A property investor enters into a preliminary sale and purchase agreement with the property seller with the following terms Property Price agreed $10 million Negotiated closing period 9 months The market practice is that if the buyer fails to close the transaction with the seller on the closing date, the buyer will forfeit the down payment On the other hand, if the seller fails to close the transaction with the buyer, the seller must return TWO times the down payment to the buyer The seller purchased the property 10 years ago for $8 million It is expected that the investor and the seller will opt to walk away from the transaction if such decision warrants a better financial payoff Both the investor and the seller share the view that the property price will fluctuate within the range of 30 to 10 around the agreed price on the closing date (a) Suppose the investor and the seller negotiate a down payment that will ensure the transaction will be completed What is the down payment (5 points) (b) Suppose the property drops by 40 on the closing date Based on your answer to (a), determine the corresponding profit or loss to the investor AND to the seller (5 points) (c) Suppose the property increases by 20 on the closing date Based on your answer to (a), determine the corresponding profit or loss to the investor AND to the seller (5 points)

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Posted on Jul 03, 2024

A property investor enters into a preliminary sale and purchase agreement with the property seller with the following terms:

Property Price agreed = $10 million
Negotiated closing period = 9 months

The market practice is that if the buyer fails to close the transaction with the seller on the closing date, the buyer will forfeit the down payment. On the other hand, if the seller fails to close the transaction with the buyer, the seller must return TWO times the down payment to the buyer. The seller purchased the property 10 years ago for $8 million. It is expected that the investor and the seller will opt to walk away from the transaction if such decision warrants a better financial payoff. Both the investor and the seller share the view that the property price will fluctuate within the range of -30% to +10% around the agreed price on the closing date.

(a) Suppose the investor and the seller negotiate a down payment that will ensure the transaction will be completed. What is the down payment? (5 points)
(b) Suppose the property drops by 40% on the closing date. Based on your answer to (a), determine the corresponding profit or loss to the investor AND to the seller. (5 points)
(c) Suppose the property increases by 20% on the closing date. Based on your answer to (a), determine the corresponding profit or loss to the investor AND to the seller. (5 points)