The Role of Profit, Law, and Ethics in Residential Real Estate Investments

Journal of Real Estate Practice and Education, Vol. 12, No. 2, pp. 157-171, 2009

22 Pages Posted: 18 Mar 2011

See all articles by Michael Seiler

Michael Seiler

College of William and Mary - Finance

Vicky L. Seiler

Johns Hopkins University

David Harrison

Texas Tech University

Kimberly F. Luchtenberg

American University - Department of Finance and Real Estate

Date Written: 2009

Abstract

This teaching case provides students with an opportunity to evaluate the series of cash flows associated with a residential real estate investment, while simultaneously probing unique aspects of legal and ethical issues confronting the potential investment. The case also introduces students to some key differences between buying real estate as an investment versus buying real estate as a primary residence. Specifically, buyers of a home are afforded the opportunity to opt out before closing in the event (1) there has been a “major change in the project” (HRS §514B-87) or (2) they no longer “qualify” for the purchase of the home. In this sense, the prospective purchasers effectively hold a call option on the property. One interesting departure from traditional financial option theory is that the buyers have a way – albeit both potentially unethical and fraudulent – to get their premium back if they decide not to invest. This potential benefit results from (1) a loose contract provision that may be upheld by common law on a case by case basis, or (2) through the willingness of the buyer and a lender to commit what the courts might interpret as fraud. All information employed in this case is based upon an actual land purchase decision, though some specifics have been altered slightly for both illustrative purposes and to retain the anonymity of various parties to the transaction.

Suggested Citation

Seiler, Michael and Seiler, Vicky L. and Harrison, David and Luchtenberg, Kimberly F., The Role of Profit, Law, and Ethics in Residential Real Estate Investments (2009). Journal of Real Estate Practice and Education, Vol. 12, No. 2, pp. 157-171, 2009. Available at SSRN: https://ssrn.com/abstract=1784805

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

Vicky L. Seiler

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

David Harrison

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Kimberly F. Luchtenberg

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

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