Case Study Due

Thursday, April 18, 2024 at 11:59 PM Central Early Submission Bon

Case Study Due

Thursday, April 18, 2024 at 11:59 PM Central Early Submission Bonus: Thursday,

April 11, 2024 at 11:59 PM Central (10-point overall grade bonus) Please submit

everything in Blackboard. No paper submissions will be accepted. You can work as

an individual or in teams of up to 3 members. It is also permissible to address

this assignment as an individual. Only one submission per group/individual.

There are no partial credits for late submissions; if you submit late your team

will receive 0 points for the case study. The case study represents 18% of the

final grade, so I strongly recommend that you plan accordingly. DO NOT wait

until the final day to prepare and submit your work. A Discussion Board has

been set up in Blackboard for submission. For Group Submissions, post the names

of all members in alphabetical order by surname on each of the documents

submitted. (example: Baker_Jones_Smith) For individuals, post all submissions

with your last name and first letter of your given name on each of the

documents submitted. (example: HilterbrandC) Documents can be submitted as

Excel, Word, or PDF format. Do not submit the document as an Apple or Google

based platform extension. You may submit an Excel file with calculations and a

complementary Word document which should not exceed 6 pages (double space)

(tables and graphs are not included in this limit). Your Excel submission can

have sheets for each question. The Excel submission does not count against the

page limit. Remember, the point of the Excel is to put together calculations.

You are permitted to answer questions within the Excel document, but make sure

that all questions on this case study are clearly addressed. You may also do

this entirely in Word with the calculations placed in tables with the narrative

written description contained in the document. As .pdf is a way to submit this

case study, please feel free to convert other formats to a .pdf for submission,

particularly if your works was not performed in Excel or Word. Description of

the Problem: Emma Jones is planning to move to Oxford, MS to start her new job

at a real estate firm. She has not yet decided whether she wants to rent or buy

a property in Oxford. Emma is not from Mississippi and is asking your team to

help her make this financial decision. Her monthly housing budget is $2,900.

This budget must cover housing expenses including rent or owner’s costs

(example: mortgage, hazard insurance, property taxes, and Home Owner

Association fees, if any). A good start of the analysis is to apply financial

concepts such as the “time value of money.” Emma’s contract is for three years

and is renewable for three more. Her plan is to stay in the Oxford area for no

more than 8 years. Even if her job continues to work out well, she will try to move

from the location she selects to a different house. Emma has money saved for

this transaction and plans to make a 20% down payment on any house that she

purchases. Emma will make this decision purely based on financial motives. She

is not worried about arguments such as “you are throwing away your money when

renting” or “it is better to be flexible and rent rather than buy”.

Total

points for the case: 100 points Questions:

1. Estimate the maximum house value

Emma can afford to buy. Assume the mortgage that terms that Emma has is based

on a fixed-rate, 30-year maturity, 80% LTV, with no points. The mortgage

interest rate that she was quoted is 7.00% with monthly payments. Assume that

property tax rate in the city of Oxford is 1.2% per year based on property

value; assume the hazard insurance premium is 0.5% per year based on property

value and assume $85 per month for maintenance. Determine the required monthly

mortgage payment and the maximum house value she can afford if she buys. (10

points)

2. Select the properties for comparison. After determining the maximum

house value for Emma’s budget in Question 1, select a house that Emma can

afford and follow the instruction for the case. Instructions for property

selection: • Use the maximum purchase amount established in the first part of

this question to select a house for purchase and use the Emma’s monthly budget

as a maximum amount for rental payments per month. • Go to an online site that

offers real estate for sale and rent. Examples of these are Zillow.com,

Trulia.com, Redfin.com or Realtor.com. • Select one property (it could be a

condominium, townhouse, or house) that is for sale. Please provide the link and

images (2 pictures maximum) for the property selected. Also state within your

document the purchase price of the house. • Special Note: You may use the

taxes, insurance, and HOA fees included in the information on Zillow, Trulia,

etc., but you must use the mortgage information that is provided in this case

study to calculate the costs associated with this decision. • Find a rental

property near the property that is for sale that you/your team selected. This

rental property must stay within the budget. Where possible, select a

comparable property based on square footage, lot size, type of property, number

of bedrooms and number of bathrooms.) Please provide the links and images (2

pictures maximum per house) for the comparable property selected. Also state

within your document the monthly rental payment of the property. (5 points)

1. Calculate

the monthly payments required for purchase and for renting. Then find the

monthly difference in these two payments.

