Real Estate Word Document

REAL ESTATE CASE STUDY

MICROSOFT WORD DOCUMENT!!

DUE DATE: 6/21/2021

Do this entirely in Word

Description of the Problem:

Emma Jones is planning to move to Oxford, MS to start her new job at a real estate firm. She has not yet decided whether she wants to rent or buy a property in Oxford. Emma is not from Mississippi and is asking your team to help her make this financial decision. Her monthly housing budget is $1,700. This budget must cover housing expenses including rent or owner’s costs (example: mortgage, hazard insurance, property taxes, and Home Owner Association fees, if any). A good start of the analysis is to apply financial concepts such as the “time value of money.”

Emma’s contract is for three years and is renewable for three more. Her plan is to stay in the Oxford area for no more than 8 years. Even if her job continues to work out well, she will try to move from the location she selects to a different house.

Emma has money saved for this transaction and plans to make a 20% down payment on any house that she purchases.

Emma will make this decision purely based on financial motives. She is not worried about arguments such as “you are throwing away your money when renting” or “it is better to be flexible and rent rather than buy”.

Total points for the case: 100 points

Questions: 1.

Estimate the maximum house value Emma can afford to buy.

Assume the mortgage that terms that Emma will have are based on a fixedrate, 30-year maturity, 80% LTV, with no points. The mortgage interest rate that she was quoted is 3.25% with monthly payments. Assume that property tax rate in the city of Oxford is 1.1% per year based on property value; assume the hazard insurance premium is 0.6% per year based on property value and assume $50 per month for maintenance. Determine the required monthly mortgage payment and the maximum house value she can afford if she buys. (10 points)

After determining the maximum house value for Emma’s budget, select a house that Emma can afford and follow the instruction for the case.

Question 2.

Select the properties for comparison.

After determining the maximum house value for Emma’s budget in Question 1, select a house that Emma can afford and follow the instruction for the case. Instructions for property selection:

• Use the maximum purchase amount established in the first part of this question to select a house for purchase and use the Emma’s monthly budget as a maximum amount for rental payments per month.

• Go to an online site that offers real estate for sale and rent. Examples of these are Zillow.com, Trulia.com, Redfin.com or Realtor.com.

• Select one property (it could be a condominium, townhouse, or house) that is for sale. Please provide the link and images (2 pictures maximum) for the property selected. Also state within your document the purchase price of the house.

• Special Note: You may use the taxes, insurance, and HOA fees included in the information on Zillow, Trulia, etc., but you must use the mortgage information that is provided in this case study to calculate the costs associated with this decision.

• Find a rental property near the property that is for sale that you/your team selected. This rental property must stay within the budget. Where possible, select a comparable property based on square footage, lot size, type of property, number of bedrooms and number of bathrooms.) Please provide the links and images (2 pictures maximum per house) for the comparable property selected. Also state within your document the monthly rental payment of the property. (5 points)

Question 3.

Calculate the opportunity costs.

Based on the house you selected for purchase in Question 2, determine the opportunity costs, of using required funds for closing (i.e., down payment plus all closing costs), rather than investing the funds and earning an effective rate of 5.5% yearly. The down payment amount will be 20% of the purchase price of the house you selected. For estimation purposes, closing costs will be $3,000.00.

1. Calculate the amount of forgone interest on investment

2. Add the sunk closing cost amount for the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(10 points)

Question 4.

Determine the difference in monthly payments required to buy the house versus the monthly rental payment.

For the monthly purchase payments, the calculations are based on a fixedrate, 30-year maturity, 80% LTV, with no points. The interest rate that she was quoted is 3.25 % with monthly payments. Assume that property tax rate in the city of Oxford is 1.1 % per year based on property value; assume the hazard insurance premium is 0.6% per year based on property value and assume $50 per month for maintenance (Special note, if your selected property includes condo fees or HOA fees that are provided, you may use that number in place of the $50 per month maintenance allowance). Use the rental payment amount found in Question 2 for the rental payment.

1. Calculate the monthly difference in payments.

2. Then calculate the cumulative (not compounded) amount of the payments for both purchasing and renting and provide the difference in payments for the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(10 points)

Question 5.

Determine the principal outstanding and interest paid on the Emma’s mortgage.

1. Calculate the outstanding mortgage balance after the periods listed below:

2. Calculate the total amount of interest paid after the periods listed below:

a. Two years

b. Three years

c. Six years

d. Eight years

(10 points)

Question 6.

Determine the future value gain or loss of the purchased property.

Select 3 different scenarios of property price appreciation (or depreciation). You can select any scenario of property appreciation that you consider appropriate (you need to provide an explanation for why you selected these scenarios). For example: one potential scenario is that properties increase by 2% per year.

Show both the projected property value and the amount of gain (or loss) after the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(10 points)

Question 7.

Calculate the mortgage interest tax deduction.

While not everyone can use a mortgage interest deduction, for the purpose of this exercise, assume that there may be a tax advantage for people who use mortgage financing. The tax advantage is a mortgage interest deduction program. This means that Emma can potentially subtract paid mortgage interest from her taxable income. Given Emma’s salary, her effective income tax savings would be based on 24%.

Calculate the mortgage interest paid and the tax savings after the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(5 points)

Question 8.

Calculate the costs at resale.

Assume that when Emma sells her house, she will incur a real estate broker fee of 6% and closing costs of $3,000.

Pick the most likely scenario that you selected for Question 6.

Use the projected property values from that most likely scenario to calculate the real estate broker costs incurred for the resale and add the closing costs after the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(5 points)

Question 9.

Calculate the net proceeds from resale.

Continuing with the most likely scenario that you selected for Question 6.

• Use the projected property values from that most likely scenario.

• Subtract the outstanding mortgage balance found in Question 5.

• Subtract the amount of costs at resale found in Question 8.

Calculate the net proceeds for the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(5 points)

Question 10.

Calculate overall purchase gain or loss.

Use the answer found in Question 9. Calculate the overall purchase net gain or loss considering all of the following:

1. The original down payment and closing costs

2. The opportunity costs

3. The difference in payments between purchase and rent

4. The potential mortgage interest deduction

Calculate the overall purchase gain or loss for the following periods:

a. Two years

b. Three years

c. Six years

d. Eight years

(10 points)

Question 11.

Provide your recommendation.

What decision would you recommend Emma Jones to make? To buy or rent? This answer must include facts and figures that you presented in the prior ten answers. This answer should include an analysis at different time increments. (20 points)