Decision Analysis
What does a game theory tree do?
Helps you figure out what decisions are in the interest of the other party and see what they are more likely to do (ex. not go international in the in-class assignment)
What are liquidated damages?
Liquidated damages are when there is a set amount of damages for breach written into a contract.
What is leverage?
When you buy a large value asset for a relatively small amount using a loan to create a larger return of profit for yourself.
Define Assets, Liability, and Equity.
Assests: Probable future economic benefit arising from a past transaction or event.
Liability: Probable future sacrifice arsing from present obligations.
Equity: What is left over?? lol that's how seitz defines it
What is the fundamental accounting equation?
A=L+E
What is risk aversion?
A person's tendency to avoid or take on risks based on factors like worth and company size
What is a cost-plus contract and what is a flat-fee contract?
CP: When you pay a contractor the cost of the materials plus an agreed-upon additional fee.
FF: When you agree upon a flat rate to pay a contractor and they are paid whatever excess is left over after materials are purchased.
How is real estate unique?
2) holding period
3) complexity of transfer
What is the difference between cash and accrual accounting?
Accrual counted as you EARN it (accounts payable and recievable)
What does a Statement of Cash Flows show?
Cash and cash equivalents over a period of time
What is moral hazard?
When a contract incentivizes a party to act to the detriment of another party (ex. car insurance incentivizing poor driving)
What is asymmetric information?
Information the other party may have that you are unaware of
What are the pros and cons of investing in Real Estate?
Pros: tax benefits, appreciation, equity build-up, cash flow, and passive income
Cons: not liquid, legal complexity, and management
What is the conservative bias of accounting?
It is that accountants hate estimating. This affects how intangible assets are accounted for and also affects contingent liabilities, judgment calls, and book values until you sell. It highlights the difference between the economic reality and an accounting reality.
Pros: interests are aligned
Cons: money and resources could be at risk
What is sensitivity analysis? Can you give an example?
Sensitivity analysis is when a small change in your assumptions changes the conclusion. An example would be if I assumed there was a 55/45 percent chance of an outcome, but if I change it to a 50/50 the outcome would likely be different.
Jenny is renovating her home. She is currently determining whether to pay the contractors on a cost-plus or flat-fee basis. What are the pros and cons of both?
Cost-Plus:
Pros: Higher quality materials, easier to modify
Cons: no incentive to spend reasonably on materials (can fix this by requiring Jenny's approval)
Flat-Fee:
Pro: easier to forecast spending
Con: hard to modify and no incentive to purchase high-quality materials (can fix this by adding in a provision with minimum quality materials)
Explain equity build-up and appreciation
Equity build up is when you have income (from tenant) paying your mortgage, which increases your investment and thus increases your equity on the home; Appreciation is when the value of an asset (typically a home) increases over time. Both increase your bottom line.
What does a balance sheet show?
What is the income capitalization equation?
Net operating income/current market value
Give an example of adverse selection.
Adverse selection is when high-risk individuals are more likely to enter into a contract. Examples: sick people are more likely to buy insurance, etc.
WOO! Great example!
What are the MAJOR things you should consider when contracting? (think about Ricardo)
DIEVUR!
-Dispute Resolution
-Incentives
-Enlargening the pie
-Verifiability
-Uncertainty and Risk Bearing
-Reputation
What are the four methods of appraisal?
1) Income Capitalization
2) Direct Sales Comparison
3) Cost Approach
4) Gross Rent Multiplier
What does an Income Statment Represent?
Reflects a change over time. Shows revenues and expenses.
Revenue--> decrease in equity
Expense--> increase in equity
What does a T-Account do?
Records single transactions to be put in one of the three sheets
Debit on left, credit on right