The partial views of the LDM input page below illustrate the effect of seller financing on profitability. In Scenario#1 the seller has agreed to finance $300,000 at an interest rate of 4 percent for a term of five years (60 months) while the seller does not provide owner financing in Scenario #2.
The profit is higher in Scenario #2 because there is no interest cost for seller financing. However the average return on equity is higher in Scenario #1 because the developer/investor has less money in the project. In the case of the Scenario #2 the developer/investor has to come up with the $300,000 in cash because the the costs of phase one land and development are unaffected by the presence or non-presence of seller financing (e.g. the lender will loan only a certain percentage of the phase one land and development costs). It is easy to see that seller willingness to help finance a project in the form of a subordinated mortgage can make or break a developer's ability to take on a project.
It is important to point out that the effect seller financing 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 seller financing and other development components such as construction duration, absorption, presence or non-presence of builder deposits, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements.
Seller Financing - Scenario #1
Seller Financing - Scenario #2
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