Emma Jones is planning to move to Oxford, MS to start her new job at a real estate firm. She has not yet decided whether she wants to rent or buy a property in Oxford. Emma is not from Mississippi and is asking your team to help her make this financial decision. Her monthly housing budget is $1,600. This budget must cover housing expenses including rent or owners costs (example: mortgage, hazard insurance, property taxes, and Home Owner Association fees, if any). A good start of the analysis is to apply financial concepts such as the time value of money.

Emmas contract is for three years and is renewable for three more. Her plan is to stay in the Oxford area for no more than 8 years. Even if her job continues to work out well, she will try to move from the location she selects to a different house.

Emma has money saved for this transaction and plans to make a 20% down payment on any house that she purchases.

Emma will make this decision purely based on financial motives. She is not worried about arguments such as you are throwing away your money when renting or it is better to be flexible and rent rather than buy.

Total points for the case: 100 points

Questions:

1. Estimate the maximum house value Emma can afford to buy. Assume the mortgage that terms that Emma will have are based on a fixed-rate, 30-year maturity, 80% LTV, with no points. The interest rate that she was quoted is 3.5% with monthly payments. Assume that property tax rate in the city of Oxford is 0.7% per year based on property value; assume the hazard insurance premium is 0.5% per year based on property value, and assume that on average you should consider $50 per month for maintenance. Determine the required monthly payment for the mortgage and the maximum house value she can afford if she buys. (15 points)

After determining the maximum house value for Emmas budget, select a house that Emma can afford and follow the instruction for the case.

Instructions for the case:

• Go to an online site that offers real estate for sale and rent. Examples of these are Zillow.com, Trulia.com, Redfin.com or Realtor.com.
• Select one property (it could be a condo, townhouse, or house) that is for sale. The maximum value that Emma can afford depends on the mortgage, taxes, Home Owners Association (HOA) fees and insurance. Please provide the link and images (2 pictures maximum) for the property selected.
• Special Note: You may use the taxes, insurance, and HOA fees included in the information on Zillow, Trulia, etc., but you must use the mortgage information that is provided in this case study to calculate the costs associated with this decision.
• Find a comparable rental property near the property that is for sale that you/your team selected. Select comparable property based on square footage, lot size, type of property, number of bedrooms and number of bathrooms.) Please provide the links and images (2 pictures maximum per house) for the comparable property selected.

2. Based on the house that you selected, determine the opportunity costs, on a monthly basis, of using required funds for closing (i.e., down payment plus all closing costs), rather than leaving those funds invested and earning the monthly effective rate 5.5% yearly. The down payment amount will be 20% of the purchase price of the house that you selected. For estimation purposes, closing costs will be $4,000.00. (10 points).

3. Determine the difference in monthly payments required in order to buy the house versus the monthly rental payment Perform one analysis with just a straight comparison and include another analysis which includes the monthly opportunity costs determined in part 2. (10 points)

4. Determine the principal outstanding on the Emmas mortgage after:
   1. Two years
   2. Three years
   3. Six years
   4. Eight years

(10 points)

5. Determine the net future gain or loss after two, three, six and eight years under the different price appreciation scenarios. Select 3 different scenarios of property price appreciation. You can select any scenario of property appreciation that you consider appropriate (you need to provide an explanation for why you selected these scenarios). For example: one potential scenario is that properties increase by 2% per year. (20 points)

6. Now assume that there are tax advantages for people who buy houses with mortgage financing. The tax advantage is a mortgage interest deduction program. This means that Emma can subtract paid mortgage interest from her taxable income. Given Emmas salary, her effective income tax bracket is 22%. Assume that she is holding the property for 6 years and that the property price will follow the most likely scenario (pick the one you consider most likely from all the scenarios you selected in question 5). What is the gain (or loss) after tax considerations under this scenario?

(15 points)

7. What decision would you recommend Emma Jones to make? To buy or rent? Describe any qualitative consideration that could factor into your decision. This answer must include facts and figures that you presented in the prior six answers. (20 points)