contractual capabilities of the subjects involved, since there is no market reference that can direct an appropriate assessment.

A logical operating model for the assessment of the forced sale value in the judicial procedures

“…t-1). Volatility is then determined by using the exponentiallyweighted moving average (EWMA) method (Lowry et al, 1992;Lucas and Saccucci, 1990;Winters, 1960;Tajani et al, 2019), which, in the classic standard deviation formuladispersion indicator that expresses the riskiness of the investment -, allows for greater weight to be attributed to the information closest to the time of valuation. Accordingly, volatility is calculated by using Eq.…”

“…La volatilità è poi determinata attraverso il metodo exponentially-weighted moving average (EWMA) (Lowry et al, 1992;Lucas e Saccucci, 1990;Winters, 1960;Tajani et al, 2019), che nella classica formula della deviazione standard -indicatore di dispersione che esprime la rischiosità dell'investimento -consente di attribuire un peso maggiore alle informazioni più prossime al momento della valutazione. Pertanto, la volatilità è calcolata mediante Eq.…”

Alternative housing models for precariously housed older Australians

“…The tenants are generally then unable to secure finance to purchase at the end of the lease, meaning they may forfeit the 'option to buy' monies and be evicted (AHURI 2017c). The rent-to-buy market involves complex risk assessments (see, for example, Tajani, Morano et al 2020) that mean independent professional advice is recommended before tenants enter into contracts.…”

An Evaluation Model for the Optimization of Property Sales in Auction Markets

“…Volatility (σ ) -a fundamental parameter for ROA risk analysis -is determined by considering the change in revaluation/devaluation rates of the half-yearly quotations published by the Real Estate Market Observatory (OMI) of the Revenue Agency for the macrozone, the city and the intended use analyzed [29], and by using the exponentiallyweighted moving average (EWMA) method [18,19,28,30]. Once volatility has been obtained, the tree of scenarios can be constructed based on the binomial approach, considering as the evolutionary variable the change in the present value of cash flows of the investment (Y ), equal to the total of discounted rents received in the period of possession of the property (m − n) and any real estate revaluation/devaluation expected from the investment.…”