Question

PLEASE SHOW WORK IN EXCEL* A bank owned “fixer-upper” property is selling for $500,000. You are considering purchasing the property from the bank, and have run the following estimates: Lawyer and broker fees to purchase: $22,000 Monthly repair and maintenance for the first year: $5000 Monthly repair and maintenance after the first year: $700 The bank wants to get rid of the property soon, so they are offering a seller financed 90% LTV interest only loan at a 5.5% rate, with monthly payments, and a 5 year term. Your analysis suggests that a year from now, you could sell the repaired property for $650,000. The sale will cost you $7000 in brokerage fees and commissions. If you want to make at least a22% annual IRR (aka yield) on your initial invested capital, then how much would you be willing to pay for the property, assuming you would sell the repaired property one year after purchase? Assume there are no taxes or tax rebates, so you can ignore tax effects in your analysis. Hint: set up the cash flows, then use solver ***PLEASE SHOW WORK IN EXCEL**

Hint: set up the cash flows, then use solver

Answer 1

I am will to pay the bank $498,787 for 22% IRR

Expected proceeds from property after 1 year	650,000
Sales cost	7,000
Lawyer and broker fees to purchase	22,000
Repair and maintenance for 1st year	5,000
Expected IRR from the property sales	22%
Future value after 1 year	650,000
Tenure for property sale (year)	1
Based on present value formula in excel
Present value of property for 22% IRR (before the below costs)	532,787
Less
Sales cost	-7,000
Lawyer and broker fees to purchase	-22,000
Repair and maintenance for 1st year	-5,000
Property value at which you buy from the bank	498,787

Excel formula: