Question

For Exercises \(1-20,\) solve.For Exercises \(1-20,\) solve. Scott takes out a loan to buy a fixer-upper house. He spends \(\$ 15,475\) in repairs and improvements. He sells the house for \(\$ 194,000\) but pays the new owner's \(\$ 3750\) closing costs. If the payoff for the loan that Scott took out to buy the house is \(\$ 162,324,\) what is his net? Is it a profit or loss?

Short answer

Answer: Scott made a net profit of $12,451.

Step-by-step solution

Calculate the Total Expenses

First, we need to find out how much money Scott spent on the house, repairs, improvements, and closing costs. The total expenses can be calculated by adding the loan payoff, the amount spent on repairs and improvements, and the closing costs: Total Expenses = Loan Payoff + Repairs and Improvements + Closing Costs

Calculate the Total Revenue

Next, we need to find out how much money Scott earned from selling the house. In this case, it's simply the selling price: Total Revenue = Selling Price

Calculate the Net Profit or Loss

Now that we have Scott's total expenses and total revenue, we can find his net profit or loss by subtracting the total expenses from the total revenue: Net Profit/Loss = Total Revenue - Total Expenses

Determine if the Net is a Profit or Loss

If the Net Profit/Loss is greater than 0, then Scott made a profit. If the Net Profit/Loss is less than 0, then Scott made a loss. If the Net Profit/Loss is equal to 0, then Scott neither made a profit nor a loss. Now let's plug in the given values and calculate Scott's net profit or loss:

Calculate the Total Expenses

Total Expenses = Loan Payoff + Repairs and Improvements + Closing Costs Total Expenses = \(162,324 + \)15,475 + $3,750 Total Expenses = $181,549

Calculate the Total Revenue

Total Revenue = Selling Price Total Revenue = $194,000

Calculate the Net Profit or Loss

Net Profit/Loss = Total Revenue - Total Expenses Net Profit/Loss = \(194,000 - \)181,549 Net Profit/Loss = $12,451

Determine if the Net is a Profit or Loss

Since the Net Profit/Loss is greater than 0 in this case, Scott made a profit of $12,451.

Key concepts

Loan Payoff

When buying a property with borrowed money, one of the key expenses is the loan payoff amount. This refers to the total money that needs to be repaid to clear the borrowed amount. In our exercise, Scott's loan payoff is \(\$162,324\). This means, regardless of any improvements or sales value, he must repay this amount to his lender. Understanding the loan payoff is crucial, as it directly affects your net calculations. When you know your payoff amount, you can compare it with the revenue from a sale to determine if you're in the profit lane. Failing to account for this can lead to severe financial miscalculations.

Closing Costs

Closing costs are expenses over and above the price of the property which buyers and sellers typically incur to complete a real estate transaction. In Scott's case, he agreed to pay \(\$3,750\) towards these costs for the new owner. Such costs can include items like:

• Title insurance fees
• Appraisal fees
• Loan origination fees
• Inspection fees

These fees can significantly impact the final profit or loss from a sale. Including them in total expenses is crucial for an accurate calculation of net profit.

Repairs and Improvements

Investing in repairs and improvements can boost the value of a property, potentially leading to a higher selling price. Scott invested \(\$15,475\) in upgrading his house. While this appears as an upfront expense, it can make the property more appealing and competitive on the market.Common improvements may include:

• Kitchen and bathroom remodels
• Roofing and floor upgrades
• Painting and landscaping

These enhancements can transform a fixer-upper into a desirable residence, which can ease the selling process or even hike the price.

Net Profit Calculation

The essence of this exercise lies in understanding how to calculate net profit or loss. The net profit is simply the difference between total revenue and total expenses. In Scott's scenario, the selling price is \(\\(194,000\). By subtracting the total expenses of \(\\)181,549\) (which includes the loan, repairs, and closing costs), his net profit turns out to be \(\$12,451\). To summarize:

• Net Profit/Loss = Total Revenue - Total Expenses
• If the result is positive, it indicates a profit
• If negative, it indicates a loss
• If zero, no profit or loss was made

Scott made a tidy profit, showcasing the successful balancing of expenses and revenue.