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Time Value of Money in Real Estate: Southampton

Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan - a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan's onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of the Corcoran Group.

Located on Ox Pasture Road in Southampton, the shingle-style home was built around 1900 and is known as "Gardenside" or "Cara-Mia". Ms. Balsan, the great-granddaughter of railroad magnate Cornelius Vanderbilt, owned the house until her death in 1964.

According to public records, the estate is owned by Robert G. Goldstein, executive vice president and president of global gaming operations at Las Vegas Sands Corp, and his wife Sheryl, who purchased the house in 2007 for $17.4 million." (The Wall Street Journal, August 1, 2014, M2)

1. Calculate the annual compound growth rate of the house price during the period when the house was owned by Robert G. Goldstein (since 2007). (Round the number of years to the whole number).
2. Assume that the growth rate you calculated in question #1 remains the same for the next 20 years. Calculate the price of the house in 20 years.
3. Assume the growth rate that you calculated in #1 prevailed since 1900. Calculate the price of the house in 1900.
4. Assume the growth rate that you calculated in #1 prevailed since 1900. Which price was paid for the house in 1964?
5. You were using the time value of money concept to answer the question #3. What is the time point 0 is this problem?

Solution Preview

It is best to start with a simple time line in order to figure out the transfers of the house ownership over the years. Notice that not all information is known. The purpose of the question is to find out the value of the house over the years.

Owner Year Price

Vanderbilt family, and built 1900 n/a
Ms. Consuelo Vanderbilt Balsan sold 1964 n/a

Owner unknown bought 1964 n/a
sold 2007 $17.4 million

Robert G. Goldstein, &w/Sheryl bought 2007 $17.4 million
selling 2014 $28 million

In time value of money computations, we assume payments at the end of the year. Since not all sales ...

Solution Summary

This solution shows a real-life example of the use of time value of money in real estate, with real sales price information. The estimated values and sales prices of the wealthy Vanderbilt family home are being computed at different times in history when the house was built (1900) or changed ownership in 1964, 2007, and 2014. The solution includes detailed explanations on how the computations can be done with a financial calculator.

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