Absorption Analysis
The
partial views of the LDM input page below illustrate the effect of
different absorption rates on profitability. The lot sales
rate in
scenario #1 is two lots per month (line 28),
and the rate in scenario
#2 is four lots per month. Obviously, the faster lots sell
the greater
the profit.
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 $1,746,600.
This 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.
absorptionAbsorption 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 $1,746,600.
This 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
| Before changing month below, click the 'Clear Absorption & Rates' macro | ||||||
| Construction/Holding Period & Absorption | ||||||
| Profit Summary | ||||||
| 24 | Mo of Initial Land Purchase | August | < OK | |||
| 25 | Mo of First Lot Sale | November | < OK | Gross Revenue | $6,085,000 | |
| 26 | Construction & Holding Period in Months | 3 |
Sales/Closing Costs | $243,400 | ||
| 27 | # of Sale Months in Yr #1 | 2 | Net Revenue | $5,841,600 | ||
| Before changing absorption click the | Cost of Goods Sold | $4,095,000 | ||||
| Clear Absorption & Rates' macro | Gross Profit | $1,746,600 | ||||
| 28 | Absorption Rate Per Month | 4 | < OK | Interest | $113,962 | |
| 29 | Absorption Rate is: | < OK | Profit Before Tax | $1,632,638 | ||
| Minimum Absorption Requirement > | .76 | |||||