Posted: September 18th, 2017


Scenario Summary
Joshua Michaels has decided to partner with a long-time friend, Jim Thompson, and formally invest in real estate. After consulting with his attorney, he decided that he would form a limited liability corporation (LLC) called Citadel, LLC, for the purpose of holding and managing future investments in real property. He also wants the company to serve as a consulting firm. He has built up a network of contacts including a mortgage broker at a local bank (American National) and many real estate agents in his area.
Joshua is preparing for an advisory board meeting for the newly formed LLC. As part of the by-laws, he is required to provide a status update on any recent and proposed activities. However, he is concerned that he may not have all the information needed to provide a comprehensive report related to current and anticipated real estate transactions. He is familiar with the basics of obtaining standard mortgage loans from personal experience. However, he now needs assistance with more complex scenarios.

Your Assignment
You have been hired as a real estate and financial consultant for Citadel, LLC. Joshua has tasked you with addressing the following concerns that will be presented at the advisory board meeting:
1. When purchasing real estate property, what methods can be used to provide a buyer with the assurance that a title is valid, marketable, and free of legal concerns? Discuss the advantages and disadvantages of each different method.

2. As Citadel, LLC, searches for future investing opportunities, there are questions regarding property rights and issues that may be encountered. What type of property right restrictions could potentially be found on a property? Explain how these restrictions could possibly be lifted.

3. Jim recently purchased a property at a foreclosure sale. It was originally owned by a person named Ms. Mary Smith, with American National holding the first mortgage and another lender, U.S. Bank, holding the second. Ms. Smith defaulted on her mortgage payments, but American National foreclosed without joining U.S. Bank in the foreclosure suit. What are the rights of U.S. Bank, if any? How does this situation affect Jim’s ownership (and subsequently the ownership of the LLC)?

4. What options are available to property owners that are facing default? Is foreclosure the only and final option? In addition, what advice would you give to an individual who is considering bankruptcy? What about a company that is considering bankruptcy? How would mortgage debt be affected under the different forms of bankruptcy?

5. Joshua purchased a property 10 years ago that is now a part of the company’s portfolio. It was a 30-year fully amortizing loan, and the original balance was $85,000 at an original rate of 9%. At this point in time, he would like to prepay the mortgage balance by $10,000. If the prepayment is approved, what would be the new balance? If the loan maturity is shortened, and using the original monthly payments, what is the new loan maturity?

6. Courtney Baxter indicates that she is excited about the current low interest rate levels and believes that Joshua and Jim should take advantage of this. She has found a property for $200,000 and believes they can be approved for an interest-only ARM for 30 years. The start rate is 3% and monthly interest-only payments will be made for 3 years. After the 3-year period, payments must be sufficient to fully amortize the loan at maturity. What will the interest-only payments be each month during the 3-year period? Assume that at the end of the 3-year period, the reset rate is 6% and again, payments must be made to fully amortize the loan. What will the new payments be for the remaining term of the loan? Are there any risks associated with this overall arrangement?
Questions must be addressed in a complete manner with an average of 50 words per question. For problem-based questions, the solution must be provided, but it is also recommended that mathematical work is provided for support.

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