Keywords Case method; Sunk and Opportunity costs; Decision making; Actual case

CASE SYNOPSYS Mr. George Adams is a theoretical economist by education and training, but has always been interested in getting into the real estate market. Currently, he works full time in a management position as a senior financial analyst for a public insurance company which is listed on the NYSE. In December of 2001 he finally decided to take a chance and bought a brand new Condominium Townhouse (CTI) in Mississauga, Ontario, Canada. At that time, only a deposit of $15,000 was required to be paid to the builder. Since this was the last unit the builder had for sale in this subdivision that backed on to a protected wildlife reserve, George made the non- refundable deposit and signed the “Agreement to Purchase” without consulting his wife.2 The possession date was May 31, 2002, with a probable ownership date of September 2002. The CTI rules state that the unit cannot be rented out or sold until ownership. An occupancy fee of $1,400 per month will be charged between the possession date and ownership date. Only Mr. Adams' family can occupy the unit during the occupancy period. Mr. Adams already has a residence and his primary occupation is that of an economist. Mr. Adams’ intention for this property was for it to be an investment and not his personal residence. It is now November 1, 2002. Mr. Adams has taken title of the unit and is now free to rent it out to anyone. Of course, taking title of the unit required taking out a mortgage of $145,000 and $40,000 as a down payment. Mr. Adams made such a large down payment because a 20% down payment did not require the mortgage to be insured from the Canadian Mortgage and Housing Corporation (CMHC) by his bank. The standard insurance premium can cost up to 2 George and his wife (who works as a nutritionist for a major Toronto hospital) have subsequently argued many times about making such a large purchase without discussing it with her. This is an actual case with only minor changes to real events and numbers.   3.1 % of the mortgage amount, which Mr. Adams has avoided.3 However, the higher down payment would reduce the amount of interest that can be expensed for tax purposes if the CTI is rented out. After months of frustration waiting for the builder and the municipality to approve the taking of title, he is now pondering what to do next. George realizes that there are property management companies that can rent out and manage the CTI, but he desires to take on the responsibility of a landlord himself. George has asked you, Jacqueline Books, to advise. Since you are a friend of George, you agreed not to charge him and only take 20 minutes of his time with your ANALYSIS. Jacqueline is not only a good accountant but she has some experience with residential real estate, which is why George asked for her analysis. She was able to forecast the cash flows from renting the property (Exhibit 1) and from selling it (Exhibit 2).