2. After finding the monthly

difference, calculate the cumulative (not compounded) amount of the payments

for both purchasing and renting and provide the difference in payments for the

following periods: a. Two years b. Three years c. Six years d. Eight years (10

points)

3. Calculate the opportunity costs. Based on the house you selected for purchase in Question 2, determine the opportunity costs, of using required funds for closing (i.e., down payment plus all closing costs), rather than investing the funds and earning an effective rate of 6.25% yearly. The down payment amount will be 20% of the purchase price of the house you selected. For estimation purposes, closing costs will be $4,000.00. Calculate the amount opportunity cost (the foregone interest) due to purchasing the house rather than making a investment a. Two years b. Three years c. Six years d. Eight years (10 points)

4. Determine the difference in monthly payments required to buy the house versus the monthly rental payment. For the monthly purchase payments, the calculations are based on a fixedrate, 30-year maturity, 80% LTV, with no points. The interest rate that she was quoted is 7.00 % with monthly payments Assume that property tax rate in the city of Oxford is 1.2 % per year based on property value; assume the hazard insurance premium is 0.5% per year based on property value and assume $85 per month for maintenance (Special note, if your selected property includes condo fees or HOA fees that are provided, you may use that number in place of the $85 per month maintenance allowance). Use the rental payment amount found in Question 2 for the rental payment.

5. Determine the principal outstanding and interest paid on the Emma’s

mortgage. 1. Calculate the outstanding mortgage balance after the periods

listed below: a. Two years b. Three years c. Six years d. Eight years And 2.

Calculate the total amount of interest paid after the periods listed below: e.

Two years f. Three years g. Six years h. Eight years (10 points)

6. Determine

the future value gain or loss of the purchased property. Calculate Three (3)

different price scenarios of property price appreciation (or depreciation). You

can select any scenario of property appreciation that you consider appropriate

(you need to provide an explanation for why you selected these scenarios). For

example: one potential scenario is that properties increase by 2% per year. To

keep the returns realistic, there will be a cap on these rates used between

high of a positive eight percent (8%) a low of a negative three percent (-3%)

annual increase (or decrease). Show both the projected property value and the

amount of gain (or loss) after the following periods: a. Two years b. Three

years c. Six years d. Eight years (10 points)

7. Calculate the mortgage

interest tax deduction. While not everyone can use a mortgage interest

deduction, for the purpose of this exercise, assume that there may be a tax

advantage for people who use mortgage financing. The tax advantage is a

mortgage interest deduction program. This means that Emma can potentially

subtract paid mortgage interest from her taxable income. Given Emma’s salary,

her effective income tax savings would be based on 20%. Calculate the mortgage

interest paid and the tax savings after the following periods: a. Two years b.

Three years c. Six years d. Eight years (5 points)

8. Calculate the costs at

resale. Assume that when Emma sells her house, she will incur a real estate

broker fee of 6% and closing costs of $4,000. Use the projected property values

from the question 6 scenarios to calculate the real estate broker costs

incurred for the resale and add the closing costs after the following periods

(Note: There should be three answers for each): a. Two years b. Three years c.

Six years d. Eight years (5 points)

9. Calculate the net proceeds from resale.

Continuing with the three scenarios that you selected for Question 6. • Use the

projected future property values from the three scenarios is Question 6 •

Subtract the outstanding mortgage balances found in Question 5. • Subtract the

amount of costs at resale found in Question 8. Calculate the net proceeds for

the following periods: (Note: There should be three sets of answers for each

time period) a. Two years b. Three years c. Six years d. Eight years (5 points)

10. Calculate overall purchase gain or loss. Use the answers found in Question

9. Calculate the overall purchase net gain or loss considering (adding or subtracting)

all of the following items in the following order: 1. The original down payment

and closing costs 2. The opportunity costs 3. The difference in payments

between purchase and rent 4. The potential mortgage interest deduction Note:

Make sure to provide a subtotal after each calculation. Calculate the overall

purchase gain or loss for the following periods Show subtotals after each

calculation before moving to the next item. Note: There should be three sets

answers for each: a. Two years b. Three years c. Six years d. Eight years (10

points)

11.Provide your recommendation. What decision would you recommend Emma

Jones to make? To buy or rent? This answer must include facts and figures that

you presented in your prior ten answers. This answer should include an analysis

at different time increments. This should be a full analysis of the overall

case study.