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To cite this article:
Kaklauskas, A.; Zavadskas, E. K. 2009. Theories of investment in property: use of information,
knowledge and intelligent technologies. Economics for the modern built environment. London:
Taylor & Francis. ISBN 9780415454247, p. 249-268.
Theories of Investment in Property: Use of Information, Knowledge
and Intelligent Technologies
A. Kaklauskas, E. Zavadskas
At first sight, the area of investment in property looks anything but complicated. However,
such attitude changes after a more thorough analysis of the issues related to this area. Recent books
and publications about the investment in property (real estate investment) are abundant, and certain
topics appear in more than one book. As an example, we will briefly list several typical topics
related to investment in property and repeated in many books: investing goals, comfort zone, real
estate values and trends, location, land use regulation, choosing investments (apartment complexes,
hotels, office buildings, shopping centres, industrial buildings, etc.), microlevel investment analysis,
macrolevel real estate investment issues (portfolio theory, the institutional landscape, etc.),
measuring investment performance, management of investment process, real estate development,
risk, appraisal techniques, valuation models, real estate transaction, buying techniques, negotiation,
forms of ownership available to investor (partnership, corporate ownership, syndication, land trusts,
limited partnerships), financing techniques (mortgage (second mortgage, adjustable rate mortgage,
fixed rate mortgage, reverse mortgage, balloon mortgage, assumable mortgage, adjustable-rate
mortgage), leverage, creative financing techniques), financing strategies (how to be at the right time
and at the right place, etc.), tax benefits, foreclosure, etc. Some issues related to investment in
property are detailed in this chapter.
Investment into a Building vs. Investment into a Built and Human Environment
Built environment is developed in order to meet most needs of residents. Human needs may be
physiological and social and related to security, respect and self-expression. People want their built
environment to have an attractive aesthetically and to be in an accessible place with well developed
infrastructure, convenient communications and good roads, besides the dwelling should be by
comparison cheap, comfortable, with low maintenance costs and sound and thermal insulation walls.
People also are interested in ecologically clean and almost noiseless environment, sufficient options for
relaxation, shopping, fast access to work or other destinations and good relationships with neighbours in
place of their residence.
It must be admitted that the most serious built environment problems (unemployment, vandalism,
lack of education, divorces, hooliganism, robberies, etc.) are not related to the direct physical structure
of the housing. Increasing investment to the development of social, and relaxation (athletic clubs,
physical fitness centres, and family entertainment centres) infrastructure, good neighbourhood and
better education of young people may solve these problems.
Investment, purchase and sale of a built environment, its registration are related to legal issues. The
legal system tries to reflect the existing social, economic, political and technical state of the country and
the requirements of market economy.
From a social perspective, built environment can affect the society, separate groups of people and
separate individuals. For example, poor dwellings are non-aesthetic, uncomfortable, can be sources of
various diseases or pose acute social problems (dirty environment, drinking, hooliganism, etc.). These
factors affect neighbours from various aspects. In some countries, low-income households (retirees,
large families, the unemployed) often cannot afford to pay for the utility services (heating, hot water)
without state support. In case of failure to solve this problem at the national level, the ruling party may
loose considerable constituency during the next election. Thus the problem is not only social but also
political. Similar problems occur when governments attempt to create better conditions for long-term
mortgage loans and must intervene into financial markets.
Built environment is not constructed in an empty space. During their lifecycle (brief, designing,
construction, maintenance, facility management, renovation, demolition and utilization) buildings are
affected by various micro, meso and macro level factors.
It is estimated that about 20% of the USA’s population suffers from asthma, emphysema,
bronchitis, diabetes or cardiovascular diseases and are thus especially susceptible to outdoor air
pollution (American Lung Association, 2005). Outdoor air quality plays an important role in
maintaining good human health. Air pollution causes large increases in medical expenses, morbidity
and is estimated to cause about 800,000 annual premature deaths worldwide (Cohen et al. 2005).
Much research, digital maps and standards on the health effects (respiratory effects, cardiovascular
effects, cancer, reproductive and developmental effects, neurological effects, mortality, infection and
other health effects) of outdoor air pollution, a premise’s microclimate, and real estate valuation, has
been published in the last decade. The above-mentioned and other problems are related to a built
environment’s air pollution, the premise’s microclimate, health effects, and real estate market value,
etc.
The provided examples allow making a conclusion that various stakeholders prefer the concept
“built and human environment” to the concept “built environment” usually. This proposition is
especially true when not only the built environment but also the surrounding micro, meso and
macro environment is considered as the research object.
Currently built environment is characterized by the intensive creation and use of information,
knowledge and automation (software, knowledge, expert and decision support systems, neural
networks, etc.) applications. It is commonly agreed that use of these applications would speed up
built environment processes significantly, would improve the quality of built environment and the
value of decisions made and would decrease the overall cost of a built environment’s life cycle.
Comfort zone
A comfort zone denotes that limited set of behaviors that a person will engage without
becoming anxious. A comfort zone is a type of mental conditioning that causes a person to create
and operate mental boundaries that are not real. Such boundaries create an unfounded sense of
security. Like inertia, a person who has established a comfort zone in a particular axis of his or her
life, will tend to stay within that zone without stepping outside of it. To step outside a person's
comfort zone, he must experiment with new and different behaviors, and then experience the new
and different responses that then occur within his environment. The boundaries of a comfort zone to
result in an internally rigid state of mind. A comfort zone may alternatively be described with such
terms as rigidity, limits or boundaries, or habit, or even as stigmatized behavior (Bardwick 1995).
