Cases in Engineering Economy 2nd by Peterson & Eschenbach 20-year mortgage. In discussing this interest rate, his parents also mentioned that their long- term investments in the stock market had averaged an annual rate of return of about 11%. The annual operating costs for the 4-plex, as reported by the current owner, have been about $350 for water and sewer, $150 for lawn mowing, and a $700 assessment from the cooperative pool/parking authority. The renters pay for their own electricity and natural gas. Property taxes are calculated at 1.8% of the assessed value, and properties are assessed at 100% of market prices with biannual adjustments by the city. The city currently appraises the property at $103,000 for the building and $41,000 for the land. Insurance for fire and liability is 1% of the building's value. Rents for these and other similar units in the cooperative have been fairly stable at $550/month or $500/month for long-term leases. Suggestions to the Student 1. Real estate deals usually have substantial transaction costs. Realtor's fees average 6% and are paid by the seller. Loan origination fees, title insurance fees, etc., will often cost the buyer 1.5%. These closing costs must be apportioned between the buyer and the sellerfor the property purchase and for its later sale. How much occurs now and how much at the problem's horizon? 2. What horizon should be used? What happens to the property at the problem's horizon? 3. How should the property's value at the horizon be determined? What is it? 4. Are there other costs or possibilities that must be allowed for? What are they? 5. What is the maximum purchased price that can be justified? 6. Which variables represent the bulk of the risk? What risks are not addressed? 74 Cases in Engineering Economy 2nd by Peterson & Eschenbach 20-year mortgage. In discussing this interest rate, his parents also mentioned that their long- term investments in the stock market had averaged an annual rate of return of about 11%. The annual operating costs for the 4-plex, as reported by the current owner, have been about $350 for water and sewer, $150 for lawn mowing, and a $700 assessment from the cooperative pool/parking authority. The renters pay for their own electricity and natural gas. Property taxes are calculated at 1.8% of the assessed value, and properties are assessed at 100% of market prices with biannual adjustments by the city. The city currently appraises the property at $103,000 for the building and $41,000 for the land. Insurance for fire and liability is 1% of the building's value. Rents for these and other similar units in the cooperative have been fairly stable at $550/month or $500/month for long-term leases. Suggestions to the Student 1. Real estate deals usually have substantial transaction costs. Realtor's fees average 6% and are paid by the seller. Loan origination fees, title insurance fees, etc., will often cost the buyer 1.5%. These closing costs must be apportioned between the buyer and the sellerfor the property purchase and for its later sale. How much occurs now and how much at the problem's horizon? 2. What horizon should be used? What happens to the property at the problem's horizon? 3. How should the property's value at the horizon be determined? What is it? 4. Are there other costs or possibilities that must be allowed for? What are they? 5. What is the maximum purchased price that can be justified? 6. Which variables represent the bulk of the risk? What risks are not addressed? 74