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
Date Written: 2009
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.
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