Problem:
You are interested in a foreclosed property that a local bank is willing to sell for $150,000. You intend to hold the property for one year and then sell it. You expect to pay selling costs of $8,000. You are able to get an interest-only home equity loan on your principal residence for $130,000 at 7% to finance the purchase. The loan will be repaid when the house is sold. Acquisition fees incurred to purchase the property amount to $12,000. The holding costs for the year, including interest, are expected to be $24,000, payable monthly.
Required:
Question 1: What must the property sell for at the end of the year to repay the loan, cover the selling costs, and earn you a 20% return on your equity investment? Explain in detail and show your all work.