For example, the following is a list of the information that real estate investor should strive to
learn about investment comfort zone (Quadreal 2007): geographic layout; street names; subdivision
names; zoning rules & regulation; local ordinances that affect real estate; price ranges by
subdivision or streets; rental market data and rents charged; future road plans; future utility plans;
future developments in the planning stages; local employment statistics; employment trends; major
impacts that will affect employment trends; the “how” and “who” of local government; “what”,
“how” and “who” of the local building department; school districts and how to get in to other
schools; bus and other local transportation routes; “what”, “who” and “how” of public records;
names of prominent business leaders in the community; sources for local financing. The investor
should to keep in mind that many of these factors change from time to time and thus a constant
review of the current circumstances is required.
Also build the investment techniques (the option agreement, the lease option agreement, wrap-
around mortgages and secondary seller-held financing, sweat equity, etc.) required. Investor can
find that investment will be short lived if he needs to rely on conventional methods of purchasing
and financing the properties that he find in his comfort zone. These techniques will become the
tools for building investment portfolio (Quadreal 2007).
Real Estate Investing and Portfolio Theory
Real estate investing involves the purchase of real estate for profit. Profits are accumulated
slowly by renting out properties in a cashflow method, or are generally improved and resold for a
capital gain. In addition, real estate investors may wholesale properties as a means to make profits.
The biggest factor in marketability of an investment is supply and demand. Leverage, or the ability
to borrow based on the value of the property, is probably the on of the greatest advantage. It is
much easier to finance real estate than any other product. While investing in most assets requires
the purchaser to have the full purchase price available for the asset, in real estate investing, one only
needs to have a fraction of the purchase price available (like 5%, 10% or 20%) as a down payment.
Therefore, real estate, although incredibly expensive, is still easier to buy than say, a piece of
industrial equipment of the same value. Real estate is an illiquid investment that needs maintenance
and taxes to be paid. A balanced investment portfolio has some liquid assets that can be quickly
converted to cash to sustain the real estate when its returns are not sufficient to pay its recurring
costs (RLI 2008).
Portfolio Theory originally developed by Harry Markovitz in the early 1950's, Portfolio Theory
- sometimes referred to as Modern Portfolio Theory - provides a mathematical framework in which
investors can minimize risk and maximize returns. The central plank of the theory is that
diversifying holdings can reduce risk, and that returns are a function of expected risk (Portfolio
theory 2007). The key result in portfolio theory is that the volatility of a portfolio is less than the
weighted average of the volatilities of the securities it contains (Portfolio theory 2006). The
volatility is the standard deviation of expected return on a security. The volatility therefore changes
with the period of times over which it is measured (Volatility 2007). The expected return on most
investments is uncertain, however it is possible to describe the future returns statistically as a
probability distribution (Expected return 2007).
An efficient portfolio is one that lies on the efficient frontier (Efficient portfolio 2007). The
efficient frontier describes the relationship between the return that can be expected from a portfolio
and the riskiness of the portfolio. It can be drawn as a curve on a graph of risk against expected
return of a portfolio. The efficient frontier gives the best return that can be expected for a given
level of risk or the lowest level of risk needed to achieve a given expected rate of return (Efficient
frontier 2007). An efficient portfolio provides the lowest level of risk possible for a given level of
expected return. If a portfolio is efficient, then it is not possible to construct a portfolio with the
same, or a better level, of expected return and a lower volatility. An efficient portfolio also provides
the best returns achievable for a given level of risk. If a portfolio is efficient it is not possible to
construct a portfolio with a higher expected return and the same or a lower level of volatility with
the securities available in the market, which excludes risk free assets (Efficient portfolio 2007).
Investors can reduce risk, and improve the level of risk relative to return, by diversifying their
portfolios. The key to diversification is to choose investments whose prices are not strongly
correlated. Firstly, investing in different sectors, geographical regions and classes of security
improves diversification: the values of shares, bonds and pieces of real estate will be more
correlated with each other than with investments of completely different types (Diversification
2007).
Life cycle portfolio models are designed to identify optimal savings and portfolio policies over
the lifetime of investors. The standard portfolio theory introduced by Markowitz (1952) is static in
nature, since it explores investment decisions for only one period. A more realistic setting must
account for the multiperiod dimension of the portfolio choice problem. Only under very specific
circumstances, the optimal portfolio structure is time invariant. In this special case, a one-period
optimization suffices to characterize the optimal portfolio choice also in a multiperiod environment.
Under more general conditions, however, investors will restructure their portfolios in reaction to
changes in income, the accumulated wealth and the investment opportunity set. This possibility to
adjust the portfolio composition affects the initial investment choice (Wallmeier and Zainhofer
2006).
Sufficient software items and intelligent systems are developed for Real Estate Investment.
Several are briefly described further.
