As is the case with all or most mathematical models, one limitation is the uncertainty of variable inputs. Estimates usually involve some error. Additionally, the structure of the model requires 'cash-flow timing' designed to reflect timeline concepts inherent to the land development process. In actuality however, it is not possible to precisely model each and every cash flow.
Mindful of the later limitation the user should, from a practical standpoint, recognize that the model sets upper or lower limits in its profitability calculations. For instance, while a consistent monthly absorption rate is assumed within the model, seasonal variations invariably occur. Twenty-four lot sales generally will not occur at the precise rate of two lots per month. Thus the actual pattern of sales activity versus the model's assumed constant absorption is one example of how the model results tend to set an upper or lower limit. Another example is the model's assumption that development costs are paid out as a lump sum at the beginning of the absorption period, and, in the event of multi-phase projects, at the beginning of subsequent phases. In reality such costs are paid out incrementally, so if these costs can be deferred beyond the model's assumed payment date, the profitability calculated by the model will be skewed on the low side - and vice versa.
An understanding of limitations such as those noted here as well as an understanding of the model assumptions is necessary for proper interpretation of model results.
If you wish to ask us a question about the model, 'Contact Us' and we will get back to you as soon as possible.
Land Development Model, LLC
302 West Lafayette Road
Medina, OH 44256