An investor is considering the acquisition

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An investor is considering the acquisition of a “distresses property” which is on Northlake Bank’s REO list. ŒæThe property is available for $200,000 and the investor estimates that he can borrow $160,000 at 8% intgerest and that the property will require the following total expenditures during the next year:

Inspection – $500Loan Interest – $12,800

Title Search – $1,000Insurance – $1,800

Renovation – $13,000Property taxes – $6,000

Landscaping – $800Selling expenses – $8,000

a) ξThe investor is wondering what such a property must sell for after one year in order to earn a 20% return (IRR) on equity. ξWhat other issues must be considered?

b) ξThe lender now is concerned that if the property does not sell, he may have to carry the property for one additional year. ξHe believes that he could rent it and realize net cash flow before debt service of $1,200 per month. ξHowever, he sould have to make an additional $12,800 in interest payment on his loan during that time, and then sell. ξWhat would the price have to be at the end of year 2 in order to earn a 20% IRR on equity?

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