Real Estate Offer Generator (2007) is a real estate software that calculates the offer price for a
rental property. Generator can help users to buy properties that make positive cash flow. The
software uses an easy-to-use interface in order to help investors calculate the Net Operating Income,
create the various offers and initial offer letter, and calculate the cash flow and projected cash flow
for each of their options. The software allow professional (and amateur) investors to gain a strong
advantage in real estate investments and move on a solid mathematical basis.
The classical Markowitz-Sharpe optimization model for investment portfolios gets applicable in
practice as Real Estate Offer Generator (2006). The software allow customer to import market data,
define groups of assets, specify legal and market constraints and then find the optimum portfolio
composition.
Real Estate Notebook (2007) can help real estate investors analyze and organize investment
properties. The software performs calculations crucial to property analysis including mortgage
amortization, total expenses, return on investment, net operating income, depreciation and many
others. Real Estate Notebook can store all analyzed properties for later viewing or reporting based
on criteria you specify. The software includes a unique portfolio reporting feature that shows the
performance of your real estate portfolio as a whole and a charting feature for quick visual head-to-
head analysis of properties.
Software for real estate investment (2007) produces projections and presentations of up to 20
years for office buildings, industrial buildings, shopping centers, apartments and mixed-use
properties. Customer can forecast commercial revenue stream in detail, as well as operating
expenses, pass-throughs, financing, cash flows, tax liability, resale, rates of return and partnership
allocations. Software for real estate investment (2007) also released two optional add-on products
that allow to compare multiple investment-property scenarios and to perform portfolio analysis.
Real Estate Tracker (2007) was created to help customer make intelligent, accurate choices for
residential investment properties and integrate real estate portfolio with a tool to track customer
income and expenses in an easy to use budget tracker. Real Estate Tracker is an online property
investment tool designed by investors for investors to empower customer with the information will
need to leverage return on investment and accurately track real estate cash flow over time. Real
Estate Tracker (2007) can help to identify the best properties to buy, identify when the right time is
to sell or when do a tax-deferred exchange, when to raise rent, and alert when customer should pull
equity to purchase new investments.
Mortgage and e-Mortgage
Mortgage is an instrument for lending money on real estate. The property is pledged as security
for the loan, and the lender has the right to take over the property if the borrower defaults on the
terms of the loan. Mortgage derives from two French words meaning dead pledge, because when
the loan has been repaid, the mortgage is considered void or dead (Grass 2007).
There are many types of mortgage loans. The two basic types of amortized loans are the fixed
rate mortgage (FRM) and adjustable rate mortgage (ARM). In a FRM, the interest rate, and hence
monthly payment, remains fixed for the life (or term) of the loan. In an ARM, the interest rate is
fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down
to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the
borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult
to obtain. In most scenarios, the savings from an ARM outweigh its risks, making them an attractive
option for people who are planning to keep a mortgage for ten years or less. Additionally, lenders
rely on credit reports and credit scores derived from them. The higher the score, the more
creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high
scores. Lower scores indicate higher risk to the lender, and lenders require higher interest rates in
such scenarios to compensate for increased risk (Patrick 2007).
There are essentially two types of legal mortgage: a mortgage by demise and a mortgage by
legal charge. In a mortgage by demise, the creditor becomes the owner of the mortgaged property
until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a
conveyance of the property to the creditor, with a condition that the property will be returned on
redemption. This is an older form of legal mortgage and is less common than a mortgage by legal
charge. In a mortgage by legal charge, the debtor remains the legal owner of the property, but the
creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take
possession of the property or sell it. To protect the lender, a mortgage by legal charge is usually
recorded in a public register (Mortgage 2007).
Leece (1997) reviewed recent developments in the design and innovation of mortgage
instruments in the UK, from the early to mid-1990s. Rasmussen et al. (1997) presents a more
expansive view of reverse mortgages as a financial tool for tapping housing equity for various
purposes and at various stages in the life cycle. Dyk (1995) examine the mechanisms used since the
1970s to finance social housing in Canada. He demonstrates that direct government assistance has
proven to be the most cost-effective mechanism. Experimentation with alternative mortgage
instruments such as the graduated-payment mortgage and the index-linked mortgage has also been
central to the attempt to minimize subsidy and financing costs. Dhillon at al. (1990) evaluate the
choice between 15-year and 30-year fixed rate contracts in the USA and estimate a simple profit to
represent this choice. Lam at al. (1998) developed a model for financial decision-making which
provides a method of solving borrowing decision problems. Leece (2000) estimates reduced form
credit demand equations that reflect the interactions between the choice of mortgage instrument, the
lessening of mortgage rationing and liquidity constraints and the demand for housing debt. Most of
these studies have concentrated on single objective decision-making.
The housing finance systems differ greatly from country to country. As Renaud (1999) stated,
there are profound differences among the 180 developed and developing countries that are now
members of the World Bank. The advanced housing finance systems can be found in OECD
countries. Renaud (1999) show that, these systems grew out of two main traditions: Anglo-Saxon
systems where the building societies of the UK and the savings and loans from the US are mutual
forms of housing finance. There is also the mortgage bank tradition of continental Europe where
term funding was mobilised through bond markets.
There are a wide and growing literature on the choice of housing investment instruments. This
mainly concerns the econometric estimation of the demand for fixed rate mortgages compared with
adjustable rate mortgages. There is also an amount of empirical work on the mortgage choice
between the conventional annuity mortgage and payment via saving in a diversified portfolio of
assets.
