The property is a large mansion house on a main thoroughfare in a medium-sized c
ID: 1732328 • Letter: T
Question
The property is a large mansion house on a main thoroughfare in a medium-sized city. It was constructed originally in 1917 to house the family of Oscar W. Flintrock, who made a fortune in mining phosphate in the local mountains. Over the years it has had a number of owners and uses including the current 8 apartments which house students from the local university. You believe you can remodel the old house into 3 office spaces with a nice reception area on the main floor. The mansion is located about 3 blocks from an expanding downtown.
After careful consideration, you decide that an option is the best approach. Explain how you would structure an option agreement to purchase the mansion. The property was most recently listed at $425,000.
The owner, Charles Flintrock, later (after he has signed the option with you) has a dream that the house is really worth $600,000.
Can he withdraw the option after it is in place?
What can you do once you have the option in place? Discuss fully.
What if in your investigation of the property, you determined that the rock used in constructing the property is in fact radio-active and would require significant and expensive clean-up?
Explanation / Answer
ANSWER:
The Flintlock house alteration plan can be prearranged as being equal to purchasing a cal option
On the fundamental asset.
The fundamental asset being the Flintrock house in this case.
A call alternative gives the Option holder the right but not obligation to buy the fundamental asset (Flintrock House). a fixed Exercise price at a later date irrespective of the marketplace value of the asset at that date.
In this case the house's mark. value = 5625000 and the option exercise price =$600000 (as Charles
Flintlock will not go into into a option at anything below the ',reamed. of price)
Since,
I am the alternative holder (buyer) and not Mr. Flintlock; he has to respect the option in case I wish to
Proceed with the alteration plan.
Once the option is in place I can either work out it ifithe market value of the house goes over the exercise
Price of 6600000. Purchase the house at 6600000 when the actual market price is 5425000 will not be
advisable.
Since radio alive rock clean up would incur additenal expenses, it might not be possible to exercise th
Purchase option on the house.
However, if the market value of the house goes above the exercise price of
5600000, the profit made by purchase the hose under the call option can be Oil L. to offset the
Additional radio lively rock clean up cort and yet make a net profit.
In such a scenario exercising the option
would be advisable
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.