You are a broker for high-end residential real estate. You meet a potential new client, 40-yearold tech billionaire Jay Smedley. To win his business, you have to find the right house for him
and walk him through all the important decisions he needs to make.
1. Mr. Smedley has narrowed the search down to his three favorite properties:
a. 15000 Corona Del Mar, Pacific Palisades, CA 90272
b. 23622 Malibu Colony Rd, Malibu, CA 90265
c. 64 Laurel Dr, Rancho Palos Verdes, CA 90275
He wants your help to pick the perfect house for him. Here are his preferences:
• He likes new construction. He doesn’t want to maintain a very old house.
• He has an expensive, growing art collection. He wants high ceilings and big, open
walls to display his paintings.
• He values a good view. He wants to be able to see the water from as many rooms in
the house as possible.
• He is recently married, and he plans to have several kids. He will hire a live-in nanny
to take care of the kids. He wants to be able to have peace-and-quiet on his side of
the house, while the kids have their own wing to play in.
• He works from home. He needs a good home office. He doesn’t care about being close
to the CBD. He’ll make people come to him, and he wants to impress them.
Which house do you pick, and why?
For the rest of the exam, please use the house that you chose in your answer to Question #1.
You can ignore the other two.
2. Now that you have chosen a house for Mr. Smedley, he wants to know what he should
pay for it. On Zillow, please select two sales comps in the neighborhood, and perform an
appraisal, using the following characteristics: bedrooms, bathrooms, building area (SF),
and garage spaces. Then, reconcile the two adjusted comps into one appraised value.
Based on your analysis, what is the house worth?
3. Mr. Smedley wants to make sure he’s not getting ripped off. He asks you to explain to
him why the house is worth so much. Why is the price per square foot so high in this
neighborhood? What amenities contribute to its value? What disamenities detract from
its value? Why is there such high demand? Why is there such low supply? Please consider
regulatory factors such as density zoning and use zoning in your answer.
4. Mr. Smedley doesn’t have a specific budget in mind. He can easily afford any of these
houses. But as a savvy investor with a high risk tolerance, he wants to get the highest
return possible. So, he wants to maximize his leverage: He wants to use as much OPM as
possible. He asks you to help him figure out his financing options:
a. How can he get a 95% LTV? What kind of loan can he get? How can he convince the
lender to give him this much leverage?
b. He wants to know how much money he should set aside and when it will be due.
Assume that the purchase price is equal to the appraised value that you calculated in
Question #2. If the lender says that earnest money is 3% of the purchase price and
closing costs are 5% of the purchase price, how much cash will he need for (i) earnest
money, (ii) down payment, (iii) closing costs, and (iv) total cash on the closing day?
c. He wants a 30-year, fixed-rate mortgage. According to Freddie Mac, the average
mortgage rate is 4.16%, but the lender quotes him 4.75%. Why? Please name all the
reasons why his loan is more expensive than the average FRM that lenders are
originating.
Extra Credit: Jay Smedley wants to brag about his investment return. He doesn’t mind if housing
prices come down in the next year or two, but he wants to make sure he’s putting his money
into an appreciating asset for the next 5 to 10 years. His friends in Texas tell him he’s making a
mistake. People are leaving California, taxes are too high, regulations are too strict, and
homelessness is taking over. How many of these complaints are valid? Are they right? Is
California a bad bet? Should he buy a house somewhere else? How, exactly, do you expect
housing prices to change in the coming years?