On Contracts As Options: Some Evidence From Condominium Developments

In a recent article, Shilling, Benjamin, and Sirmans (1985) applied the standard European option pricing model to option contracts for real estate. Their work does an admirable job of placing the real estate option contract in a formal analytical framework instead of the more common descriptive framework. Although the article provides a good analytical framework, the methodology section may benefit from a clarification of notation and from the consideration of the temporal relationship between the option price and the random component of the value of the underlying asset. While the empirical results of the paper are unlikely to be affected by the clarification of the methodology section, the interpretation of the empirical results may be made clearer. Such a clarification is carried out, and it is concluded that the statement that Shilling, Benjamin, and Sirmans' empirical results might not be affected by this clarification is a reasonable one.