Modeling And Case Studies Approach With Spreadsheets On Real Estate Pricing

For all business organizations, product pricing is one of the core issues from the perspective of business decision-making. According to the neoclassical theory of the firm, a company could be considered as one independent single system. This system aims to achieve profit-maximizing by adjusting the quantity and price of its product, under the constraints of its own technology (endowment), product markets and factor market. The real estate business is more complex than other industries due to its long manufacturing cycle time and the uncertainty of its operations and profitability. Therefore, it is essential for real estate companies to obtain a balance among the product price, the cost of capital and opportunity costs. And it’s also necessary to adopt an optimal methodology as guidance for the product pricing.Based on the optimization theory, this paper analyzed the economic characteristics of revenue and cost related to real estate pricing, and then formed a mathematical function, which is called "objective function of product pricing decision". By using the Excel spreadsheet as a tool, this paper converted this function into a data model of real estate pricing. And by using the what-if analysis approach, this paper simulated the process of product pricing of small and medium sized real estate enterprises.The main procedure of this research is as follows:Firstly, applying the methods of normative analysis, this paper studied price mechanism and competition mechanism of the real estate market.Secondly, this research presented the economic profit as the primary goal in the pricing decision, and analyzed the nature of influencing factors to economic profit and the relations among those factors such as quantity, price, unit product cost, tax burden, capital cost, sales cycle, etc. From the perspective of the process of capital movement, this paper described the production process of real estate enterprises, which is a process of gathering, employing and transforming capital. Then, to minimize the cost of real estate product can be considered as to minimize the capital demand and the cost of capital. Based on the assumptions above, this paper generated a mathematical function for making pricing decision of real estate.Thirdly, this paper transformed this mathematical function into a data model by using Excel spreadsheet as a tool and chooses income statement as the data model’s form language. According to the changes of trading conditions and environment, this paper designed data models of real estate pricing for decision-making.Finally, this paper made an in-depth research of three case studies.The main results of the research are as follows.(1) To provide an effective tool for small and medium sized real estate enterprises to optimize its product pricing and to improve the efficiency of making appropriate decisions, this model can not only apply to real estate pricing, but also can extend the application into other products’pricing, of those with long production cycle.(2) The data model could be applied in the area of investment management. By comparing the different impact on profit due to the changes of discount rates, this model could assist investors to optimize decision making by finding out any arbitrage space among various investment opportunities.(3) This paper found out the relationship between price adjustment and the level of tax burden. The enterprises’product price adjustment could be affected by the ceiling level of tax burden. This finding is consistent with the cases in reality.