Question

You own a house that you rent for $1,475 per month. The maintenance expenses on the house average $275 per month. The house cost $234,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $256,000. If you sell the house you will incur $20,480 in real estate fees. The annual property taxes are $3,250. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

Answer 1

The value to be placed on this house while determining the usage of this house as a professional office

The Value to be placed will be the Opportunity Cost of the purchase of house.

The Opportunity Cost is the Appraised Value of the house as deducted by the expenses that would incur if the house is sold

Therefore, the Opportunity Cost = Appraised Value of the house – Expenses that would incur if the house is sold

= $256,000 - $20,480

= 235,520

“Hence, the value to be placed on this house would be $235,520”