The effect on interest cost, profitabilty and rate of return are different when absorption rates vary. Scenario #1 is 1 lot per month and Scenario #2 is 2 lots per months. (Note that the model allows for non-whole number absorption. The absorption rate could be 1.5 lots per month, 2.75 lots per month, 10.5 lots per month, etc.).
Absorption is probably the most critical land development component. If lots do not sell at a reasonable pace, profitability suffers significantly. It is important to point out that the effect absorption has on profitability shows up below the gross profit level of analysis. Note below that gross profit under both scenarios is $1,894,280.
The model allows for below gross profit analysis on absorption and other development components such as seller financing, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements.
Absorption Rate - Scenario #1
Absorption Rate - Scenario #2
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