please tell me this is a trick question (computation of BTER)

Financing, Hard Money Lenders, Private Money
1

just took my final exam in my real estate principles class. the exam was online, and there was a question that i am sure is impossible, yet it wouldn’t make sense for him to do a trick question like this. please, if anyone knows, just tell me if it is impossible or not, and if it is possible, how you would compute it (not keystrokes, just the idea).

The question reads:

[i]8. An office building is purchased with the following projected cash flows:
-NOI is expected to be $130,000 in year 1 with five percent annual increases.
-The purchase price of the property is $720,000.
-80% debt financing is used to purchase the property at an interest rate of 7.00%
-The property is sold at the end of year 4 . The property has appreciated at a compund rate of 4% per year since purchase. Selling costs are five percent.
(Show all work)

a. Calculate the Net Sales Proceeds

b. Calculate the Before Tax Equity Reversion[/i]

Part A wants NSP, which would be selling price minus selling expenses, or $800,183.26; part B wants our BTER, before tax equity reversion, which would just be subtracting the remaining mortgage balance from the net sale price.

BUT… although it is easy to compute the NSP, and to derive a BTER, we need to be able to compute the remaining mortgage balance (RMB)!!! THE GIVENS IN THE PROBLEM CONCERNING THE MORTGAGE ARE LIMITED TO THE LOAN AMOUNT, AND THE INTERST, WITH NO MENTION OF TERMS OR PAYMENTS!!!

How in hell are you supposed to calculate how much is left on a $576,000 loan (80% times $720,000), at 7%, 4 years into it if you don’t know how long it is, or what the payments are??? if the loan is 4 years you are totally paid off, if the loan is 20 years you haven’t put much of a dent in it yet. I am dumbfounded at this question, which is frustrating because I was nailing everythign on this test, and i have been staring at this problem forever now and don’t see how it would be humanly possible to compute a remaining balance, at a future point in time, without knowing how much has already been paid.

if it really wasn’t supposed to be answerable, it wasn’t cool the way the question is setup; it doesn’t really lend itself to a ‘not enough info given’ answer the way it is written imo

2

Owwww…“ice cream headache”…don’t do that JD!

LOL

Keith

3

hahah i hate to drop in the numbers, but felt posting the real question is the only way to make sure i wasn’t missing something others could see

i really don’t even care about what the actual numeric answer is, i just want to know if it is possible to find what the remaining loan balance is after 4 years with the info in the question.

it seems completely illogical to ask for a balance at a particular point in time, if the problem does not tell you where that particular point is in relation to the life of the mortgage.

4

okay so i emailed my teacher, and this is the response i got. in his response, he just starts using 30 years like it was in the problem. is he implying that should have just been assumed? is that something one should just assume, especially given that the property in question is a commercial property, and not residential?

[b]"1. This problem is assuming 30-year amortization @ 7% APR

  1.  N= 360 assumption (you could assume 240, 180 etc)

I= 7/12= .5833

Pv= 720,000 x .80 = 576,000

Solve for Monthly payments = $3,832.14

To calculate remaining balance after 4 years, you calculate the Future Value of this loan.

Leave all registers as is, but now N= 4x12=48

Compute FV= $549,933.38

Balance at end of 4th Year = $549,933.38 (Mortgage Balance)"[/b]

5

many times you make assumptions and assign a risk involved in making those assumptions. That’s business.

This however is not business. this was a question seeking a specific answer without all of the information. Someone else could have assumed a 15 yr mtg or a 50 yr mtg. I guess if they stated the assumption all of the answers would be correct.

6

obviously, your prof has never been in the real world as his assumption is bad. Many commerical lenders will only go to 25 years amortization (and really like to see 20 years).

7

<<obviously, your prof has never been in the real world>>

aak,

What professor have you ever met that even visits the real world ocassionally???

LOL

Keith

8

This sound slike one of those questions you need to bring up in class and it will be thrown out due to the professors lack of telling an amortization period. You probably aren’t the only one that was like WTF…

9

well, as much as it would comfort me to call him an ivory tower prof with no experience, he actually does own rentals, although i don’t know how many. definitely multiple ones anyways

in my answer, i wrote a long paragraph about how it doesn’t work without a given time period, and in my explanation i made up an example about how if it were X years, the answer would be Y. Luckily i got credit… i wonder about the other students who were unable to solve, and didn’t put in a guessed at answer that they clearly said was a made up loan term just to generate some kind of answer and show they know the equation

i also noticed that, after the answer he gave, it doesn’t work to assume 30 years on a commercial loan; the only fair and reasonable way to do that problem on a 30 year scale is to explicitly state it, as we are talking commerc property here.

(on the positive side, i got an A- in the class, adn pulled a 96% on this last exam, which was like 20 pts above class average… hell yeah. this course was really great for understanding a lot of random, fundamental ideas, despite being based primarily upon commercial investing / investment grade properties. still not done with the book, and it is definitely way more info than i need, but it is very thorough and is covering most every topic)

10
11

(did you read in my past post where i said he DOES invest in rental properties? he’s not just a teacher, he’s at least beginner level accomplished in teh real world. )

people should be a little easier on professors. i know a majority fit your descriptions, but it’s not fair to throw them all into that category. there are schools where ALL of the professors are currently active in their field, you guys don’t even know where i go. my school could very well have only teachers who are active in their field in real life.

(but that isn’t the case haha. my school is full of professors like that, but not all professors are that way. i’ve had great professors, and i know people who have almost all great professors, though they don’t go to my school.)