When a homeowner defaults by failing to make payments on his or her mortgage, the bank or
financial institution that holds the mortgage note may foreclose on the property. Foreclosure gives
the legal ownership of a property to the bank to allow the bank to recoup its investment. Foreclosure
proceedings vary by state but usually involve court appearances to ensure the foreclosure is
warranted. Pre-foreclosure sale can allow a defaulting borrower to sell the mortgaged property to
satisfy the loan and avoid foreclosure. Foreclosure sale following foreclosure. The proceeds of the
sale are used to pay the mortgage debt, with any excess going to the mortgagor (the property owner)
(Schwartz, 2007).
In general terms the main participants in a mortgage are creditor, debtor and other participants
(mortgage broker, financial adviser). Creditor has legal rights to the debt secured by the mortgage
and often make a loan to the debtor of the purchase money for the property. Typically, creditors are
banks, insurers or other financial institutions who make loans available for the purpose of real estate
purchase. The debtor or debtors must meet the requirements of the mortgage conditions (and often
the loan conditions) imposed by the creditor in order to avoid the creditor enacting provisions of the
mortgage to recover the debt. Typically the debtors will be the individual home-owners, landlords
or businesses who are purchasing their property by way of a loan. Due to the complicated legal
exchange, or conveyance, of the property, one or both of the main participants are likely to require
legal representation. Because of the complex nature of many markets the debtor may approach a
mortgage broker or financial adviser to help them source an appropriate creditor typically by
finding the most competitive loan (Patrick 2007).
Clearly, the Internet is poised to have a significant impact on the real estate capital markets,
serving primarily as a new platform for the delivery of data and services. Through on-line mortgage
firms, real estate finance seekers can easily find information about mortgages, rates, fees, duration
and upcoming offerings. Closing a deal is still a traditional transaction. In order to solve real estate
finance issues more efficiently virtual loan and financing markets are created. Developers, brokers,
investors and lenders are involved in these activities. These virtual loan and financing markets
contain real estate software and intelligent systems that facilitates it activities. When considering
applying for a loan with a mortgage company, an investor should determine the following: interest
rate, time required for approval and closing the deal; loan service ease; familiarity with and
perceived professional competencies of the loan staff. After a lender’s selection a mortgage package
is required for submission with the mortgage application so that the lender can approve it. The
mortgage package contains many items: e.g. a mortgage application listing the amount of loan
requested, personal financial data of the borrower, the borrower’s job history, real estate to be
purchased, and the agreed sales price. Further it contains a verification of employment and salary;
credit checks; real estate appraisal; verification of bank deposits and/or loan amounts, etc. There are
many on-line mortgage brokers. Though many consumers are researching loans on-line, few are
closing loans through the Web.
One of the most important goals of a potential home buyer is to find the best possible variant of
credit. It can be claimed that discovery of the best possible loan equals to discovery of the best
dwelling for lower income households, who not only become home owners but also assume a
serious financial commitment. Types of loans are abundant, and search for and assessment of all of
them is a rather complicated process for the consumer. The so-called sector of intermediaries deal
with these issues; their aim is to put in touch those who demand and those who offer loans. It
usually costs big money to the person who searches for a rational loan life cycle. Such process of
search for loans and filing of applications for them includes human and „bureaucratic” expenditures
and increases the cost several times compared to e-loan.
Some companies are already offering online services, which allow clients to search for and get
loans from numerous alternative creditors. By sending queries, they can get comparisons of interest
rates and charges, and the most appropriate variant can be selected by a mere mouse-click. The loan
is perceived as a commodity, and its selection is primarily based on determination of buyer’s (who
seeks a rational loan life cycle) needs and finding the seller (who can supply the loan) who meets
the needs best. This process is absolutely internet-friendly and is more efficient and effective than
the services of traditional agents. In order to be able to compare conditions offered by various credit
suppliers easier, it must be granted that the information provided by the suppliers is as precise as
possible and unified nationwide. Otherwise, if one of the loan suppliers provides incorrect or
incomplete data about the offered loan package, a consumer can be mislead and the selected loan
can be not the most rational.
Explicit and Tacit Knowledge in a Real Estate Investment
By finding, capturing, and sharing explicit and tacit knowledge, investors can significantly
improve results. On of the main role of explicit and tacit knowledge management in real estate
investment is sharing best practice. Throughout the world there are many examples of the adoption
of the best practice (investing process, appraisal services, brokerage, consulting, insurance,
matching/listing services, mortgages, project development, real estate finance, real estate’s
transaction process, etc.) by the major players in real estate investment.
Explicit knowledge is comprised of documents (investment appraisal, feasibility study of an
investment project, balance sheets, buy-sell agreements, insurances, market analysis, contracts,
declarations, etc.) and data that are stored within the memory of computers. This information must
be easily accessible, so that an investor could receive all the necessary knowledge without
disturbances. Explicit knowledge is information that is widely used in information technologies.
