Anderson Street Case Study Solution
Introduction:
Charlie Leonard former student of Harvard Collage had received a heritage income of $25,000 from her aunt, there is a long-standing wish of Leonard to invest in the real estate sector of Boston and recent grant from his aunt have made him able to fulfill this wish. Although the one-off income of $25,000 is not sufficient for this purpose but this has made him and his wife financially stable to some extent. Leonard have great amount of interest in the real estate sector and he has made many real estate agents his friends, moreover, he actively do research regarding the property attributes and prices in Boston city.
After getting the heritage income he actively searches properties which have great earning potential, soon he identify a property in Anderson Street with the help of his one real estate friend. The property has an asking price of $168,000 and the property also requires some additional capital expenditures which would cost almost $55,000 and some further expenses also have to incur in order to bring the property in a condition to generate significant returns.
Leonard has identified and consulted from two banks regarding the capital necessary to purchase the properties. One of the banks have agreed to make the rent payment of $210,000 which is more than the 80% of the value of property however, they have demanded personnel guarantee from Leonard. And the other bank have denied to give loan of $210,000 rather the bank is agreed to give loan of $175,000.
Even after the loan receipts and equity of $25,000 there will still be a shortfall however, Leonard is certain that he will eliminate this shortfall by carrying out some repairs and maintenance work by its own. But it can be argued that Leonard might find it very difficult to manage the construction work as he is also a full time employee in a manufacturing company in Newtown, Massachusetts.
Problem Statement:
Although the investment, financing and construction of Anderson Street properties seems to be smooth but there are many complexities involved in this transactions such as the shortfall in the financing, the earning potential of the property, the ancillary problems, the ability of Leonard to carry some of the work on its own and the option to Leonard to live in the fourth floor of the property.
Analysis of the problems:
The most important problem that the Leonard is facing is the financing of the property, although there are many parties which could invest in the proposed transaction but the terms and conditions and amount of loan represents the significant issues for Leonard. The banks are denying to lend the amount which Leonard is asking, even if they lend the required funds the interest rates will be too high which can affect the level of returns for Leonard.
Moreover, Leonard can also got secondary mortgage finance but again the interest on the secondary mortgage loan will be considerably high thus affecting the overall returns of the property.
The second most important problem faced by Leonard is the earning potential of the property, although it is expected that the first three floors of the property will be rented out at $990 per month, but it will only be possible if the appropriate renovations have been made and proper marketing of the property is being conducted. Due to lack of experience of Leonard it is highly likely that the earnings from the property will be affected and certain unexpected cash flows are also expected to occur due to inexperience of the potential owner.
The renovations also represents one of the most significant problems for Leonard, as the Leonard have no prior experience in the field of real estate so it might be possible that he identifies inappropriate renovation requirements which could affect the cash outflows drastically, moreover, the operational attributes of the Anderson Street property will also be affected if the inappropriate renovation requirements are identified. Although Leonard have hired a contractor to identify and execute the renovation requirements but it can be argued that the contractor can take advantage of his little knowledge.
Anderson Street Harvard Case Solution & Analysis
Another problem that exist in the proposed buying transaction of property at Anderson Street is that some of the renovation work have to perform by Leonard itself in order to save money and increase the earning potential. Moreover, Leonard have decided to carry the work of janitor themselves in order to save janitor expenses.
It is possible that the lack of expertise and time of Leonard and his wife could make it difficult to manage these works. Furthermore, their ability to negotiate the rentals might be impair if they had friendly relations with their tenants, this can be avoided by not living in the top flat. This problem have also been identified by the wife of Leonard which reflects the seriousness and materiality of the issue.......................
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