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Problem 3 . Seller Financing. You bought a list of addresses where vacant land owners are delinquent on their property taxes ( and hence in

Problem 3. Seller Financing. You bought a list of addresses where vacant land
owners are delinquent on their property taxes (and hence in danger of losing their
land) from a large county in the Midwest for $200, then sent "yellow letters" to
100 landowners on this list offering to buy their land at a significant discount. To
sweeten the deal, in each letter you also offered to pay cash, to pay off all property
taxes and late penalties, and to cover all closing costs. The cost to produce and
mail each letter was $1.25.
One landowner calls the next day to agree. You buy his land, which you think
is worth about $100,000, for $20,000 in cash. You pay off his delinquent property
taxes, which have grown with penalties and fees to $4,950. Closing costs for the
purchase are $500. You immediately list the vacant land for sale at $55,000, and
offer seller financing.
(a) What will you require as a down payment, if you worry a buyer might not make
any loan payments and your short term objective is to recoup your costs?
(b) A prospective buyer makes an offer at list price, with a down payment of 15
percent. You decide to accept, and to finance the outstanding $46,750 at a fixed
interest rate of 9%(compounded monthly) over 15 years, as your primary goal
is a quick sale.
(1) What will the buyer pay you each month?
(2) What is the total amount the buyer will pay you?
(3) Total interest paid on the loan?
(4) When will you recoup the costs of your investment?
(5) What is the present value of the loan, assuming your minimum acceptable
annual rate of return is 5%?
(6) What is the NPV of your investment, assuming your annual discount rate
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