After graduating from MSU, you and a couple of your friends started a house-flipping business, where you buy a house on the market, do some repairs-remodeling and resell the house within a year, hoping to make profit. Given that you are a small business, you can only work on one house project at a time.

You are currently trying decide between two houses: one in East Lansing and another in Okemos, for your next buy-resell project. East Lansing houses are generally a bit older so need more work than houses in Okemos which are newer.

The East Lansing house costs $500K to buy. After buying it, you can either remodel it extensively or do some minor upgrades before reselling. Extensive remodeling costs $100K and minor upgrading costs $20K. You estimate that after extensive remodeling there is an 80% chance that you will be able sell it for $700K in net proceeds (i.e. actual sale price minus the taxes, commissions, fees etc), but there is a 20% chance that the net proceeds will only be $550K.

If you try to sell after just minor upgrades, there is a 50% chance that you can resell the house for $600K and 50% chance that you only get $500K.

The Okemos house costs $550K to buy. After buying it, you can either add a pool and a sunroom costing $40K or simply repaint it (which costs $10K) before reselling. You estimate that after adding the pool and sunroom, there is a 60% chance that you will be able sell it for $700K in net proceeds and a 40% chance that the net proceeds will only be $500K. If you try to resell after just repainting, there is a 40% chance that you can resell the house for $600K and 60% chance that you only get $550K.

Which option (which house and which upgrade option) would you choose and why? Please draw the decision tree and show all your calculations clearly.