logo for land-development-model.com
LEFT for land-development-model.com

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 $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

If you wish to ask us a question about the model, 'Contact Us' and we will get back to you as soon as possible.

Home Page

Land Development Model, LLC
302 West Lafayette Road
Medina, OH 44256