Knowledge is the integrated sum of physically intangible resources, the bigger part of which is
tacit: skills, competences, experiences, organizational culture, informal organizational
communication networks and intellectual capital of an organization. It is frequently believed that
the utmost knowledge resource leaves the organisation at end of each working day in the heads of
employees. Capturing the tacit knowledge of individuals in a way that can be leveraged by
companies is perhaps one of the biggest challenges in real estate investment. The main investor
knowledge is tacit. The creation and distribution of tacit knowledge requires creativity and
competence. Tacit knowledge is a mixture of informal and non-registered procedures, practice,
skills, deliberations, subjective insight, intuition and judgment that investor acquire by virtue of
their experience and expertise. This knowledge is vitally important because it defines the abilities
and experience of investor. Tacit knowledge represents an important intellectual resource that
cannot easily be duplicated by competitors. Tacit knowledge must be converted into explicit
knowledge so that it can be recorded. Recorded knowledge is static and can soon become outdated.
Innovative organisations establish an environment where knowledge is continuously created,
captured and disseminated.
The transfer of tacit knowledge is unverifiable and requires face-to-face contact, creation spatial
nearness significant. Experts can share information about a current investment issue, problem, or
topic through meetings, workshops, seminars, video conferencing, e-mail, intranet based discussion
groups, extranets, telephone, working on joint projects, coffee conversations, canteen discussions,
brainstorming sessions.
Different knowledge capture techniques (interview, on-site observation, brainstorming, protocol
analysis, consensus decision making, nominal-group technique, Delphi method, concept mapping)
can be used to capture tacit knowledge and writing down tacit knowledge in the form of investment
appraisal, feasibility study of an investment project, buy-sell agreements, market analysis, contracts,
methodology. Once knowledge is captured or codified it’s no longer tacit.
Best Practice in a Real Estate Investment
Much more attention has to be paid to knowledge creation and its distribution in the form of the
knowledge and data bases of best practice, and this has recently begun in the most progressive
activities of real estate investment. Throughout the world there are many examples of the adoption
of the best practice by the major players in real estate investment. Some of their works are presented
in the following list: comfort zone, land use regulation, choosing investments, investment analysis
at microlevel, macrolevel real estate investment issues, measuring investment performance,
management of investment process, real estate development, risk, appraisal techniques, valuation
models, real estate transaction, buying techniques, negotiation, forms of ownership, financing
techniques, financing strategies, etc.
Search, storage, management and improvement of the best practice, and the best practice
knowledge and data bases created on their basis, is one of the newest priorities of real estate
investment in most advanced countries. Comparative analyses of the best practice are becoming
more popular in the real estate investment. Comparative analyses are based on the analysis of the
best examples of services available to clients. On the basis of comparative analysis, certain
recommendations are formed, indicating how to provide services of higher quality and how to better
serve the needs of clients. Comparative analyses provide the possibility to quickly and efficiently
understand and apply the methods, which could help to achieve the quality of client service at a
world-class level.
The best practice in the real estate investment is obtained in different ways, e.g. applied research,
wisdom and experience stored by practices, experiences of clients and other stakeholders, and
opinion of experts, etc. Databases and knowledge bases of the best practice are knowledge-
obtaining tools, which allow one to save a lot of time, provide information on the best real estate
investment practice in different forms (studies, reports, agreements, market analysis, contracts,
declarations, e-mail messages, slide presentations, text, video and audio material).
Stakeholders most often are trying to achieve different economic, comfort, technical,
technological, social, political and other aims. Different means could be used to achieve them.
Some aims are not so easy to be achieved, and others might require more expenses. The best
practice allows one to not limit oneself only to the implementation of economic aims; it creates
conditions to reach a higher level and realise, from what perspective this practice was named as the
best one. The main problem of many best practices is the way they are presented, i.e. they are
suggested, by not taking into account certain situation.
Comparative analysis systems of the best practice help investors to determine directions of
priority for their increase in activity efficiency and ways of determining achieved progress,
measuring investment performance which allow one to compare the performed investments with
existing investments; as well as, determining the spheres that are lagging behind and suggest
theories and practices of investment in property to eliminate these gaps. Modern investors know
how to use the possibilities of a comparative analysis, and therefore decrease their expenditure and
increase competitiveness.
Information gathering and comparison intelligent agents
One of the major problems in Web-based information systems is to find what you want. The
number of alternative real estate investment products and services on the Internet are in the
thousands. How can customers find the rational investment products and services on the Internet?
Once investment product or service information is found, the customer usually wants to compare
alternatives. There are a specific class of information gathering and comparison intelligent agents:
search on hypertext files by agents, search alternatives on databases, alternative search and tabular
comparison, comparison of alternative products and services from multiple malls, search and
multiple criteria decision-making.
It may be expensive for brokers and users to find each other. On the Internet, for example,
thousands of products are exchanged among millions of people. Brokers can maintain databases of
user preferences and supplier (i.e. provider) advertisements, and reduce search costs by selectively
routing information from suppliers to users. Information gathering agents, called worms and
spiders, are used to gather information about the contents of the Internet for use in search engines -
are consuming quite a lot of bandwidth with their activities. Information gathering agents can
reduce the waste of bandwidth. This reduction is achieved by such things as:
- Using results and experiences of earlier performed tasks to make future executions of the same
task more efficient, or even unnecessary. Serious attempts are being made where agents share
gained experience and useful information with others.
- Using the "intelligence" of agents to perform tasks outside peak-hours, and to spread the load
on the Internet more evenly. Furthermore, agents are better at pinpointing on which hours of
the day there is (too) much activity on the Internet, especially since this varies between the days
of the week as well (Hermans 2000).
