You are interested in a foreclosed property that a local bank is willing to sell

Question

You are interested in a foreclosed property that a local bank is willing to sell for $150,000. You intend to hold the property for one year and then sell it, at which time you expect to pay selling costs of $8,000. You are able to get an interest-only home equity loan on your principal residence for $130,000 at 7% to finance the purchase. The loan will be repaid when the house is sold. Acquisition fees incurred to purchase the property amount to $12,000. The holding costs for the year, including interest, are expected to be $36,000, payable monthly. What must the property sell for at the end of the year to repay the loan and cover all costs and to earn you a 20% return on your investment?

Explanation / Answer

Following is the calculation for the selling price of the property.

Purchase price - $150000

Acquiring fee - $12000

Selling cost - $8000

Holding Cost - $24000

Total Costs for Purchasing and holding the property for a year - Sum of the above values - $194000

Return Expected on Equity Investment -

0.2*$20000= $4000, $20000 is the equity investment and $130000 financed by loan

Hence, total selling value of the property consideting the return expected - $194000 + $4000 = $198000

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