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You are trying to estimate the value of a property that you are
interested in buying. The subject property is located at 322 Rock Creek
Road in a new suburb of a large metropolitan area. The property is like
many others in the area, with three bedrooms, two baths, a living room, a
den, a large kitchen, and a two-car garage. The residence has about
1,800 square feet of air-conditioned space and is of traditional design.
The property is located on an interior lot with no potential flooding
problems. The quality of construction appears to be about average for
the market area. The property being purchased was built within the past
two years. Three properties have been chosen as comparables and they
also were constructed within the past two years.
Comparable properties in the area have the following characteristics:
Comparable IComparable IIComparable III
Address123 Clay Street301 Cherry Lane119 Avenue X
Sale price$ 96,200$ 89,500$ 85,000
Time of sale6 months ago7 months ago13 months ago
DesignModernTraditionalTraditional
Parking2-car garage2-car carport1-car garage
LocationCorner lotInterior lotInterior lot
DrainageGoodBelow averageGood
BedroomsFourThreeTwo
BathsTwoTwoTwo
ConstructionAverageAverageBelow average
You
have come to some conclusions concerning what you believe the different
attributes of the comparable properties are likely to be worth in the
market area. Appreciation in house values in the area has been very low
over the past eight months, and you think that any properties that have
sold within that period would probably not require any adjustments for
the time of sale. However, one of the comparable properties sold over a
year ago, and you think it will require a $1,700 upward adjustment. You
also believe that properties in the area that are located near the creek
sell for about $1,400 less than other properties in the area because of
a slower rate of runoff after heavy rains. Properties on corner lots
generally sell for a premium of about $1,200. Houses with the
fashionable modern design usually bring about $1,200 more than those
that have traditional design characteristics. Because three-bedroom
homes are considered desirable by buyers in the area, an additional
fourth bedroom will generally only add about $1,450 in value to a
property. However, properties that contain only two bedrooms are rather
difficult to sell, and often bring $2,200 less than their three-bedroom
counterparts when they are sold. Most homes in the area have a two-car
garage, but when properties have a one-car garage, they usually sell for
about $1,000 less. A two-car open carport generally reduces the value
of the property by $1,050. The inferior construction quality exhibited
by comparable III should reduce its value by about $1,700.
Required:
a.Complete the sales comparison approach to value and assign an estimate of value to the subject property.
a.Sale price for property 1, 2, 3
b.Time of sale for property 1, 2, 3
c.Location for property 1, 2, 3
d.Site for property 1, 2, 3
e.Design for property 1, 2, 3
f.Construction quality for property 1, 2, 3
g.Number of bedrooms for property 1, 2, 3
h.Garage for property 1, 2, 3
b.A
second approach using the cost method of valuation will also be used to
estimate value. Comparing vacant lot sales in the market area indicates
that the value of the lot the subject property is constructed on is
$18,000. Air-conditioned space in the dwelling would cost about $36.00
per square foot to reproduce, and the garage would cost approximately
$4,200 to reproduce. Complete the cost approach to value, assuming that,
because the property being valued is relatively new, no depreciation of
the structure is required.
2. An investor is considering the
acquisition of a “distressed property” which is on Northlake Bank’s REO
list. The property is available for $201,200 and the investor estimates
that he can borrow $160,000 at 4.5 percent interest on an interest-only
loan and that the property will require the following total expenditures
during the next year:
Inspection$ 518
Title search1,036
Renovation13,000
Landscaping836
Loan interest7,200
Insurance1,818
Property taxes6,018
Selling expenses8,000
Required:
a.The
investor is wondering what such a property must sell for after one year
in order to earn a 20 percent return (IRR) on equity. Sale value of
property is?
b.The investor is now concerned that if the property
does not sell, he may have to carry the property for one additional
year. The investor believes that he could rent it (starting in year 2)
and realize a net cash flow before debt service of $1,560 per month.
However, he would have to make an additional $7,200 in interest payments
on his loan during that time, and then sell. What would the price have
to be at the end of year 2 in order to earn a 20 percent IRR on equity?
Sale value of property is?
3. You have an opportunity to acquire a
property from First Capital Bank. The bank recently obtained the
property from a borrower who defaulted on his loan. First Capital is
offering the property for $284,000. If you buy the property, you believe
that you will have to spend (1) $11,900 on various acquisition-related
expenses and (2) an average of $3,400 per month during the next 12
months for repair costs, and so on, in order to prepare it for sale.
Because First Capital Bank would like to sell the property as soon as
possible, it is willing to provide $264,000 in financing at 4.25 percent
interest for 12 months payable monthly (interest only). Your market
research indicates that after you repair the property, it may sell for
about $334,000 at the end of one year. Furthermore, you will probably
have to pay about $4,400 in fees and selling expenses in order to sell
the property at that time.
Required:
a.If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a good investment?
b.What would you need to sell the property for in order to achieve the 20 percent return?
5.
A potential home buyer is wondering about her credit card accounts and
the effect that they may have on her credit score which will be
evaluated when she applies for a mortgage loan. At present, she has
three accounts with credit limits and balances outstanding as follows:
She
would like to transfer the balance in account number 2 to account
number 3 in order to save the membership fee and because the interest
charges for account number 2 are higher than the others. If she does
this account number 2 would be closed.
AccountLimitOutstanding Balance
(1)$ 5,000$ 3,650
(2)12,0005,650
(3)15,0008,650
Required:
a.How much credit capacity is she currently using? As a percent
b.If she cancels account number 2 and transfers the balance to account number 3, what will be the capacity used now?
c.After
the transfer, how much would an increase in the total credit limit have
to be in account number 3 to restore the total capacity used in all
accounts prior to the transfer?
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