Seller Financing
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 $500,000 (lines 40 & 41) at an interest rate of 5
percent for a term of three years (lines 43 & 44), while the
seller
does not provide owner financing in scenario #2 (line 40).
In the case of the second scenario the developer has to come up with the $500,000 in cash because the the costs of phase one land and development are unaffected by the presence or non-presence of seller financing (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.
In the case of the second scenario the developer has to come up with the $500,000 in cash because the the costs of phase one land and development are unaffected by the presence or non-presence of seller financing (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 $1,746,600. (Scenario #1 , Scenario #2)
This model allows for below gross profit analysis on seller financing and other development components such as construction duration, absorption, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements.
This model allows for below gross profit analysis on seller financing and other development components such as construction duration, absorption, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements.
Seller
Financing - Scenario #1
| Seller Financing | ||||||||
| 40 | Seller Financing, Yes or No? | Yes | < Yes or No | |||||
| 41 | If Yes, Amt of Seller Financing | $500,000 | < Enter Amount | Profit Summary | ||||
| 42 | If Yes, Amt Must Be Less Than: | $745,075 | Gross Revenue | $6,085,000 | ||||
| 43 | If Yes, Interest Rate | 5.00% | < Enter % Rate | Sales/Closing Costs | $243,400 | |||
| 44 | If Yes, Term in Months | 36 | < Enter Term of Loan | Net Revenue | $5,841,600 | |||
| 45 | If Yes, Line 44 Must Be Less Than Line 45 | 46 | < OK | Cost of Goods Sold | $4,095,000 | |||
| Gross Profit | $1,746,600 | |||||||
| Owner Tax | Interest | $197,985 | ||||||
| Profit Before Tax | $1,548,615 | |||||||
| 46A | %
Ownership |
35% | < Enter % Owned | |||||
| 46B | Filing Status | Jointly | < Enter Status | |||||
Seller
Financing - Scenario #2
| Seller Financing | ||||||||
| 40 | Seller Financing, Yes or No? | No | < Yes or No | |||||
| 41 | If Yes, Amt of Seller Financing | < Make No Entry | Profit Summary | |||||
| 42 | If Yes, Amt Must Be Less Than: | NA | Gross Revenue | $6,085,000 | ||||
| 43 | If Yes, Interest Rate | < Make No Entry | Sales/Closing Costs | $243,400 | ||||
| 44 | If Yes, Term in Months | < Make No Entry | Net Revenue | $5,841,600 | ||||
| 45 | If Yes, Line 44 Must Be Less Than Line 45 | Cost of Goods Sold | $4,095,000 | |||||
| Gross Profit | $1,746,600 | |||||||
| Owner Tax | Interest | $122,985 | ||||||
| Profit Before Tax | $1,623,615 | |||||||
| 46A | % Ownership | 35% | < Enter % Owned | |||||
| 46B | Filing Status | Jointly | < Enter Status | |||||
Land Development Model, LLC
302 West Lafayette Road
Medina, OH 44256
330.441.1690
302 West Lafayette Road
Medina, OH 44256
330.441.1690