The authors have developed Cooperative Integrated Web-Based Negotiation and Decision
Support System for Real Estate (Kaklauskas et al. 2005). Proposed Web-based Intelligent DSS for
Real Estate can create value in next important ways: search for real estate alternatives, finding out
alternatives and making an initial negotiation table, multiple criteria analysis of alternatives,
negotiations based on real calculations, and determination of the most rational real estate purchase
variant.
e-Brokerage and e-Transactions
Under the traditional system, the real estate agent offers a package of services: showing real
estate, advising sellers on how to make the real estate more marketable, assessing current market
conditions, providing information about real estate values and neighborhoods, matching buyers and
sellers, negotiating the sale price, signing contracts, arranging for inspections, and assisting with
closings, and so on.
The Internet and intelligent technologies can disaggregate the above services: the Internet
searches for real estate, finds alternatives and prepares comparative tables, databases that provide
information about real estate, their values and neighborhoods, match buyers and sellers, negotiate
the sale price, assist with real estate selection, and lender selection, provides smart software for
boilerplate contract’s language, and personalized websites that manage complicated transactions.
Brokers usually work for a commission, acting as intermediaries between buyers and sellers.
Brokers are involved in matching, negotiating, and contracting. In general, sellers and renters set
preliminary prices and these are then negotiated. However, direct negotiations are sometimes
undesirable or unfeasible.
Many of the new investment in property portals make economic sense in that they make life
better (cheaper or faster) for somebody. The greatest real estate opportunity for big profits appears
to be in brokerage (both leasing and sales). Brokers whether human or electronic, can address the
following five important limitations of privately negotiated transactions:
Real estate search costs. The residential brokerage system already has databases in place
with shared listings, making transitions to a Web based system for the sharing of
information fairly and this is straightforward. Brokers can maintain Multiple Listing
Services and reduce search costs by selectively routing information from sellers or renters to
consumers and by matching customers/clients with residential buildings. Brokers with
access to a customer’s preference data can predict demands. Some brokers already offer
such services.
Lack of privacy. Either the buyer or seller may wish to remain anonymous or at least to
protect some information that is relevant to a trade. Brokers can relay messages and make
pricing and allocation decisions without revealing the identity of one or both parties.
Incomplete information. The buyer may need more information than the seller is able or
willing to provide, such as information about a building’s quality and the market value. A
broker can gather building information from sources other than the building’s seller, e.g.
independent evaluators.
Risk. The broker may accept responsibility for the behaviour of parties in transactions that it
arranges and act as an inspector on his/her own.
Ham and Atkinson (2003) focus on five key aspects of the home buying and selling process and
discuss barriers to transformation and changes in law and regulations for each:
1. Improving computerized access to and accuracy of credit reports by standardizing reporting
data to allow for one-stop correction at all credit bureaus and requiring more accountability
for accurate reporting of credit history;
2. Facilitating computerized shopping for mortgage interest rates by tandardizing forms and
eliminating protectionist rules that favor in-state bricks-and-mortar lenders;
3. Unbundling the functions of real estate agents by encouraging competition for brokerage
and listing services and disclosing alternatives to buyers and sellers;
4. Streamlining the recording process to cut costs and reduce risks associated with incomplete
or inaccurate land records by establishing electronic recordation systems;
5. Reducing the costs and paperwork associated with the settlement process by encouraging
digital signatures and online settlements.
Many buyers and sellers hire professional agents as the first step in making a sales deal in the
real estate market. The agents perform numerous functions: they advice the seller on making its
object for sale more attractive for the market, they help to prepare and collect various documents,
they represent the client’s interests in the negotiations on the price and they guide him/her through a
number of mandatory phases of a real estate deal until moving into the new home. Although these
services are really useful, most buyers and sellers claim that the primary reason to hire an agent is to
find a suitable dwelling or a buyer/seller. The services of a real estate agent are charged as a
commission fee, which is paid by the buyer or the seller and usually makes about 6% of the deal’s
value. Usually, the seller pays all 6% to its agent, who, in turn, offers part of the amount to another
agent who found the buyer (if the buyer is not represented by any other agent, the seller’s agent
retains all 6%). Information, knowledge and intelligent technologies can reduce these expenditures
considerably. Broader application of IT could make prerequisites for a buyer to select only the
desired services of an agent, and to leave the remaining services for intelligent technologies.
Online search for home or mortgage also saves the consumer’s time; a consumer who makes a
search using other than web-based means wastes more time undoubtedly. Those real estate buyers
who search in internet can view considerably more potential objects than consumers who use the
services of a regular agent. Increased use of IT should also influence the standard commission fee
(6%), i.e. the fee which is more related to culture and tradition than is based on market logics.
Agents provide valuable services, and many buyers and sellers will always prefer services of an
agent who offers a full service portfolio. However, it must be clients and not the agent who should
decide what services to buy.
A website of a notary could specify all documents that are needed to complete the deal and
which would be available for thorough analysis of all deal’s stakeholders. Each document could be
signed by a digital signature and sent via electronic means, thus saving time and money which
would be needed to organize a meeting. Implementation of this process requires changing of laws
and revocation of the mandatory participation of lawyers in the process of deal finalisation.
