Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
20 views

DMA Homework Assignment #2

The document summarizes an analysis conducted by Baumgartner's Analytical Developers to determine an initial asking price for a property purchased by Mr. Illiatch located in Detroit, Michigan. The analysis utilized a linear regression model based on data from 200 previous home sales in Detroit from 2002-2022, with variables like square footage, number of bedrooms/bathrooms, location, and presence of a pool. The model estimates the property is worth $948,010 on average, with a 95% prediction interval of $683,227-$1,212,793. Based on the analysis, Baumgartner's recommends an initial asking price of $959,999, which has a 71% probability of

Uploaded by

Claire Kropp
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
20 views

DMA Homework Assignment #2

The document summarizes an analysis conducted by Baumgartner's Analytical Developers to determine an initial asking price for a property purchased by Mr. Illiatch located in Detroit, Michigan. The analysis utilized a linear regression model based on data from 200 previous home sales in Detroit from 2002-2022, with variables like square footage, number of bedrooms/bathrooms, location, and presence of a pool. The model estimates the property is worth $948,010 on average, with a 95% prediction interval of $683,227-$1,212,793. Based on the analysis, Baumgartner's recommends an initial asking price of $959,999, which has a 71% probability of

Uploaded by

Claire Kropp
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Hello Mr.

Illiatch,

Thank you for using Baumgartner’s Analytical Developers (“You have a problem, we probably have a
pretty good solution”) for your recent real estate development project. We understand that you
purchased a property located at 678 Yesterday St, Detroit, Michigan (details of which are given in Exhibit
1). We also have been told by you that the total cost of interior design, staging, the real estate itself,
and all other costs totalled $875,145.

We propose an initial asking price of $959,999. The details of our analysis process are laid out below. For
the output of our final model, see Exhibit 2.

Data

We utilized historical single-family home sales in Detroit city limits from 2002 to 2022, totalling 200
properties. We manually searched for, and removed foreclosures/bank auctions in the dataset to avoid
artificially depressed prices that are not relevant in your home sale. For each home sale, we collected
the sales price recorded, as well as the independent variables used in our study

The independent variables1 in our model include SQFT, Month_Sold, Num_Bedroom, Num_Bathroom
Location,and Pool?.

SQFT is the number of square feet in the house in terms of thousands (i.e. 2.5 means 2500 sqft).
Month_Sold is the month (1=January, 2=February…) that the sale took place in, to account for seasonal
trends in demand. Num_Bedroom is the number of bedrooms in the house. Num_Bathroom is the
number of bathrooms in the house. Location is a categorical variable coded as 1=Terrible, 2=Good,
3=Very good, 4=Outstanding. Pool? is equal to 0 if the house has a pool, and 1 if the house does not
have a pool.

Method

We use an analytical method called linear regression (or multiple linear regression). This is a widely used
statistical technique to help forecast or predict values based on a historical dataset. This type of model
allows our firm to accurately forecast your specific property and provide you with a range of sales values
that would be consistent with our model, as well as a point estimate of the average value. Importantly,
this analytical method allows us to control for characteristics that are different between houses in a
transparent and objective manner.

To achieve the final model, we first ran a linear regression including all the variables listed above. We
then removed all variables that were non-significant to generate a second and final linear regression
model. Non-significant variables are variables whose coefficients are not statistically different from zero.
We used the conventional level of .05 as the threshold for non-significance.

Results

1
Independent variables, also known as X variables, are variables that are in some way related to the dependent
variable (Y).
The final regression results are given in Exhibit 2. We are confident in the results given the adjusted R2
value (of approximately 0.71) is higher than 0.5, signifying that this model is unlikely to be driven by
chance alone.

Plugging your property’s values into the Final Model suggests that your property is worth on average
$948,010. The 95% prediction interval is between $1,212,793 and $683,227. The model does have a
high standard error of $135,094 showing that there are other factors impacting a sales price that we
have not accounted for. We propose an initial asking price of $959,999 to allow for some room to
negotiate downwards if necessary.

The beautiful part of our analytical model is that it also allows us to estimate the probability of you
making a profit on this project (ignoring time value of money issues since we do not know when you
purchased the property). In Excel, this formula would be “=1-norm.dist(875145,948010,135094,1)” and
results in an approximately 71% probability of you making money on this project. It does indeed seem
like this was a wise purchase!

Please contact me at any time if you have any further questions about our analysis or our model.

Yours Truly,

Exhibit 1 – 678 Yesterday St, Detroit, Michigan

Property
Sqft 3.23
Num_Bedroom 4
Num_Bathroo 4
m
Location? 3
Pool? (1=No) 1

Exhibit 2 – Final Model

Regression Statistics
0.84343
Multiple R 8
0.71138
R Square 8
Adjusted R
Square 0.70697
135093.
Standard Error 5
Observations 200
Coefficien Standar Lower Upper
ts d Error t Stat P-value 95% 95%
40539.6 - 0.01008675 -
Intercept -105325 1 2.59808 4 -185275 25375.2
14236.5 14.6992 1.85249E- 181189. 237341.
Sqft 209265.5 1 1 33 1 9
8342.55 17.2149 4.59201E- 127163. 160069.
Location? 143616.4 3 2 41 7 1
22599.7 - 0.01902107 - -
Pool? (1=No) -53441.9 3 2.36471 3 98011.8 8872.05

You might also like