You have an opportunity to purchase a home which has been turned back to a bank.

Question

You have an opportunity to purchase a home which has been turned back to a bank. The bank is asking $200,000, and is willing to offer a one year loan for $180,000 at 6% interest (interest only). You estimate that in addition to the interest cost, you will have to spend an average of $800 per month after acquisition, and closing costs on the acquisition will be $5,000. You have researched the market and you believe you can sell the property in a year for $230,000, with selling costs of $3,000. If you believe you need a 20% return on equity, is this a good investment? If not, what should your counteroffer be to the bank to achieve a 20% return, if you can borrow 90% of the counteroffer?

Explanation / Answer

total cost of aquisition= capital cost(180000)+one year interest(180000*6/100=1080)+monthly costof maintenance(800*12=96000+closing cost 5000) =195680

if the house is sold for 230000with sellin cost of 3000

net receivable after sale=227000

hence net profit =227000-195680=31320 which is 16% only

as we want 20% return on investment which is 39136 we incur a loss of 7816.

we should offer a purchase price of185000 to bank with 90% loan

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