Although the client has a right to select its own lawyer, this action only increases the client’s
expenditures anyway. A transparent and unified e-signature system is required for this purpose.
Strict identification of users who use e-signatures should be granted.
The authors have developed Real Estate’s Market Value and a Pollution and Health Effects
Analysis Decision Support System (Zavadskas et al. 2007). Developed System can create
significant value for e-Brokerage and e-Transactions.
Project Development
Many new laws and practices (such as environmental impact reviews, historic preservation
requirements, growth controls, sewer moratoriums and impact fees, etc.) served to slow the
development process and add to the costs of real estate development. Developers find themselves
increasingly involved in public relations campaigns and public policy initiatives, working with local
residents, business and civic groups, community leaders and government officials to have projects
approved by agreeing to pay a greater share for public facilities and amenities. They also are busy
finding new ways to address neighbourhood concerns and mitigate the perceived negative effects of
proposed development. All of which might be decided more easily by using project development
Web sites.
The full-service needs of large projects are now being met by a new generation of Web sites that
integrate virtual community creation, on-line collaboration and support services to developing an
environment in which the whole process from the design stage to the facility management process is
running smoothly. These Web sites bring together investors, designers, economists, building
material manufacturers, suppliers and contractors and mortgage brokers involved in project
development. Some developers, construction firms and contractors have their own specific, project-
linked Intranets.
In order to increase project development’s efficiency various software, expert and decision
support systems are used. One such computer software system is Commercial/Industrial
Development Software. This software performs a complete project cost analysis for any new
commercial income property. It also provides the developer with an excellent budget ‘pro forma’
for presentation to a lender, partner or client. The report includes a project summary and overview,
financing and leasing information and a pro-forma operating statement and resale projection. The
report summarises land, development, architectural, financing, construction and lease-up costs.
Developers, contractors, lenders and others who will be involved in the construction or rehabbing of
a commercial, industrial or multi-unit residential income property use this software. Interested
parties often use this program to analyse the development phase, and then also use Real Estate
investment analysis software to project the performance of the property over time. This software
allows one to produce a comprehensive 10-year projection for any type of residential or commercial
income property and to construct anything from a simple and straightforward analysis to a highly
sophisticated investment scenario. This software is devoted to all who deal with commercial or
residential income properties: individual and institutional investors, brokers, appraisers, lenders,
attorneys, accountants, portfolio managers, financial planners, architects and developers, etc.
Real Estate’s Transaction Process and Investment Multiple Listing Service
Steps in a real estate transaction process are represented by the example of residential
transactions. The real estate transaction process can be divided into five stages: listing, searching,
evaluation, negotiation, and closing transactions. Transaction costs will be reduced directly through
a reduction in underwriting costs as appraisals, environmental reviews, title insurance, and other
vendors are efficiently contracted and managed through the Internet. Faster and higher-quality
information flow between brokers, owners, lawyers, vendors, lenders, and other participants in the
transaction process will reduce costs.
A seller may place information about a real estate intended for sale in various real estate-for-
sale databases called Multiple Listing Service (MLS). Real estate-for-sale databases are operated by
the local real estate’s broker-board and on the basis of such databases clients can very quickly find a
house they want. MLS are primarily financed by the sellers, either from the commissions they pay
when they list a house with a real estate broker or directly to the maintainer of the site. The service
lists of real estate for sale and data on sales is made by brokers. Statistical data regarding listings,
sales and data about the market and information on the trends are also often provided. MLS data is
essential for the professional real estate agent and the appraiser who wants to offer clients a wide
variety of available properties and current market data. MLS, in most areas, represents the vast
majority of properties offered for sale. The MLS does an efficient job of quickly selecting specific
types of sales in a specific area from the hundreds and thousands of recorded sales. As a rule, sellers
are trying to highlight the positive aspects of the house and suppress drawbacks and defects.
After finding all the possible alternatives they should be assessed. The real estate needs to be
assessed because each buyer has a different understanding about the quality of the real estate. The
buyers also pursue their own specific goals. For instance, a buyer wants to have a relatively cheap
and comfortable house with low maintenance costs plus, good thermal and sound insulation of the
walls and a good external aesthetic appearance of the house. Furthermore, he/she desires to have an
ecologically clean and quiet living surrounding with good relaxation and shopping facilities, good
neighbours and excellent transport connections to drive to work or elsewhere. The list of goals
pursued by the buyers can be extended further. Each buyer having fully attained all their goals
believe in the utmost efficiency of a house. In this vein, Web sites such as Virtual Home Tours
(www.hometours.com) offer additional information about houses in the form of a virtual walk-
through. Such virtual promenades save both broker’s and potential buyer’s time and help the buyer
to make a decision on whether or not to take an actual look at the house.
Real estate e-negotiation involves process, behavior and substance. The process points to how
the stakeholders negotiate (context, tactics, stages). Behaviours refer to the relationships among
stakeholders, the communication between them and the styles they apply. The substance points to
what the stakeholders negotiate over (agenda, interests, options, agreement).
Legally a real estate’s ownership is transferred by giving the real estate’s deed to the buyer and
closing is usually handled by a third party (e.g. lawyer or the title’s company) that both sides trust,
although who that is differs from jurisdiction to jurisdiction. The Property Transaction Network
(www.theptn.com) is already offering an “Electronic Closing Table” on which the real estate
transaction can be completed on-line. This ’Table’ provides a secure area in which all transactions
participants (i.e. real estate brokers, insurers, title companies and escrow representatives) may
safely exchange documents.
At present the developed MLS don’t allow for the performance of the following functions:
multiple criteria analysis of alternatives (priority, utility degree and market value of the analysed
real estate alternatives), negotiations and determination of the most rational real estate purchase
variant based on real calculations.
The Real Estate’s Market Value and Pollution and Health Effects Analysis Decision Support
System (Zavadskas et al., 2007) and the Cooperative Integrated Web-Based Negotiation and
Decision Support System for Real Estate (Kaklauskas et al., 2005) developed by the authors create
conditions for e-listing, e-searching, e-evaluation, e-negotiations, and e-execution and above
functions. For example, Real Estate’s Market Value, Pollution and Health Effects Analysis
Decision Support System consists of a Market Value Analysis, Air Pollution, Premises
Microclimate Analysis, Health Effects, Voice Stress Analysis, Cooperative Decision Making and
Multiple User Subsystems.
Neural Networks, Expert and Decision Support Systems and their Integration
Expert system is a computer program or set of computer programs that contains a knowledge
base and a set of rules that infer new facts from the knowledge and from the incoming data and are
used to help solve problems in certain areas. Moreover the system performs many secondary
functions, as an expert does, such as asking relevant questions, explaining its reasons and the like.
The degree of problem solving is based on the quality of the data and the rules. Expert systems
today generally serve to relieve a ‘human’ professional of some difficult but clearly formulated
tasks.
Decision support system is an information system that stores and processes information and data
from various sources. By using different mathematical and logical models it provides the
decisionmaker with the information necessary for analyzing, compiling and evaluating possible
decision alternatives, making decisions and effecting the output and storage of the obtained results.
Therefore, the decision support system, which can be based on the data accumulated from different
sources, should enable consumers to transform a huge amount of unprocessed data into information
necessary for the analysis of a particular problem and for further decision-making. DSS provides a
framework through which decision-makers can obtain the necessary assistance for decision through
an easy-to-use menu or command system. Generally, a DSS will provide help in formulating
alternatives, accessing data, developing models and interpreting their results, selecting options, or
analysing the impacts of a selection.
Neural network is a method of computing that tries to copy the way the human brain works. A
group of processing elements receives data at the same time and links are made between the
elements, as repeated patterns are recognized (Oxford 1996).
Many various-purpose neural networks, expert and decision support systems can be used for
investment analysis, investment performance, portfolio analysis, management of investment,
comfort zone, land use regulation, real estate development, risk, valuation, real estate transaction,
negotiation, financing, etc.
Integration of neural networks, multimedia, knowledge-based, decision support and other
systems in the real estate investment has a very promising future in scientific research. Recently,
much effort has been made in order to apply the best elements of multimedia, neural networks, and
knowledge-based and other systems to decision support systems.
Knowledge-based and decision support systems are related, but they treat decisions differently.
For example, knowledge systems are based on previously obtained knowledge and rules of problem
solving, and a decision support system leaves quite a lot of space for a user’s intuition, experience,
and outlook. Knowledge systems form a decision trajectory themselves, while decision support
systems perform a passive auxiliary role, though a situation might occur when decision support
systems suggest further actions to the decision maker. Calculation and analytical DSS models can
be applied to process the information and knowledge that is stored in the knowledge base. For
example, some DSS models can be applied to prepare recommendations by referring to the
knowledge in the knowledge base. Decision support systems can also facilitate the search, and an
analysis and distribution of the explicit knowledge.
Some think that computer (i.e. agent) intermediaries will replace human intermediaries. This is
rather unlikely, as they have quite different qualities and abilities. It is far more likely that they will
co-operate closely, and that there will be a shift in the tasks (i.e. queries) that both types handle.
Computer agents (in the short and medium term) will handle standard tasks and all those tasks that a
computer program (i.e. an agent) can do faster or better than a human can. Human intermediaries
will handle the (very) complicated problems, and will divide these tasks into sub-tasks that can (but
not necessarily have to) be handled by intermediary agents. It may also be expected that many
commercial parties (e.g. human information brokers, publishers, etc.) will want to offer middle
layer services (Hermans 2000).
Web-based intelligent, voice stress analysis and IRIS recognition systems in property
investment field developed by authors in cooperation with their associates are as follows: Real
Estate’s Market Value and a Pollution and Health Effects Analysis Decision Support System;
Cooperative Integrated Web-Based Negotiation and Decision Support System for Real Estate;
Innovation Multiple Criteria Decision Support Web-Based System; Multiple Criteria On-Line
International Trade Decision Support System; Loan Analysis Decision Support System; Multiple
Criteria Decision Support Web-Based System for Facilities Management; Multiple Criteria
Decision Support On-Line System for Construction Products; Sustainable Development Analysis
Web-Based System; IRIS Recognition System; Ethical Multiple Criteria Decision Support Web-
Based System; Building Life Cycle Decision Support System; Buildings’ Multivariant Design and
Multiple Criteria Analysis Decision Support System, etc.
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